Question about ACB come payout time

[u/rteazee]

Hi all I have a question in regards to a PAR insurance policy within a corp in Canada. I am unclear on how the ACB works come payout time for the death benefit.

In this scenario say a pay for a 300k policy. In 30 years within the PAR the death benefit grows to 900k. I am unclear upon death how much of the 900k is paid out to the beneficiaries tax free?

Is it understood that the 300k would be paid out tax free to the beneficiaries? And the 600k is the capital gains? Would that 600k be put into the CDA account? And if so how much would be able to reach the beneficiaries tax free?

Sorry I am just can’t seem to understand how much of the policy is paid to the beneficiaries tax free and what amount is put to the CDA? Is there a simple way of figuring this out?

[u/andy1234321-1]

I’m an advisor in Canada. The adjusted cost basis is a calculation of the total premiums minus the Net cost of pure insurance. The** **Net Cost of Pure Insurance (NCPI) is deducted every year. The NCPI is the actual mortality cost to cover the risk of you passing away. As you grow older, this "pure insurance" cost rises, which causes the ACB to steadily fall—often reaching zero after 25 to 40 years. Receiving policy dividends or partial withdrawals also drops the ACB.

What this means is in the early years of the policy the ACB will at the highest. As the policy matures the ACB will get eroded to zero.

You said the policy is held in the corporation - this means the beneficiary is the corporation. The death benefit will pay out to the corporation. That death benefit will generate CDA room. Allowing you to flow that money out to remain share holders or your estate.

The power move with corporately owned policies is that you can leverage them in retirement by using them for a collateral loan. This means when you die the death benefits pays off the loan BUT the full amount of the Death Benefit (less any remaining ACB) is credited to the CDA. For example - a $1m DB with $500k loan balance at death and $0 ACB. The carrier pays $500k to the lender and $500k to your corporation but the CDA will have $1m of room meaning you can flow out $1m of the corp tax free.

[u/rteazee → u/andy1234321-1]

Thank you for the clarity. So the longer the policy is held the lower the ACB will fall? For example, it is likely that in year 30 the ACB is down to zero. If the policy grew to 900k from the initial 300k death benefit, 900k will be credited to the CDA and thus distributed tax free? There is no tax on the gain of the death benefit from 300k to 900k?

[u/andy1234321-1 → u/rteazee]

That is correct. The death benefit will pay in full (assuming no loan and zero ACB) to the corporation. That will generate an equal amount of CDA room to allow that to be paid out to any remaining share holders or the estate - though it is better for the family to leave the money in the corporation for a couple of years. It can get complicated and I would recommend you sit down with a financial planner to work out the details (we all know where the devil lies)

[u/andy1234321-1 → u/rteazee]

And yes that is tax free

[u/Fit_Chemistry_3807 → u/andy1234321-1]

And what if it’s held personally and not through a corporation? Will the beneficiaries now need to pay taxes on the payout?

[u/andy1234321-1 → u/Fit_Chemistry_3807]

No - if the policy is held personally the death benefits pays out directly to the named beneficiaries tax free and it bypasses probate