Canada
Customs and Revenue Agency (CCRA):
This is the name of Revenue Canada since Nov. 1, 1999.
Capital
Dividend Account (CDA):
The Capital Dividend Account is a notional tax account into which certain
capital receipts of a corporation can be credited. It enables a corporation
to pay a tax-free dividend to shareholders.
The
CDA is available only to private corporations that are resident in Canada.
Here are some key criteria for determining if a corporation qualifies for
a CDA, although final determination of whether a corporation qualifies for
a CDA rests with the client's legal, taxation and accounting advisors:
-
The corporation must be a Canadian corporation, which usually means it has
been incorporated under federal or provincial law after 1977.
-
The corporation must be a private corporation and cannot be controlled directly
or indirectly by a public corporation (see section 89(1) of the ITA).
-
The corporation must receive non-taxable money, such as non-taxable portion
of a capital gain less the non-deductible portion of any capital loss. The
tax free portion of realized capital gains is credited to the CDA. When life
insurance death benefits are received by a corporation, the mortality gain
is credited to the CDA.
Any
capital dividend is paid on a tax-free basis. The dividend distribution must
be made on a pro-rata basis among all shareholders of the class of shares
on which the dividend is declared.
Cash
surrender value (CSV):
When cash value life insurance is surrendered during the life lifetime of
the person whose life is insured, the cash surrender value is the amount
that the policy owner receives after any outstanding policy loan, interest
and other surrender charges have been paid. The CSV is a taxable income receipt
to the extent that the CSV exceeds the policy's ACB.
Cash
value life insurance policy or cash value policy:
Permanent life insurance can provide life insurance coverage and cash value
growth within the contract. For the purpose of this guide, "cash value
life insurance" and "cash value policy" refer to life insurance
policies that are exempt from annual accrual taxation of the growth in cash
value under the provisions of the ITA.
Collateral
assignment:
In the common law provinces and territories, the owner of a life insurance
policy can use the policy as collateral for a loan or line of credit. The
owner cannot sell or dispose of the policy without either first getting the
lender's consent or paying off the loan or line of credit. This process is
sometimes called a "A partial assignment".
Income
Tax Act (Canada) (ITA):
This is the Federal statute that governs taxation of the income of individuals,
corporations, partnerships, trusts and estates in Canada. The provinces and
territories also levy income tax. The ITA is amended on a regular basis.
Leveraging:
A policy owner assigns a life insurance policy to a financial institution
as collateral for a loan or line of credit. In the common law provinces and
territories, the legal mechanism is "collateral assignment". In
Quebec, it is a "movable hypothec".
Mortality
gain:
When an eligible corporation (see definition of CDA) receives life insurance
proceeds, the mortality gain is credited to the CDA. The mortality gain is
the life insurance death benefit minus the ACB of the corporation in the
life insurance policy.
Movable
hypothec:
In Quebec, the owner of a life insurance policy can use the policy as collateral
for a loan or line of credit.
Net
cost of pure insurance (NCPI):
NCPI is calculated based on a prescribed mortality charge applied to the
amount at risk (i.e. the total death benefit less the accumulating fund of
the policy). It is a separate calculation for tax purposes and need not have
any relationship to the actual mortality charges assessed under the policy.
Policy
advance or policy loan:
Cash value life insurance contracts can permit the policy owner to receive
an advance against the death benefit payable under the terms of the policy.
Most people (advisors and clients alike) refer to this arrangement as a policy
loan and consider this to be a form of borrowing. While terms like "policy
loan" and "borrow" are used to describe this method of accessing
the cash value of a policy, the legal requirements and obligations of this
arrangement are different from when a person uses a cash value policy as
collateral for a loan or line of credit from a financial institution. Like
a loan from a financial institution, interest on the advance must be paid.
The policy advance is taxable to the extent that the amount borrowed exceeds
the policy's ACB. For convenience, we will refer to this arrangement as a
"policy loan" and will use the term "borrow" to describe
the action of accessing the cash value of the insurance policy.
Policy
withdrawal:
Cash value life insurance contracts can permit the policy owner to make a
permanent withdrawal of part of the policy's cash value. Withdrawals result
in a permanent reduction in the amount of life insurance coverage. A withdrawal
is a taxable income receipt of the policy owner calculated on a pro-rated
basis.
Retirement
Compensation Arrangement (RCA):
A Retirement Compensation Arrangement (RCA) is an inter vivos trust (one
set up during an individual's lifetime) that is used to provide retirement
income or benefits to an employee. Under the ITA, 50% of all deposits to
the trust must be paid to CCRA, which holds them in a refundable tax account
(RTA). Once the employee begins to receive retirement income, the RCA trust
may get a refund of $! from the RTA for every $2 paid to the employee. The
RCA rules in the ITA permit CCRA to deem an RCA to exist when an employer
is under an obligation to provide retirement income and other technical criteria
are met. It is possible for CCRA to determine that an RCA exists years after
the structure was set up, which can result in a significant retroactive tax
liability.
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