Should my Corporation own my Life Insurance Policy? There are two excellent strategies involved in transferring a personally held insurance policy to a corporation: Corporation pays premium; and, Corporation pays fair market value for the policy. Corporation pays premium You can save substantial amounts of tax by transferring a personal life insurance policy to a corporation. Corporations are allowed to own insurance policies just like a corporation can own a building or a bank account. The corporation can then use retained earnings to pay the premium. In order to pay the premium the corporation must be the policy owner and beneficiary under the policy. It is possible for a holding company to own the policy and an operating company to pay the premiums – provided the reason is to protect the policy from creditors … There must be an insured person (when the insured person dies the policy pays out). The insured person can be anyone who consents to the corporation taking out a policy on their life. Normally the insured would be the owner/manager or a key person of the corporation, but nothing prevents other family members from being insured persons even if they are not shareholders or employees of the corporations. Using retained earnings to pay for a life insurance policy gives a 60% advantage over paying personally. The 60% advantage works like this: if your premium is $10,000 per year and you pay personally the real cost is $19,000 per year, this is because you have to have a $19,000 salary – pay $9,000 in tax – in order to have $10,000 left over to pay the premium. When you use corporate dollars the math is 60% better: if you use retained earnings you only need $12,000 – pay $2,000 in corporate tax – in order to have $10,000 left over to pay the premium. This means you save $7,000 every year simply by transferring the policy to the corporation. You could improve the result by making a portion of the premium deductible. To be deductible the policy has to be assigned to a bank as security for an investment loan. By now some of you are concerned that … the life insurance will be paid to the corporation. There is a very simple answer: the amount of insurance over ACB (adjusted cost base), is credited to the capital dividend account and can be paid out as a tax free dividend. Over time the ACB amount gets ground down (by NCPI) and is usually very low by the time the policy is paid out. Also where the policy is owned by Holdco but paid to Opco the entire amount is credited to the CDA (capital dividend account). In terms of share valuation for estate purposes the policy is valued at CSV (cash surrender value) less ACB. This value can be eliminated from the share valuation for estate purposes by ensuring that the class of shares the insured owns cannot participate in the CSV of the policy. Transferring the ownership of the policy The ownership of a life insurance policy is easily transferred. All that is required is that the current owner (shareholder) file a request with the insurance company to change the records to show a new owner (corporation). The corporation needs: a director’s resolution authorizing the policy acquisition; and, an entry in the financial statements reflecting the policy acquisition. Tax consequences of transfer For tax purposes: shareholders and corporations are not at arm’s length so s. 148(7) deems the proceeds of disposition for the shareholder to be the value of the policy. This value is defined in s. 148(9) essentially to be the CSV of the policy- NOT – the fair market value of the policy. As a result, the shareholder will have to report income equal to the CSV less ACB of the policy. Even worse a life insurance policy is not capital property which has two nasty results: 1. the income from the policy sale (CSV over ACB) is not a capital gain so it is fully taxable; 2. no s. 85 rollover is available to roll a life insurance policy into a corporation. On the other hand there is a couple of interesting opportunities. The first is that ownership of the life insurance policy can be split in to two pieces: insurance; and CSV. The insurance portion of the policy can transferred to the corporation; and, the CSV portion can be retained by the shareholder. An insurance company can provide an illustration showing the cost components of the two pieces so that the: shareholder can continue to pay for the CSV; and, the corporation can start paying for the insurance. This avoids any s. 15(1) benefit concerns. Corporation pays fair market value for the policy The second and more interesting opportunity is where the insurance policy has gone up in value due to age or illness. Consider an uninsurable 70 year old who bought a policy 25 years earlier. That policy clearly has ‘fair market’ value, in other words an investor would be prepared to pay a certain amount of money for a $1 million policy on a 70 year old who has health problems. That ‘fair market’ value can be accurately measured by an actuary. Valuation fees for a life insurance policy range from $1,000 to $2,500. So why is this an opportunity? … remember that for tax purposes a policy is valued at CSV, not fair market value. If the insurance portion of the policy has fair market value, separate and apart from CSV or there is no CSV, then that insurance policy can be sold to the corporation at the fair market value determined by the actuary without tax consequences to the shareholder. GBL provides this example: For example, a business owner has a permanent life insurance policy. The face value of the policy is $1,000,000. The CSV of the policy is $350,000 and the ACB (essentially the accumulation of all policy premiums paid over the years) is $275,000. Last year, he suffered a heart attack. Determining that he would like to remove some money from his business, he commissions a fair market valuation of his life insurance policy, given his new health status. After the medical data is reviewed, an actuary has determined that the FMV of the policy is $750,000. He transfers the policy to his corporation and takes out $500,000 in cash and a $250,000 promissory note. The company acquires the policy with a new ACB of $350,000 and the business owner pays tax on income of $75,000 (CSV over ACB). A life insurance policy should be owned by a holding company so it is protected from creditors and so that it does not throw the active asset test (90%) offside for purposes of the capital gains exemption. If you have any comments or questions, feel free to call or email us.
Posted on: Sat, 22 Jun 2013 22:52:24 +0000
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