Opco, which is owned 50/50 by the respective wholly-owned holdcos of Messrs. A and B (Holdco A and Holdco B) jointly owns with Holdco A (and Holdco B) an exempt life insurance “Policy A” on the life of Mr. A (and an exempt life insurance “Policy B” on the life of Mr. B), each of which names Opco as the beneficiary for $1 million and Holdco A (or B) as to the excess.
Opco pays the premium relating to $1 million of death benefit coverage in each case, and Holdco A and Holdco B make additional deposits on an annual basis into their respective joint policies.
On Mr. A’s death, the total death benefit to be paid under Policy A is $1.2 million and the adjusted cost basis (“ACB”) of Policy A is $150,000. What will be the addition to Opco’s and Holdco A’s CDA with respect to the total death benefit paid under Policy A? CRA stated:
As we noted in 2017-0690311C6, where there are multiple corporate beneficiaries designated under a policy, it is our view that each beneficiary must apply paragraph (d) of the definition of CDA independently. For the purposes of determining the addition to each beneficiary’s CDA, the portion of the death benefit received by each beneficiary must be reduced by the total of all amounts each of which is a policyholder’s ACB. In other words, the addition to each beneficiary’s CDA should be reduced by the total ACB of the life insurance policy.
[Here] the addition to the CDA of Holdco A with respect to the death benefit would be $50,000 ($200,000 death benefit received by Holdco A reduced by the total ACB of the policy which is $150,000). The addition to the CDA of Opco with respect to the death benefit is $850,000 ($1,000,000 death benefit received by Opco reduced by the total ACB of the policy which is $150,000).