Transfer of life insurance policies within a corporate group
For various reasons, a business owner may wish to transfer a life insurance policy owned by one corporation to another corporation within the same corporate group. For example, upon a sale of the shares of an operating corporation, the business owner may wish to keep a life insurance policy owned by the operating corporation, and thus wish to transfer it to a holding corporation that will not be sold as part of the transaction.
In addition to an outright sale, there are several possible ways to transfer a life insurance policy from one corporation to another. For example, the life insurance policy could be transferred from the operating corporation to the holding corporation via a dividend in kind prior to the transaction. The operating corporation may realize a gain on the transfer of the policy, which gain would not benefit from capital gains treatment. However, should certain conditions be met, the gain may be reduced depending on the cash surrender value and the adjusted cost base of the policy. There may be other tax consequences relating to the intercorporate dividend, even in the case of a dividend in kind. These include the application of subsection 55(2) of the Income Tax Act (Canada) where the operating corporation does not have sufficient safe income on hand to cover the dividend, as well as tax on the intercorporate dividend under Part IV of the Income Tax Act (Canada).
The choice of the best method of transferring a life insurance policy from a tax point of view depends on various factors such as whether the parties are dealing at arm’s length, the type of life insurance policy and the tax characteristics of the policy (fair market value, adjusted cost base and cash surrender value).
It is important to obtain qualified tax advice prior to transferring life insurance policies within a corporate group in order to avoid unwanted tax consequences and to determine the most tax-efficient manner of effecting the transfer.
Please note that the above does not constitute a legal opinion and is for information purposes only.