Home Insurance [Chronique de Sandy Lachapelle] A good idea, life insurance in an operating company?

[Chronique de Sandy Lachapelle] A good idea, life insurance in an operating company?

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[Chronique de Sandy Lachapelle] A good idea, life insurance in an operating company?

When life insurance is intended to meet personal protection needs, the question does not arise. In the vast majority of cases, the insured will be the policyholder. However, when the time comes to take out life insurance in a corporate structure, strategic thinking is required because its holder, the insured(s), the payer and the beneficiary may all be different persons (physically or morally).

Talk to Catherine, a reader who asked me the following question: “I recently sold my shares in the company to my former partner. We had several company-owned policies, each of which was a whole life policy purchased a few years ago with cash values ​​of over $250,000. How can I recover this amount? Should I keep this contract or cancel it?”

First: never take the choice of your owner lightly. Such a formula always requires analysis, but beforehand, if a permanent life insurance policy in an operating company has been recommended to you, red lights should automatically turn on to warn you. Why ? For several reasons, but at least two main reasons.

First, if you want your shares to qualify as qualifying small business shares (QBSE) so that you can benefit from your capital gains allowance when the business is sold, be aware that the accumulated redemption values ​​may prevent this status. Indeed, among the criteria to qualify the shares is that, during the 24 months preceding the disposal, the shares must have constituted a Canadian-controlled private corporation (CCPC) of which more than 50% of the fair market value of the assets consisted of items that actively used in the operation of the company. Therefore, remember that any type of investment, whether investing or accumulating cash values ​​in an operating company, can “corrupt” this test.

Second, if your insurance needs are permanent, you will probably want to transfer this policy to your holding company or personal ownership. Given the non-arm’s length relationship between you and your company, this transfer will be made in accordance with the application of para. 148, subsection 7, of the Income Tax Act (ITA). The disposition proceeds of the transferor and the new adjusted cost base (ACB) of the transferee will be the greater of the ACB, the value of the interest in the contract, and its fair market value.

However, few people know that life insurance can achieve a fair market value. This must be confirmed by an actuarial certificate, and the surprise can be very bad if several years have passed since the policy was signed, especially if the health of the insured has deteriorated or if the accumulated values ​​are important.

Why such a fundamental error?

In many cases, the company benefits from a lower tax rate than its shareholder. It is therefore a safe bet that, in connection with a sale, it will be easier to convince a shareholder to use the company’s liquid funds for a permanent life insurance project. In addition, it also often happens that the shareholder is the sole shareholder in his company, and he does not think he will be able to sell his shares one day.

I like to remind my clients that nothing is more certain than the unpredictable! Holding permanent life insurance in a company should ideally only be done if you are thinking of dying with it. For some entrepreneurs whose assets are very important, it is also a must to optimize the legacy. For others, however, the question deserves consideration.

Finally, there may be several reasons for using life insurance in a business context: to protect the company in the event of the death of a key employee, to guarantee a creditor’s loan or to allow the financing of the terms of the redemption of shares in the event of death as stipulated in your shareholders’ agreement. These needs are, and in most cases should be, met by life insurance.

While it is true that the transfer of a term policy in the context of a non-arm’s length relationship rarely leads to serious tax consequences – unless, for example, the health condition of the insured seriously deteriorates – is it better to warn and have all life insurance policies held by the shareholders’ management companies or even in their personal names. However, nothing prevents the company from paying the premiums afterwards.

As for Catherine, our reader, unfortunately I have no good news for her. Either she disposes of the policy and recovers its cash values ​​tax-free – provided the remaining shareholder in the holding company is willing to pay her this amount and she first consults with her tax advisers about the handling of this transaction – or it makes a transfer after a actuarial valuation to find out the fair market value of his policy. It is completely unnecessary tax stress, which could have been avoided from the start by choosing the right holder.

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