Hello again,
In my last blog I examined the process of changing the ownership of a life insurance policy where at least one of the parties was a single individual. In this edition I will take the next step and look at what is involved when both parties to the change are corporations.
First, let us examine the most common scenario where a policy is being transferred from an operating corporation to its parent Corp, a holding corporation. The transfer can take one of two forms. The first is Hold Co simply purchases the policy for cash at the greater of its ACB, CSV or FMV. This scenario causes a disposition of the policy in OpCo so if the policy CSV exceeds the ACB there is a taxable gain in OpCo. the policy has a new ACB in HoldCo equal to the purchase price.
The second and in my experience, far more common method of transfer is through the use of a tax free intercorporate dividend. Under this method OpCo declares a “dividend in kind” to HoldCo for the greater of the ACB, CSV or FMV. The change of ownership from OpCo to HoldCo is again a disposition in OpCo and as before, if the CSV exceeds the ACB there will be taxes owing at the OpCo level. Recently CRA has introduced the concept of “Safe Income”. What this means is that all dividends, to maintain their tax free status, must not exceed this amount. The safe income amount is tied to the OpCo retained earnings and can most easily be found by the corporate accountant. The dividend in kind is declared for the value stated above and if the value is less than the safe income amount, the dividend will truly be tax free to HoldCo. If, however, the value of the dividend is greater than the safe income level, any surplus above safe income will be taxed as a capital gain at the HoldCo level.
The next scenario is where we have the transfer of a life policy between two related companies. The concept of related companies is not as simple as we might assume at first glance. Usually, we think of sister companies or related companies as two Corps owned by the same HoldCo or the same individual. In fact, the definition is much broader and generally states that related Corps are two Corps owned by related individuals. This includes related by blood, marriage, or adoption, and also takes in an individual and a corporation, a trust, or two corporations.
This means related companies are any group of companies that have the potential to be influenced by a single individual, company, or a group of individuals or companies. For related companies they are assumed to be dealing at non-arm’s length which in turn means the process of transferring policies between related Corps is slightly different than a transfer between arm’s length companies. The process can take one of three forms.
Version One: No Consideration Paid
Corp A wishes to transfer a life policy to a related corporation Corp B, and the transfer takes place at no consideration. The proceeds of disposition to Corp A is the highest of CSV, FMV and ACB. This is the transfer price and will form the new ACB to Corp B. As always, with the disposition of a policy, if the CSV exceeds the ACB, there will be tax incurred by Corp A. CRA has ruled that there may be a taxable benefit to the shareholder(s) of Corp B under certain circumstances. The circumstances include the concepts of “impoverishment” to Corp A and “enrichment” to Corp B. It is beyond the scope of this blog to explain fully these two concepts, and they will be dealt with in a later edition.
Version Two: Consideration Paid equal to CSV
In this version, Corp A transfers the policy to Corp B, and Corp B pays consideration equal to the CSV. The regular tax implications that arise from any policy disposition applies to Corp A. Corp B pays consideration in the amount of the CSV, and this amount now constitutes the policy ACB for Corp B. Due to consideration being paid, there is no potential for tax liability to the shareholders of Corp B.
Version Three: Consideration Paid equal to policy FMV
FMV exceeds ACB and CSV. Corp A now reports a taxable gain equal to the difference between the policy CSV and the FMV. Corp B now has the policy with an ACB equal to the consideration paid (FMV).
The rationale behind choosing version one, two or three will be unique to each situation so any time a policy transfer is made between two related Corps advisors must be careful about the advice they provide. It is important to note, that related or sister Corps do not have any share overlap. This means neither owns shares in the other.
The next topic to address is the transfer of a policy between two unrelated Corps who are assumed to be dealing at arm’s length. Typically, the transfer of a policy between arm’s length parties occurs at Fair Market Value. If FMV is greater than the CSV, then the transferor will have a taxable gain equal to the difference, and the transferee will have a new ACB equal to the transfer price. If the transfer price is below the CSV there will be no gain to the transferor, and the transferee will have a new ACB equal to the transfer price. If in fact the transfer price equals the CSV, there will be no gain to the transferor, and the transferee will have a new ACB equal to the CSV.
The above has dealt with some of the transfer of life insurance policies between corporations. There will undoubtedly be examples that will not fall within the structures explained above.
If an advisor comes across one of these more unique structures, I would advise them to contact the ACES inbox ([email protected]) or me directly (403-355-2114).
Please lookout for the next blog in early May dealing with the reinsurance marketplace in Canada today.
