Transferring life insurance to a corporation - CIFPs

Transferring life insurance to a corporation

CIFP Conference June 13, 2010

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Transferring life insurance

Even if all or a portion of a life insurance premium is not taxdeductible, the policy should generally be held by a closelyheld corporation rather than personally in order to be able to pay the premiums with the cheapest dollars.

This is especially true if the corporation is eligible for the 16.5% (soon to be 15.5%) small business rate in Ontario.

The income tax act contains special rules that apply to individuals who transfer policies to non-arm's length corporations.

These rules differ for term policies and whole-life policies.

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Transferring life insurance

It is clear, however, that the beneficiary of a corporate owned policy must be a corporation.

If a corporation owns a policy on its individual shareholder's life but such individual is the beneficiary, payment of the premiums by the corporation will result in the corporation being considered to have conferred a taxable benefit on the individual (subsection 15(1)).

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Transferring life insurance

Subsection 148(7) deems the proceeds of disposition of a

policy to a non-arm's length person to be the "value" of the

policy as defined by subsection 148(9). This value, for tax purposes, is deemed to be equal to the

CSV of the policy at the date the policy is surrendered. The real value of the policy might be considerably higher than

its CSV if, for example, the person insured has a serious illness.

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Transferring life insurance

Term policies Since a term policy has a zero CSV, the individual who

transfers a policy to a non-arm's length corporation will be deemed to receive zero proceeds even if he or she actually receives proceeds equal to FMV, which are a greater amount. Therefore, the individual could receive, from the corporation, cash and/or a promissory note equal to the real value of the policy, without incurring a tax liability. This would allow corporate surplus equal to the cash/promissory note to be extracted at no tax cost. Furthermore, the capital dividend account of the corporation

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Transferring life insurance

would not be impaired when the corporation ultimately receives the life insurance proceeds on the death of the insured: - the cost of the term policy to the corporation would be deemed to be zero (subsection 148(7) even if the corporation were to pay the transferor a greater amount. - therefore, the "adjusted cost basis" ("ACB") of the policy to the corporation would not, initially, be increased (item A of the definition of the ACB in subsection 148(9). - therefore the capital dividend account ("CDA") increment generated on the ultimate receipt, by the corporation, of the life insurance proceeds, would not be decreased by the consideration actually paid (paragraph (d) of the CDA definition in subsection 89(1)).

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Transferring life insurance

Whole-life policies In contrast to term policies, there may be adverse tax

implications when an individual transfers a whole-life policy to a non-arm's length corporation, because the value of the policy for tax purposes, per subsection 148(9), is deemed to be equal to its CSV. It the policy's CSV exceeds its adjusted cost basis, the individual will be deemed to have realized a fully taxable gain for tax purposes, on the transfer (subsection 148(1)). Furthermore, the capital dividend account generated in the corporation when it ultimately receives the proceeds of the

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Transferring life insurance

life insurance will be reduced by the CSV at the date of the transfer because the cost of the whole-life policy to the transferee corporation would be the CSV of the policy at the transfer date (subsection 148(7)). Therefore, the ACB of the policy to the corporation would also be increased by that same CSV (item A of the definition of ACB in subsection 148(9)) and the CDA increment generated on the receipt of the proceeds of the policy would be decreased. This is a reasonable result as long as the individual receives consideration equal to that CSV when transferring the policy to the corporation.

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