1

How Is Your Debt Insured?

Collateral Insurance and the Capital Dividend Account (CDA)

2

Corporate Debt Questions

• Does your client have any corporate debts?

• Are they insured?

• Who is the beneficiary on the policy?

• Will the policy create a Capital Dividend Account Credit?

• What is the Capital Dividend Account?

3

Capital Dividend Account

• Why we have it– Based upon the principle of integration– Income earned by a private corporation and

distributed as a dividend to its shareholders is “supposedly” subject to the same amount of tax as if the shareholder earned the funds directly

• CDA is a mechanism to accomplish this

4

Capital Dividend Account

• The purpose of the CDA is to keep track of certain amounts received by the corporation that if received by the shareholder directly would have been free of tax– Non-taxable portion of capital gains

– portion of life insurance proceeds payable at death

• These receipts can be passed through to the shareholder on a tax-free basis

5

CDA - Did you Know

• CDA only available to private corporations, public companies do not have CDA

• CDA credit is equal to death benefit less the ACB of the policy

• ACB is generally equal to (issued after Dec 1/82) premiums paid for the policy, less NCPI (net cost of pure insurance)

6

Collateral Insurance and Maximizing the CDACollateral Insurance and Maximizing the CDA

Shareholders

Annual Tax Savings

(Premium/NCPI) CCRA

Bank

Life Insurance Policy

(from a life insurance co.)

Business Loan

Collateral

Assignment (required)

OPCO

Stage 1: During LifeStage 1: During Life

Stage 2: Death of a ShareholderStage 2: Death of a Shareholder

Remaining Shareholder

CCRA

Bank

Life Insurance Policy

OPCO

Business Loan Repaid

Life Insurance Proceeds

Tax Savings on future Dividends

CDA Credit

7

Collateral Insurance and the CDA

Insurance through Insurance through

a Bank an Insurance Co. Loan Amount $500,000 $500,000

Death Benefit Amount$500,000 $500,000

Loan Amount after Death Benefit $0 $0

Credit to CDA $0 $500,000

Future tax savings from CDA $0 $160,000(32%)

Collateral insurance should be purchased from a life insurance company and collaterally assigned to be eligible for a CDA credit.

LifeInsurance Policy