Income Tax Act (ITA) section 148(9)

Adjusted Cost Base

The Adjusted Cost Base is the cost of capital property (e.g., shares) for tax purposes less fees and less expenses for improvements

• includes: commissions, legal fees
• excludes: ongoing maintenance (e.g., property taxes, painting, lawn mowing)

Adjusted Cost Basis

The Adjusted Cost Basis is the cost of an insurance policy. It is the out-of-pocket cost.

This is the term used throughout the site.

ACB = sum of Premiums - sum of Net Cost of Pure Insurance (NCPI)

$ACB = \sum Premium - \sum NCPI$

So the ACB grows in the early policy years because of the premiums paid and eventually becomes zero. Which ACB is preferable? It depends on the ownership.

• personally-owned: high ACB preferred since taxed on the gain upon withdrawal or surrender [expand]
• corporately-owned: low ACB preferred to maximize the tax-free CDA credit (Death Benefit less ACB)

Factors That Decrease the ACB

• proceeds of disposition of an interest in a policy through: withdrawal, policy loan, dividends received (up to the ACB)
• NCPI for policies acquired after Dec 1, 1982
• policy loans taken after March 31, 1978
• policy dividends received after payment of policy premiums (for whole life insurance only)

Factors That Increase the ACB

• all premium for policies issued before December 1982
• premiums paid for insurance coverage (excludes charges for substandard risks, additional benefits like accidental death)
• repayment of policy loans that were previously taxable
• policy loan interest (unless loan for investment purposes à tax deductible)
• amount paid to policyowner through absolute assignment
  • arm’s length: ACB = amount paid for policy
  • non-arm’s length: ???
• policy gains already reported
• accrued income previously reported on a nonexempt policy
• dividends for additional insurance via Paid-Up Additions or One-Year Term
• amounts to acquire the policy
  • new policy: premium payment
  • inforce policy: purchase price
• policy gains included in income (e.g., withdrawals, policy loans)