Tax issues of transferring life insurance policies

A gain on the policy, he recalled, invoking article 148 of the income tax law (Canada), is considered an ordinary gain and not a capital gain. Thus, 100% of the policy gain is included in income for tax purposes. There will be a gain if the amount of proceeds at disposition is greater than the adjusted cost base (ACB).

Transfers between spouses

The majority of police transfers, notes Benoît Charest, take place in a context of dependence, which involves a member of a family unit.

When the transfer is made directly from spouse to spouse (married or de facto), the proceeds on disposition are equivalent to the ACB. Consequently, there are no policy gains. However, specifies Benoît Charest, the transfer cannot be made through a trust or an estate. Also, no rollover can occur when there is a division of policy on marriage breakdown.

Transfers between generations

In order to avoid the tax impact, the policy must be assigned to the child (whose definition is very broad). This implies that the reverse does not work.

Each year, said Benoît Charest, this situation arises: the parent dies, the policy is transferred by will and there is taxation. “The estate receives a T5 and the advisor comes to see me… Unfortunately, a portion of the transaction disqualified the rollover,” says Benoît Charest. The solution is to make the child the contingent owner of the policy.

To trust and from trust

There are fewer trusts in Quebec than in the rest of Canada, specifies the tax lawyer of Canada Life, because its rules of constitution are different. From there, the cases of policy transfers are fewer.

Is it worth having a policy held and paid for by a trust as part of a corporate structure? “Generally not,” says Benoît Charest. This is not the case because usually the trust is a “conduit” that does not hold money. It transfers the dividends to an investment company or a shareholder. The trust formula does not have any tax advantage as such. As a result, the police will instead end up in an investment company.

However, the trust formula can make sense in a family context.

Benoît Charest gives the example of a grandparent who subscribes to a policy on the life of his child and for the benefit of his grandchild. By setting up a trust, the grandparent ensures that the death benefit will be given to the grandchild. This scenario is particularly interesting, explains Benoît Charest, in the case of financially immature children.

From a shareholder to a company

If the policy is owned by the corporation, the corporation will pay the premiums. And even if the bonuses are generally not deductible, it will be fiscally advantageous for the shareholder to do so because of the lower tax rates compared to payroll tax.

However, warns Benoît Charest, protection against creditors will not apply. Creditor protection should therefore not be a concern.

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