Under an individual policy for loan insurance purchased by a borrowing corporation, the death benefit on the insured’s death is applied to repay the balance of the loan owing to the lender, with the ultimate excess being returned to the borrowing corporation. Would there be a credit to the borrowing corporation’s capital dividend account (“CDA”) of the excess of the entire death benefit over the adjusted cost basis (“ACB”) of the policy? CRA responded:
Innovative …[dealt with] a group creditor life insurance policy and not an individual life insurance policy. …[I]t would be reasonable to apply the same position in [Innovative to an individual life policy] provided that the borrowing corporation is able to demonstrate that the proceeds of the life insurance policy paid directly to the lending financial institution reduced the loan balance owing by the borrowing corporation to the financial institution, in accordance with existing contractual relationships between the parties.
In such a situation, any ACB of the borrowing corporation, being the holder of the life insurance policy, would reduce the amount that could be added to its CDA, where applicable.