Call Today (905) 449-0880

  • HOME

  • FIRM PROFILE

  • SERVICES

  • HOW WE DO WHAT WE DO

  • NEWS

  • RESOURCES

  • CONTACT

  • More

    HOW TO DETERMINE AN INSURANCE POLICY’S ACB Kevin Wark / November 15, 2017

    Note: This is part three of a series on tax and insurance.

    In part one we talked about the general tax attributes of life insurance. In part two we looked at transactions resulting in a policy disposition, and how the proceeds and policy gain are determined.

    In this article we discuss the adjusted cost basis (ACB) of an insurance policy and how it’s determined.

    ACB IN ACTION

    Life insurance isn’t considered capital property, but it’s treated somewhat similarly when there’s a policy disposition. If the proceeds of disposition exceed the policy’s cost (i.e., the ACB), the resulting gain is fully included in the policyholder’s income.

    ACB is also relevant where the insurance policy’s beneficiary is a private corporation. Generally, on the death of the insured, the insurance benefit is tax-free to the corporation. The excess of the death benefit over the policy’s ACB is credited to the corporation’s capital dividend account. This permits distribution of insurance proceeds as a tax-free capital dividend to the corporation’s shareholders.

    MATH MATTERS FOR ACB — BUT LESS THAN YOU THINK

    An insurance policy’s ACB is a cumulative amount determined by the following formula:

    (A + B + […] + G + G.1) – (H + I + […] + O)

    To make things even more interesting, element O = [P × (Q + R + S)/T)] – U.

    Generally, these elements represent various transactions that impact the tax value of the policy (some of the most important transactions are discussed below).

    Obviously, it would be a daunting task for any policyholder to keep track of the policy’s ACB. Fortunately, the insurance company assumes the responsibility. A policyholder typically receives an annual or quarterly policy statement, which includes up-to-date ACB calculations.

    Still, it’s important for insurance advisors to have a basic understanding of the ACB calculation, to both address client questions that might arise and to assist clients in determining the impact of certain policy transactions.

    COMMON TRANSACTIONS THAT AFFECT ACB

    The most common types of transactions that increase a policy’s ACB include:

    • payment of life insurance premiums,

    • payment (other than premiums) to acquire an existing life insurance policy,

    • prior dispositions resulting in policy gains and

    • repayment of a policy loan.

    The most common types of transactions that decrease a policy’s ACB include:

    • proceeds of disposition of a policy (whether full or partial), including a policy loan;

    • payment of a policy’s fund reserve to provide an insurance or disability benefit (for policies issued after 2016);

    • that portion of any premium or insurance charges that don’t relate to the benefit payable on death (for policies issued after 2016); and

    • cumulative amount of the policy’s net cost of pure insurance (NCPI).

    HOW RECENT CHANGES TO NCPI AFFECT CLIENTS

    A policy’s NCPI is defined in the regulations under the Income Tax Act, and is intended to reflect the policy’s annual mortality costs. The policy’s NCPI generally increases as the insured under the policy ages, which typically results in the policy’s ACB declining over time and becoming nil near life expectancy.

    Certain changes have recently been made to the NCPI definition, which apply to policies issued after 2016. These changes generally result in a lower annual NCPI adjustment and, consequently, a higher ACB over the policy’s lifetime.

    This is a positive change for policy dispositions, as any resulting gains will generally be lower.

    However, this change can adversely impact corporately owned life insurance, as the credit to the capital dividend account from the death benefit may be lower.

    In the next article, we’ll delve deeper into NCPI and how it’s calculated. We’ll also review how a policy’s NCPI is relevant to the collateral insurance deduction, which is available when an insurance policy is assigned as collateral for an investment or business loan.


