Corporate Life Insurance

What Is the ACB of a Life Insurance Policy?

The adjusted cost basis (ACB) is a tax figure the Income Tax Act requires be tracked on every permanent life insurance policy. It's not the same as the policy's cash value, and it's the single number that determines how much of a corporate death benefit becomes a tax-free Capital Dividend Account credit.

The Basic Definition

Adjusted cost basis is, roughly, the tax cost of the policy — a running figure that starts near the premiums you've paid and is reduced over time by the "net cost of pure insurance" (the portion of each premium the Income Tax Act treats as the actual cost of the death benefit coverage, as opposed to the savings/investment component). The result is a number that generally declines over the life of a permanent policy, sometimes reaching zero or even a notional negative position well before death, depending on the policy design.

ACB Is Not the Same as Cash Value

This is the most common confusion. Cash value is the actual accumulated savings inside the policy — what you'd receive if you surrendered it, and what it's actually "worth" as an asset today. ACB is a separate tax-tracking figure used to calculate gains or credits for tax purposes. On most policies, ACB and cash value diverge over time — cash value tends to grow while ACB tends to decline, which is exactly what creates a larger Capital Dividend Account credit the longer a policy is held.

Why ACB Matters

• The Capital Dividend Account credit is calculated as the death benefit minus the ACB immediately before death — a lower ACB means a larger tax-free credit. See Capital Dividend Account & Life Insurance.
• Surrendering or withdrawing from the policy during your lifetime can trigger a taxable policy gain if the amount received exceeds the ACB — relevant if you're considering accessing cash value rather than holding to death.
• Transferring a policy (for example, from personal to corporate ownership) can trigger a disposition calculated with reference to ACB — one reason ownership decisions are worth getting right from the start. See Should My Corporation Own My Life Insurance?

Who Calculates It, and How Do I Find Out My Policy's ACB?

Your insurance carrier tracks and reports the ACB — it's not something you or Gavin calculate independently. For an in-force policy, your carrier can typically provide an ACB statement on request. Your accountant uses that figure, along with the actual death benefit received, to determine the Capital Dividend Account credit and complete the corporation's tax filings.

Frequently Asked Questions