It is not uncommon to see corporate owned life insurance transferred to a shareholder particularly when the company is being sold. The Canada Revenue Agency (CRA) was asked to comment on a set of facts and their response was no surprise given the relatively new rules in this area of the tax law.
- X owns 100% of Opco’s preferred shares that have a redemption value of $1 million, an adjusted cost base (“ACB”) of $1, and a paid-up capital (“PUC”) of $1.
- Opco’s common shares are held by a family trust.
- Opco owns a $1 million insurance policy on X’s life that has the following characteristics: $500 cash surrender value (“CSV”); $50,000 ACB; and $450,000 fair market value (“FMV”).
- At a time after March 21, 2016, X would like to personally own the policy, and Opco would transfer the policy to X.
- X does not deal at arm’s length with Opco.
Assuming the policy was transferred to X as a dividend in kind on his Opco preferred shares, the CRA was asked what would be:
- the proceeds of disposition of the policy to Opco;
- the income inclusion to X; and
- the ACB of the policy to X.
The CRA confirmed that the proceeds of disposition of the policy to Opco would be deemed to be $50,000 (i.e., the greatest of $500 CSV, nil consideration, and $50,000 ACB), resulting in no policy gain. X would be deemed to buy the policy for $50,000, and the action would trigger an income inclusion for X of the FMV of the policy interest (i.e., $450,000 plus gross up). In other words, the proceeds of disposition to the transferor and the ACB to the transferee are the greatest of the CSV of the policy, the ACB of the interest in the policy, and the consideration given for the interest. The income inclusion to the transferee is based on the FMV of the interest in the policy received.
Speak with a pro to minimize the tax hit when transferring assets including insurance from a company to a shareholder.