    Featured Posts
    SRI Socially Responsible Investing

    SRI Socially Responsible Investing

    SnapRant World Cup

    SnapRant World Cup

    CANADIANS’ TOP FINANCIAL REGRETS
Staff / May 7, 2018

    CANADIANS’ TOP FINANCIAL REGRETS Staff / May 7, 2018

    Famed Investor Predicts Historic Market Drop

    Famed Investor Predicts Historic Market Drop

    Chicken Tax

    21% OF CANADIANS USE RRSP FUNDS FOR DAILY EXPENSES: POLL

    21% OF CANADIANS USE RRSP FUNDS FOR DAILY EXPENSES: POLL

    COMMUTE THIS PENSION OR NOT?

    COMMUTE THIS PENSION OR NOT?

    Warren Buffett's Investing Style Reviewed

    Warren Buffett's Investing Style Reviewed

    Financial tips for modern families

    Financial tips for modern families

    Mercer releases projection on Canadian retirement for 2017

    Mercer releases projection on Canadian retirement for 2017

    {"items":["5fda4312e440cc0018744201","5fda4312e440cc00187441fe","5fda43152ab6780017e3e1e6","5fda43152ab6780017e3e1eb","5fda43152ab6780017e3e1e9","5fda4315560e0100177e1972","5fda4315560e0100177e1974","5fda4315560e0100177e1978","5fda4315560e0100177e1970","5fda4315560e0100177e1973"],"styles":{"galleryType":"Strips","groupSize":1,"showArrows":true,"cubeImages":true,"cubeType":"fill","cubeRatio":"100%/100%","isVertical":false,"gallerySize":30,"collageDensity":0.8,"groupTypes":"1","oneRow":true,"imageMargin":0,"galleryMargin":0,"scatter":0,"rotatingScatter":"","chooseBestGroup":true,"smartCrop":false,"hasThumbnails":false,"enableScroll":true,"isGrid":false,"isSlider":false,"isColumns":false,"isSlideshow":true,"cropOnlyFill":false,"fixedColumns":1,"enableInfiniteScroll":true,"isRTL":false,"minItemSize":120,"rotatingGroupTypes":"","rotatingCropRatios":"","columnWidths":"","gallerySliderImageRatio":1.7777777777777777,"numberOfImagesPerRow":3,"numberOfImagesPerCol":1,"groupsPerStrip":0,"borderRadius":0,"boxShadow":0,"gridStyle":0,"mobilePanorama":false,"placeGroupsLtr":false,"viewMode":"preview","thumbnailSpacings":4,"galleryThumbnailsAlignment":"bottom","isMasonry":false,"isAutoSlideshow":true,"slideshowLoop":false,"autoSlideshowInterval":3,"bottomInfoHeight":0,"titlePlacement":"SHOW_ON_HOVER","galleryTextAlign":"center","scrollSnap":true,"itemClick":"nothing","fullscreen":true,"videoPlay":"hover","scrollAnimation":"NO_EFFECT","slideAnimation":"SCROLL","scrollDirection":1,"scrollDuration":400,"overlayAnimation":"FADE_IN","arrowsPosition":0,"arrowsSize":18,"watermarkOpacity":40,"watermarkSize":40,"useWatermark":true,"watermarkDock":{"top":"auto","left":"auto","right":0,"bottom":0,"transform":"translate3d(0,0,0)"},"loadMoreAmount":"all","defaultShowInfoExpand":1,"allowLinkExpand":true,"expandInfoPosition":0,"allowFullscreenExpand":true,"fullscreenLoop":false,"galleryAlignExpand":"left","addToCartBorderWidth":1,"addToCartButtonText":"","slideshowInfoSize":160,"playButtonForAutoSlideShow":false,"allowSlideshowCounter":false,"hoveringBehaviour":"NEVER_SHOW","thumbnailSize":120,"magicLayoutSeed":1,"imageHoverAnimation":"NO_EFFECT","imagePlacementAnimation":"NO_EFFECT","calculateTextBoxWidthMode":"PERCENT","textBoxHeight":0,"textBoxWidth":200,"textBoxWidthPercent":50,"textImageSpace":10,"textBoxBorderRadius":0,"textBoxBorderWidth":0,"loadMoreButtonText":"","loadMoreButtonBorderWidth":1,"loadMoreButtonBorderRadius":0,"imageInfoType":"ATTACHED_BACKGROUND","itemBorderWidth":0,"itemBorderRadius":0,"itemEnableShadow":false,"itemShadowBlur":20,"itemShadowDirection":135,"itemShadowSize":10,"imageLoadingMode":"BLUR","expandAnimation":"NO_EFFECT","imageQuality":90,"usmToggle":false,"usm_a":0,"usm_r":0,"usm_t":0,"videoSound":false,"videoSpeed":"1","videoLoop":true,"jsonStyleParams":"","gallerySizeType":"px","gallerySizePx":220,"allowTitle":true,"allowContextMenu":true,"textsHorizontalPadding":-30,"showVideoPlayButton":true,"galleryLayout":5,"targetItemSize":220,"selectedLayout":"5|bottom|1|fill|false|1|true","layoutsVersion":2,"selectedLayoutV2":5,"isSlideshowFont":true,"externalInfoHeight":0,"externalInfoWidth":0},"container":{"width":220,"height":284,"galleryWidth":220,"galleryHeight":123,"scrollBase":0}}
    Recent Posts
    WORLD CUP NEWS FLASH

