Double counting the ACB for CDA calculations affects split-dollar arrangements too

Split-dollar arrangements involve two parties that jointly own or co-own a life insurance policy and share the rights and obligations under a life insurance policy. Each party would normally pay for their respective interest in the policy and a formal agreement would capture all the rights, obligations, terms and conditions of the deal.

Where one or more of the parties to a split-dollar arrangement is a corporation, what would be the capital dividend account credit (CDA) to the relevant corporation? This was Question 2 at the Conference for Advanced Life Underwriting (CALU) Canada Revenue Agency (CRA) Roundtable.

The CRA considered this situation.

Holdco A and Holdco B each own 50% interest in Opco. Opco and Holdco A jointly own a life insurance policy on Mr A. Opco and Holdco B jointly own a life insurance policy on Mr. B. Opco pays the premium for a $1 million death benefit amount so that it may redeem the shares of the respective Holdco on the death of Mr. A or Mr. B. Each Holdco pays the premium for any additional benefit under the policy on the relevant individual. Opco is designated as beneficiary for $1 million if Mr. A or Mr. B dies, and the respective Holdco’s are designated for the rest under the relevant contracts. At the time of Mr. A’s death, the total death benefit was $1.2 million and the adjusted cost basis (ACB) of the policy on Mr. A was $150,000.

Confirming it’s previous commentary, which we looked at in Capital Dividend Account (CDA) Comments from Canada Revenue Agency (CRA), the CRA stated that where there are multiple corporate beneficiaries designated under a policy, each beneficiary’s CDA should be reduced by the total ACB of the life insurance policy. So, in the scenario described above, Holdco A’s CDA credit would be $50,000 (i.e. $200,000-$150,000) and Opco’s CDA credit would be $850,000 (i.e.

$1 million-$150,000).

It does not appear to matter whether the corporation has an ownership interest and pays costs associated with its interest in the policy or if a corporation is merely a beneficiary under the policy. The same inflexible conclusion has been drawn from the words “the adjusted cost basis of a policyholder’s interest in the life insurance policy” in paragraph (d) of the definition of “capital dividend account” in subsection 89(1).

CALU has already asked the Department of Finance to fix the CDA definition citing legitimate, real-life scenarios. In response, Finance has requested information about how big a problem the definition is before it considers changing any wording. Whether the problem is big or small, it still makes no sense to leave the wording the way it is!