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Policy Transfers (Part 1): Why and What to Consider?


 



Corporations, and individuals, purchase life insurance for many different reasons. As time passes, these reasons may change and therefore outgrow their original purpose. Sometimes it’s not even the purpose that has changed but rather the circumstances around it (i.e. the introduction of either an Opco or a Holdco). These changes can sometimes result in the termination of the policy, but most often it results in the transferring of the policy to a different owner. In this article, (the first of a two-part article, I’ll explore a range of factors that need to be considered before contemplating the transfer of a policy. In Part 2 I’ll explore the tax implications of transferring ownership in the three most common non-arms length scenarios:


A. Individual shareholder to Corporation

B. Corporation to individual shareholder

C. Corporation (Opco) to Corporate Shareholder (Holdco/Parent Co.)


 (A) Individual shareholder to Corporation:


Due to corporate restructuring or estate planning purposes, shareholders may wish to transfer their personally owned life insurance policy to a corporation that they control. Needs may also have evolved from one of an income replacement concern for dependents to a tax-efficient planning objective of transferring corporate surplus wealth from the corporation to their family upon death. Sometimes the needs may have stayed the same, but they simply want to take advantage of using cheaper after-tax corporate dollars to fund their life insurance policy (see article May 2022 article:  Corporate Owned or Personally Owned Life Insurance: Which is best? (qfscanada.com)). As you can imagine, several scenarios may trigger this type of policy transfer.

Here are the factors to consider before transferring an individually owned policy to a corporation:

 

  • A corporate-owned policy is exposed to the creditors of the corporation.

 

 

  • Undesirable tax consequences (e.g., shareholder benefits, taxable policy gain) may arise if there is a need to transfer the policy out of the corporation before death (for example, if the corporation is sold). We’ll explore this more in Part 2 (Jan 2024).

 

 

 

  • The potential impact of double taxation due to the stop-loss rules on taxation; and

 

  • There may be tax consequences where a shareholder of the corporation becomes a non-resident. A capital dividend (CDA) paid to a non-resident is subject to non-resident withholding taxes.

 

 

(B) Corporation to Shareholder:


The two most common reasons why someone would want their corporation to transfer out a policy on their life are:

  • The corporation will be sold.

  • Its business has stopped, and its only remaining asset is a life insurance policy.

 

(1)   Corporation to “Individual” Shareholder:


There may be a situation where a corporation may have life insurance coverage on the live(s) of shareholder(s) for buy-sell funding purposes and the corporation is sold to a third party. Although the corporation may no longer need the policy, the shareholder may want to have it to address personal estate planning needs. Another scenario (but not as common) is where there’s a corporate-owned life insurance policy, the business has ceased operations, and the policy is the only remaining asset (the corporation is subsequently wound up due to the shareholder retiring). In this case, the shareholder may not wish to pay the additional cost to keep the corporation open (i.e., filing corporate tax returns, etc.)

 

(2)   Corporations to “Corporate” Shareholder (Holdco or Parent Co.):


Like the scenario outlined above (#B1), this time involving a Holdco, corporate restructuring or the sale of an operating company, or a change in the purpose of insurance may often lead to a change of ownership structure of any life insurance in place.


Although I’ll get into the tax implications of all these scenarios in Part 2 (Jan 2024),  If significant tax consequences result from transferring the policy, the business owner may consider the following options:

 

  • Selling the corporation’s business assets (instead of the shares) so the corporation’s ownership doesn’t change.

 

·        Selling the corporation with the policy but acquiring and retaining life insurance shares  (see July 2022 article: Life Insurance Shares: What are they? And When to use them? (qfscanada.com))

·         

  • Keeping the corporation in good standing until the insurance proceeds are paid out (in the case where the business has ceased).

 

 

Stay tuned for next month’s article when I’ll explore the issues of taxation for these . policy transfer scenarios.


Tony Gallippi, B.A.S (Hons.) CFP CLU


Director, Advanced Planning, Insurance


QFS


 







This communication reflects the views of Qualified Financial Services Inc. as of the date published. The information in this publication is for general information purposes only and is not to be construed as providing individual legal, tax, financial or other professional advice. Qualified Financial Services Inc. assumes no responsibility for any errors or omissions in the information contained herein nor for any reliance placed on such information. Please seek independent professional advice before making any decisions.


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