Written on November 15, 2012 – 7:00 am | by Derek de Gannes
For the tax and estate planner life insurance is a useful tool in many respects. In certain instances the value of a life insurance policy may trigger a taxable event causing the tax and estate planner to look to relieving rules in the Income Tax Act. One such rule is engaged when deciding whether or not the shares of a corporation held by an estate are qualified small business corporation shares for the purposes of claiming the capital gains exemption.
If ten percent or more of a private corporation’s assets are passive the capital gain on the sale or deemed sale of the corporation’s shares will not qualify for the capital gains exemption. Generally speaking, corporate-owned life insurance policies are considered passive assets and not assets used in an active business.
How does one value a life insurance policy for the purposes of determining the percentage of passive assets owned by a corporation?
The answer is the value of a life insurance policy insuring the life of the individual whose estate is claiming the capital gains exemption on the deceased’s shares will be the cash surrender value of the policy immediately prior to death provided those proceeds are used within twenty four months after death to buy the deceased’s shares now held by the estate.
Speak with a pro when trying to determine the status of the deceased’s shares where the company was the beneficiary of life insurance on the deceased shareholder.