Principal Issues: Whether or not a payment under a particular life insurance policy would be considered proceeds of a life insurance policy in consequence of death for purposes of the definition of “capital dividend account” in subsection 89(1) of the Act.
Position: General comments provided.
Reasons: The determination is a question of fact.
2020 CALU CRA Roundtable – July 2020
Question 2 - Return of premiums on death - Capital Dividend Account
Background
With respect to the calculation of a corporation’s capital dividend account, when proceeds of a life insurance policy are received by the corporation, paragraph (d) of the definition of “capital dividend account” in subsection 89(1) of the Act provides for, in part, the inclusion of the following [subject to reductions listed in subparagraphs (d)(iii) to (d)(vi) of that definition]
“all amounts each of which is the proceeds of a life insurance policy… of which the corporation was… a beneficiary… received by the corporation… in consequence of the death of any person” [emphasis added]
The term “proceeds of a life insurance policy” is not defined in the Act.
Consider the following fact pattern:
- A private corporation is both the owner and beneficiary of an exempt life insurance policy on the life of a shareholder.
- Under the terms of the policy, if the life insured dies as a result of an "excluded activity" (i.e., it is either a standard exclusion - for example, suicide in the first two years of the policy - or an exclusion written into the policy based on an underwriting decision taking into account the life insured's activities, lifestyle, etc.- for example, skydiving), the policy will not be void and the life insurance company will pay to the beneficiary under the policy an amount equal to all premiums previously paid to the life insurance company under the policy.
- The life insured dies as a result of an excluded activity. Cumulative premiums paid under the life insurance policy immediately before death equal $100,000 and the adjusted cost basis of the policy immediately before death, as computed under subsection 148(9) of the Act, is $90,000. The life insurance company pays $100,000 to the corporation (as beneficiary) pursuant to the terms of the policy.
Question
Can the CRA confirm that in these circumstances, the corporation has received “proceeds of a life insurance policy... of which the corporation was... a beneficiary" and such proceeds were "received by the corporation... in consequence of the death of any person" for purposes of paragraph (d) of the definition of capital dividend account, resulting in an addition to its capital dividend account of $10,000?
Also, as the proceeds are a payment under a life insurance policy (other than an annuity contract) that is an exempt policy in consequence of the death of a person whose life was insured under the policy, can the CRA confirm that, pursuant to paragraph (j) of the definition of “disposition” in subsection 148(9), there is no disposition in relation to an interest in a life insurance policy under these circumstances?
CRA Response
Generally, when a policyholder disposes of an interest in a life insurance policy, the policyholder is required to include in income the amount by which the proceeds of the disposition of the interest in the policy exceed the adjusted cost basis (ACB) of that interest immediately before the disposition. The full amount of this policy gain is included in computing income of the policyholder pursuant to paragraph 56(1)(j) and subsection 148(1) of the Act.
A disposition of an interest in a life insurance policy is defined in subsection 148(9) of the Act and specifically excludes a payment made under an exempt life insurance policy as a consequence of the death of a person whose life was insured under the policy. Consequently, the receipt of a death benefit by a beneficiary under an exempt life insurance policy is generally received tax-free.
The capital dividend account (CDA) of a corporation is defined in subsection 89(1) of the Act. Paragraph (d) of that definition includes in a corporation's CDA the amount by which the proceeds of a life insurance policy received in consequence of the death of a person exceed the total of all amounts described in subparagraphs (d)(iii) to (d)(vi) of that definition.
Given that each life insurance policy is a contract with terms that can vary, whether or not a payment under a particular life insurance policy would be proceeds of a life insurance policy in consequence of death is a question of fact which can only be determined upon the review of a particular life insurance policy. Accordingly, a review of the facts including the terms and conditions of the life insurance policy would be required to determine the nature of a particular amount received.
Where proceeds of a life insurance policy are received by a corporation as a beneficiary under an exempt life insurance policy in consequence of death of any person, the proceeds would not, in our view, generally be received as the result of a disposition in relation to an interest in a life insurance policy under subsection 148(9) of the Act. Furthermore, pursuant to the definition of CDA in subsection 89(1) of the Act, the amount by which such proceeds exceed the amounts described in subparagraphs (d)(iii) to (d)(vi) of the CDA definition would be included in the corporation’s CDA.
Sylvie Danis
July 8, 2020
2020-084214