Transferring a Life Insurance Policy to a Corporation
The Corporate Extraction Strategy involves transferring a personally owned life insurance policy to a corporation for its fair market value (FMV). When handled properly, it will result in withdrawing capital from the corporation tax free!
The preferred candidates for this strategy:
The life insurance policies best suited for this strategy:
There are two separate transactions with income tax implications:
Establishing the Fair Market Value of the policy
This will require the services of an actuary to provide a proper valuation of the insurance contract. Also required will be a projected age of mortality most commonly provided by a life insurance underwriter. The actuary will consider all factors relevant to the appraisal and provide a report indicating the FMV of the policy. This report will be used to justify the payment to the shareholder. Under ideal situations, this payment is often substantial.
Factors to consider:
Uses of life insurance in the corporation:
It is always advisable to have a business reason other than just the tax results in any strategy involving life insurance. Below are some of the more common reasons for corporate owned life insurance:
What does the Canada Revenue Agency say?
The CRA has acknowledged this strategy and refers to the tax result achieved as an anomaly under the Income Tax Act. In 2003, they stated, “The result of this transaction is that the shareholder is effectively receiving a distribution from the corporation on a tax-free basis. We previously brought this situation to the attention of the Department of Finance and have been advised that it will be given consideration in the course of their review of policyholder taxation”. These comments were echoed again in 2009. The recent changes to the Income Tax Act introduced in 2013 were silent on this issue so the strategy remains viable. Given the CRA comments, however, we expect the door to close on this planning opportunity in the near future.
The Corporate Extraction Strategy Case Study
Dan is a 66 year old lawyer. In 2003 he purchased a $500,000 term insurance policy that was issued at standard non-smoker rates. He had a series of health episodes between 2005 and 2008 that rendered him uninsurable. As a result, Dan wanted to ensure that he maintained his life insurance for the rest of his life.
In 2012 he converted his policy to a $500,000 Term to 100 policy with an annual premium of $15,800. Shortly after the conversion he requested an actuarial valuation of this policy. The actuary involved concluded that based on the mortality assessment that put Dan’s life expectancy at 9 years (age 75), the policy had a fair market value of $282,000.
The policy was then sold to his Law Corporation. As the policy was just converted and there was no cash value, there was no taxable disposition on the transfer. His Law Corporation paid to him the FMV of the policy – $282,000. Dan received this amount tax-free.
We do know that the window may close on this opportunity at any time, so don’t delay if you think it is appropriate for you. If you have questions or wish more information about the Corporate Extraction Strategy please call me. Please feel free to use the sharing links below to forward to someone you think might benefit from this information.
305 Lakeshore Road E, Suite 3
Toll free: 1.866.811.2711