As CALU members are aware, the Canada Revenue Agency (CRA) has expressed concerns with arrangements where the corporate owner of a life insurance policy designates another corporation as beneficiary in order to maximize the CDA credit. This has resulted in several technical interpretations where the CRA has indicated it might apply GAAR or other sections of the Income Tax Act to deem a taxable benefit to this arrangement. This type of planning also appears to be an impediment to discussions with the Department of Finance (Finance) about having a rule that would allow tax-deferred transfers of insurance between shareholders and corporations.
Although this issue was not raised by Finance in the Exempt Test Consultation Paper, the CALU Policyholder Tax Task Force (PTTF) did make representations to Finance on this issue. In effect, the PTTF recommended that the definition of the capital dividend account be amended so the policy ACB would be attributed to the beneficiary of the insurance proceeds, which would result in a reduction to the CDA credit by the ACB of the policy even in situations where the beneficiary was different from the owner of the contract. The PTTF also suggested that this rule be effective for designations made after the effective date of the new definition. It is unclear at this time whether Finance will be proceeding with such an amendment, but we wanted our members to be aware of CALU´s representations on in this area.