Subject: re: Are there tax implications, when transferring ownership of a term policy, from Company to Perso

Subject: re: Are there tax implications, when transferring ownership of a term policy, from Company to Person
Date: Fri, 19 Dec 2003 16:33:41 -0000

The recent Volume (4, 2003) of the CALU INFOexchange deals with this issue. In part, it reads:

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Two issues regarding the transfer of a universal life policy to a corporation:

1. What are the tax implications of the disposition by a shareholder of a universal life insurance policy to a corporation whose shares are held exclusively by the shareholder, where the cash value of the policy is less than its adjusted cost basis (ACB)?

2. What are the tax implications to the corporation on receiving the proceeds of the life insurance policy?

These were essentially the questions asked of the CCRA in September 2003. The CCRA responded on Oct. 6, 2003 (document #2003-0040145).

In its response the CCRA noted that its understanding was that the transfer will be made for an amount of consideration equal to the cash surrender value of the policy which, as stated in the first question, is less than the ACB of the policy. Following the transfer, the corporation will be designated as beneficiary of the policy. The CCRA assumed that the policy is an exempt policy. The CCRA also noted that the shareholder is the life insured under the policy.

With respect to the first question, the CCRA's response notes that, pursuant to subsection 148(7) of the Act, where a life insurance policy is disposed of to a person with whom the policyholder is not dealing at arm's length, the policyholder is deemed to become entitled to receive proceeds of the disposition equal to the value of the interest at the time of the disposition and the person acquiring the interest is deemed to acquire it at a cost equal to that value. For the purposes of section 148 of the Act, "value" at a particular time means the cash surrender value that the policyholder would be entitled to receive if the policy were surrendered at that time.

Since the cash surrender value of the policy is less than its ACB, the CCRA stated that there is no amount that the policyholder is required to include in income. The loss resulting on the transfer (ACB less cash value) is not deductible under subsection 20(20) of the Act, as that provision only allows a loss to be deducted on the disposition of a non-exempt life insurance policy. The deduction under subsection 20(20) is limited to the income previously included under section 12.2 (or former paragraph 56(1)(d.1)) of the Act.

<B>The CCRA goes on to observe that the fair market value of a life insurance policy is not necessarily equal to its cash surrender value. Such facts as the age and health of the insured, the value of the accumulating fund, the cash surrender value and the amount of premiums paid at the time of the transfer are elements to be taken into account for the determination of the fair market value of a life insurance policy. If the fair market value of the policy is greater than the cash surrender value, then a benefit will be conferred by the shareholder on the corporation. There is no provision in the Act taxing such a benefit. The CCRA noted that since the excess of the fair market value of the policy over its cash surrender value is not required to be included in the corporation's income, this excess will not be added to the corporation's ACB of the policy. Thus, the transfer results in a loss of a portion of the shareholder's ACB, with no tax recognition for the loss. This iss!
ue is being examined by the Department of Finance./<B>

With respect to the second question, the CCRA confirmed that, as the policy transferred to the corporation is an exempt policy, the insurance proceeds which the corporation receives on the death of the shareholder will be tax-exempt. The CCRA also made a general statement regarding the amount that is added to the capital dividend account of a private corporation in respect of life insurance proceeds.
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