This article was generously provided by Paulo Fonseca, Business Development Consultant, Financial Horizons Group, Quebec Region.
Financial Horizons Group receives applications for the transfer of life insurance properties or policyholders on a daily basis. These applications used to be relatively straightforward and, for some policyholders, positive transactions. Although that might still be the case today for some, the situation has changed, especially with respect to tax rules.
Let me provide a light-hearted explanation of my view of the issue by using a metaphor that I heard from one of my most valued business partners of the past few years: “There’ll be no more dipping into the cookie jar!”
March 2016: A Key Moment
March 2016 was a pivotal moment in terms of changes to the tax rules that apply to transfers of property or ownership. Indeed, the transfer of an existing policy from one owner to another remains one of the proposed solutions in certain situations: it’s still possible to transfer one’s interest to another “entity”. It’s important to note, however, that under civil law, insurable interest is treated differently in Quebec than in the rest of Canada. As a result, transfers can have tax consequences that are hard to identify and that can even have legal implications
Here are a few things to bear in mind as you consider the issue:
- What is the deemed disposition?
- Who pays the taxes, if any?
- What are the tax-free exemptions?
- What are the tax implications of a transfer involving different types of ownership (individual, direct family, company, shareholder, or employee)?
- What is the transfer situation (at time of death or during one’s lifetime)?
- What is at stake: taxable benefit or fair market value?
- Is the insurance temporary or permanent? Because value isn’t the only variable to consider; there’s also the issue of insurability.
- What are the risks to creditors?
- What are the potential risks (i.e. an inappropriate taxable benefit or the creation of double taxation at death, if the value is substantial)?
One must also consider that when there’s a disposition, tax law specifies that this may result in a policy gain for the transferor that may even be taxable and therefore added to regular income, where this type of gain is usually equal to the adjusted cost basis surplus. The cases that are most often handled on a tax-free basis are those where a blood relationship, as opposed to a corporate or shareholder relationship, exists between policyholders. The adjusted cost basis readjustment applies, depending on the specifics of each situation, in order to establish if the transfer is taxable or not. Furthermore, there are new calculation parameters for certain types of transfers. This information is available from the Canada Revenue Agency; you should also be aware that many reference documents on this topic are available from some of our trusted carriers.
Since each individual policyholder’s situation is different, the impact is therefore equally so! There are no shortcuts, but it is crucial to do everything possible to avoid a potential unexpected notice of assessment. This means that your clients will have to consult tax specialists and ensure their transactions have been duly validated prior to implementation.
In conclusion, transfers of property or ownership are now potentially more complex transactions. It is therefore necessary to analyze the ins and outs of the issue before concluding any kind of transfer. And so, dear advisor, if you have any doubts or questions, be sure to contact Financial Horizons Group for support and expertise.