A corporation owns a key person life insurance policy on an executive. Upon the executive's death, how is the death benefit credited to the corporation's Capital Dividend Account (CDA)?

Question: A corporation owns a key person life insurance policy on an executive. Upon the executive's death, how is the death benefit credited to the corporation's Capital Dividend Account (CDA)?

Answer options:

• The full amount of the death benefit is added to the CDA.
• 50% of the death benefit is added to the CDA. ✅ The death benefit minus the policy's adjusted cost basis (ACB) is added to the CDA.
• The death benefit is not related to the Capital Dividend Account.

Correct answer: The death benefit minus the policy's adjusted cost basis (ACB) is added to the CDA.

Explanation: When a corporation receives a death benefit, it can add the amount of the benefit less the policy's ACB to its Capital Dividend Account, allowing for tax-free distribution to shareholders.