Take care,
Ian Tod, B.A. (Econ), MBA, CFP, CLU
Advance Markets Specialist
[email protected]
First, let us examine the most common scenario where a policy is being transferred from an operating corporation to its parent Corp, a holding corporation. The transfer can take one of two forms. The first is Hold Co simply purchases the policy for cash at the greater of its ACB, CSV or FMV. This scenario causes a disposition of the policy in OpCo so if the policy CSV exceeds the ACB there is a taxable gain in OpCo. the policy has a new ACB in HoldCo equal to the purchase price.
The second and in my experience, far more common method of transfer is through the use of a tax free intercorporate dividend. Under this method OpCo declares a “dividend in kind” to HoldCo for the greater of the ACB, CSV or FMV. The change of ownership from OpCo to HoldCo is again a disposition in OpCo and as before, if the CSV exceeds the ACB there will be taxes owing at the OpCo level. Recently CRA has introduced the concept of “Safe Income”. What this means is that all dividends, to maintain their tax free status, must not exceed this amount. The safe income amount is tied to the OpCo retained earnings and can most easily be found by the corporate accountant. The dividend in kind is declared for the value stated above and if the value is less than the safe income amount, the dividend will truly be tax free to HoldCo. If, however, the value of the dividend is greater than the safe income level, any surplus above safe income will be taxed as a capital gain at the HoldCo level.
The next scenario is where we have the transfer of a life policy between two related companies. The concept of related companies is not as simple as we might assume at first glance. Usually, we think of sister companies or related companies as two Corps owned by the same HoldCo or the same individual. In fact, the definition is much broader and generally states that related Corps are two Corps owned by related individuals. This includes related by blood, marriage, or adoption, and also takes in an individual and a corporation, a trust, or two corporations.
This means related companies are any group of companies that have the potential to be influenced by a single individual, company, or a group of individuals or companies. For related companies they are assumed to be dealing at non-arm’s length which in turn means the process of transferring policies between related Corps is slightly different than a transfer between arm’s length companies. The process can take one of three forms.
Version One: No Consideration Paid
Corp A wishes to transfer a life policy to a related corporation Corp B, and the transfer takes place at no consideration. The proceeds of disposition to Corp A is the highest of CSV, FMV and ACB. This is the transfer price and will form the new ACB to Corp B. As always, with the disposition of a policy, if the CSV exceeds the ACB, there will be tax incurred by Corp A. CRA has ruled that there may be a taxable benefit to the shareholder(s) of Corp B under certain circumstances. The circumstances include the concepts of “impoverishment” to Corp A and “enrichment” to Corp B. It is beyond the scope of this blog to explain fully these two concepts, and they will be dealt with in a later edition.
Version Two: Consideration Paid equal to CSV
In this version, Corp A transfers the policy to Corp B, and Corp B pays consideration equal to the CSV. The regular tax implications that arise from any policy disposition applies to Corp A. Corp B pays consideration in the amount of the CSV, and this amount now constitutes the policy ACB for Corp B. Due to consideration being paid, there is no potential for tax liability to the shareholders of Corp B.
Version Three: Consideration Paid equal to policy FMV
FMV exceeds ACB and CSV. Corp A now reports a taxable gain equal to the difference between the policy CSV and the FMV. Corp B now has the policy with an ACB equal to the consideration paid (FMV).
The rationale behind choosing version one, two or three will be unique to each situation so any time a policy transfer is made between two related Corps advisors must be careful about the advice they provide. It is important to note, that related or sister Corps do not have any share overlap. This means neither owns shares in the other.
The next topic to address is the transfer of a policy between two unrelated Corps who are assumed to be dealing at arm’s length. Typically, the transfer of a policy between arm’s length parties occurs at Fair Market Value. If FMV is greater than the CSV, then the transferor will have a taxable gain equal to the difference, and the transferee will have a new ACB equal to the transfer price. If the transfer price is below the CSV there will be no gain to the transferor, and the transferee will have a new ACB equal to the transfer price. If in fact the transfer price equals the CSV, there will be no gain to the transferor, and the transferee will have a new ACB equal to the CSV.
The above has dealt with some of the transfer of life insurance policies between corporations. There will undoubtedly be examples that will not fall within the structures explained above.
If an advisor comes across one of these more unique structures, I would advise them to contact the ACES inbox ([email protected]) or me directly (403-355-2114).
Please lookout for the next blog in early May dealing with the reinsurance marketplace in Canada today.
Take care,
Ian Tod, B.A. (Econ), MBA, CFP, CLU
Advance Markets Specialist
[email protected]