    WORLD CUP NEWS FLASH

    SRI Socially Responsible Investing

    SRI Socially Responsible Investing

    This week's SnapRant World Cup Fever!

    This week's SnapRant World Cup Fever!

    HOW NET COST OF PURE INSURANCE AFFECTS POLICIES
Kevin Wark / December 20, 2017

    HOW NET COST OF PURE INSURANCE AFFECTS POLICIES Kevin Wark / December 20, 2017

    SnapRant World Cup

    SnapRant World Cup

    HOW TO DETERMINE AN INSURANCE POLICY’S ACB
Kevin Wark / November 15, 2017

    HOW TO DETERMINE AN INSURANCE POLICY’S ACB Kevin Wark / November 15, 2017

    HOW LIFE INSURANCE DISPOSITIONS ARE TAXED
Kevin Wark / October 13, 2017

    HOW LIFE INSURANCE DISPOSITIONS ARE TAXED Kevin Wark / October 13, 2017

    HOW LIFE INSURANCE IS TAXED
Kevin Wark / September 21, 2017

    HOW LIFE INSURANCE IS TAXED Kevin Wark / September 21, 2017

    How to claim the principal residence exemption
BY Allan Tong and Advisor staff June 29, 2017

    How to claim the principal residence exemption BY Allan Tong and Advisor staff June 29, 2017

