Matthew Getzler's article "Tax Planning and Insurance" was published
in Giving Advice, a publication from the Professional
Advisory Committee (PAC) of the Jewish Foundation of Greater
Tax Planning and Insurance
The benefits of life insurance are well known. Its uses range
from family protection in the event of an unexpected death, to
liquidity for funding taxes owing on death, through to being a
simple and tax-effective investment and philanthropic vehicle.
While the rules related to insurance under the Income Tax
Act are very complex, there is one rule in particular that
provides for a relatively straight-forward tax efficient plan.
Generally, when assets are transferred between non-arm's
length persons, the person disposing of the asset is deemed to have
transferred the asset at its fair market value. Tax would be owing
by the transferor on the transfer of the asset to the extent that
the fair market value exceeded the cost base thereof. In the
context of life insurance, however, a policy transferred by an
individual to a non-arm's length person (including a
corporation) will be deemed to have been transferred at its
"cash surrender value," and not its fair market value,
even if it may have been transferred for fair market value
Where a policy has grown in value since its acquisition (e.g.,
due to a change in the insured's ability to get insurance or
because the insurance was purchased when the insured was much
younger) while its cash surrender value has remained nominal, no
gain will be deemed to have incurred on the transfer. As a result,
in the case of a transfer of life insurance to a corporation, funds
from the corporation in an amount equal to the fair market value of
the policy can be extracted from the corporation without tax.
Say, for example, that Mr. Jackson obtained a policy in the face
amount of $1 million twenty years ago. If Mr. Jackson went out into
the market today and tried to obtain a similar policy, the cost of
the policy would be significantly higher than at the time it was
acquired – thus creating a fair market value for the policy.
In this case, let's assume that the policy's fair market
value is $500,000 and its cash surrender value is nominal.
If Mr. Jackson sold his policy to his corporation, BoCo, he
could receive a promissory note back from BoCo in the amount
$500,000. Mr. Jackson will not have a gain on the disposition (as
he will be deemed to have disposed of the policy at its cash
surrender value), but the repayment of the promissory note by BoCo
would be without the incurrence of any tax to Mr. Jackson. Without
this strategy, a withdrawal of $500,000 from BoCo as a regular
dividend would normally incur income tax well in excess of
$150,000. On Mr. Jackson's death, $1 million insurance proceeds
will be paid to BoCo (which, having purchased the policy, will have
changed the designated beneficiary of the policy to itself), and
assuming the cash surrender value of the policy remains nominal
until his death, the full $1 million can generally be paid out to
Mr. Jackson's estate tax-free by way of a capital dividend.
Mr. Jackson was so thrilled with the tax savings, he decided to
explore some charitable options, including gifting all or a portion
of the tax savings (which would result in a charitable receipt that
could be used to offset his personal income) or causing BoCo to
donate the policy itself (which would result in an even more
significant charitable receipt that could be used to offset
BoCo's income). In fact, as a result of the transaction, the
fair market value of the policy will have already been established
for the purposes of determining the amount of the charitable
receipt available to BoCo.
The Jewish Foundation would be happy to help implement a
charitable plan similar to that of our fictional Mr. Jackson.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The CRA provides new housing rebates for individuals who have purchased or built a new house or have substantially renovated a house or made a major addition to a house who plan on living in it personally or letting a relative live there.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).