A universal life (UL) policy (referred to as “face amount plus fund value”) purchased by Opco as an exempt policy upon the life of its shareholder provides for the payment of a death benefit equal to the fund value of the policy (being the accumulated balance of the investment accounts within the policy at the time of the death of the life insured) plus the face amount. Following the shareholder’s death, the insurer pays Opco the face amount of $200,000 plus the fund value of $20,000. Would the “proceeds of a life insurance policy” to Opco for purposes of s. (d)(ii) of the capital dividend account definition equal to the full $220,000 death benefit received by Opco? CRA responded:
In the fact pattern described above, the particular payment made by the insurer to Opco was for two amounts. The first was the face amount of the policy and the second was the balance in the investment account that had accumulated within the exempt single-life policy up to the time of the death of the life insured. In this fact pattern, it is our view that the total of these two amounts would be “proceeds of a life insurance policy” for purposes of subparagraph (d)(ii) of the definition of “capital dividend account” in subsection 89(1) of the Act.