    How advisors help in choppy markets
BY Michelle Schriver April 6, 2018

    How advisors help in choppy markets BY Michelle Schriver April 6, 2018

    {"items":["5fda4312e440cc00187441ff","5fda4312e440cc0018744201","5fda4312e440cc00187441fd","5fda4312e440cc0018744204","5fda4312e440cc00187441fe","5fda4312e440cc0018744202","5fda4312e440cc0018744205","5fda4312e440cc0018744200","5fda4312e440cc0018744203","5fda4312e440cc0018744206"],"styles":{"galleryType":"Columns","groupSize":1,"showArrows":true,"cubeImages":true,"cubeType":"max","cubeRatio":1.7777777777777777,"isVertical":true,"gallerySize":30,"collageAmount":0,"collageDensity":0,"groupTypes":"1","oneRow":false,"imageMargin":22,"galleryMargin":0,"scatter":0,"rotatingScatter":"","chooseBestGroup":true,"smartCrop":false,"hasThumbnails":false,"enableScroll":true,"isGrid":true,"isSlider":false,"isColumns":false,"isSlideshow":false,"cropOnlyFill":false,"fixedColumns":0,"enableInfiniteScroll":true,"isRTL":false,"minItemSize":50,"rotatingGroupTypes":"","rotatingCropRatios":"","columnWidths":"","gallerySliderImageRatio":1.7777777777777777,"numberOfImagesPerRow":3,"numberOfImagesPerCol":1,"groupsPerStrip":0,"borderRadius":0,"boxShadow":0,"gridStyle":0,"mobilePanorama":false,"placeGroupsLtr":false,"viewMode":"preview","thumbnailSpacings":4,"galleryThumbnailsAlignment":"bottom","isMasonry":false,"isAutoSlideshow":false,"slideshowLoop":false,"autoSlideshowInterval":4,"bottomInfoHeight":0,"titlePlacement":["SHOW_ON_THE_RIGHT","SHOW_BELOW"],"galleryTextAlign":"center","scrollSnap":false,"itemClick":"nothing","fullscreen":true,"videoPlay":"hover","scrollAnimation":"NO_EFFECT","slideAnimation":"SCROLL","scrollDirection":0,"scrollDuration":400,"overlayAnimation":"FADE_IN","arrowsPosition":0,"arrowsSize":23,"watermarkOpacity":40,"watermarkSize":40,"useWatermark":true,"watermarkDock":{"top":"auto","left":"auto","right":0,"bottom":0,"transform":"translate3d(0,0,0)"},"loadMoreAmount":"all","defaultShowInfoExpand":1,"allowLinkExpand":true,"expandInfoPosition":0,"allowFullscreenExpand":true,"fullscreenLoop":false,"galleryAlignExpand":"left","addToCartBorderWidth":1,"addToCartButtonText":"","slideshowInfoSize":200,"playButtonForAutoSlideShow":false,"allowSlideshowCounter":false,"hoveringBehaviour":"NEVER_SHOW","thumbnailSize":120,"magicLayoutSeed":1,"imageHoverAnimation":"NO_EFFECT","imagePlacementAnimation":"NO_EFFECT","calculateTextBoxWidthMode":"PERCENT","textBoxHeight":60,"textBoxWidth":200,"textBoxWidthPercent":75,"textImageSpace":10,"textBoxBorderRadius":0,"textBoxBorderWidth":0,"loadMoreButtonText":"","loadMoreButtonBorderWidth":1,"loadMoreButtonBorderRadius":0,"imageInfoType":"ATTACHED_BACKGROUND","itemBorderWidth":0,"itemBorderRadius":0,"itemEnableShadow":false,"itemShadowBlur":20,"itemShadowDirection":135,"itemShadowSize":10,"imageLoadingMode":"BLUR","expandAnimation":"NO_EFFECT","imageQuality":90,"usmToggle":false,"usm_a":0,"usm_r":0,"usm_t":0,"videoSound":false,"videoSpeed":"1","videoLoop":true,"jsonStyleParams":"","gallerySizeType":"px","gallerySizePx":1000,"allowTitle":true,"allowContextMenu":true,"textsHorizontalPadding":-30,"itemBorderColor":{"themeName":"color_12","value":"rgba(221,221,221,0)"},"showVideoPlayButton":true,"galleryLayout":2,"calculateTextBoxHeightMode":"MANUAL","targetItemSize":1000,"selectedLayout":"2|bottom|1|max|true|0|true","layoutsVersion":2,"selectedLayoutV2":2,"isSlideshowFont":true,"externalInfoHeight":60,"externalInfoWidth":0.75},"container":{"width":220,"galleryWidth":242,"galleryHeight":0,"scrollBase":0,"height":null}}
    Archive
    • July 2018 (1)
    • June 2018 (6)
    • May 2018 (5)
    • April 2018 (5)
    • April 2017 (1)
    • March 2017 (1)
    • February 2017 (5)
    • January 2017 (3)
    • December 2016 (2)
    • November 2016 (1)
    • October 2016 (2)
    • September 2016 (2)
    • August 2016 (2)
    • July 2016 (2)
    • June 2016 (14)
    • May 2016 (7)
    • April 2016 (10)
    • March 2016 (4)
    • February 2016 (1)
    Follow Us
    • Facebook Basic Square
    • Twitter Basic Square
    • Google+ Basic Square