Portable Life Insurance
Life insurance can be a key element in an individual’s estate plan. This is a universal fact, and many individuals in countries around the world buy life insurance to protect their families and pass wealth on to the next generation.
As globalization continues to expand its reach and we see increased economic interdependence between nations, many individuals find themselves relocating from one country to another. Such a move may take place because of a personal employment opportunity, a relocation to be closer to family or perhaps simply exploring a new lifestyle. As people move between countries, the individuals and their family members need to recalibrate the family’s financial plan to reflect the local situation and their own changing circumstances.
Life insurance purchased in one country can migrate with the owner to another country. However, as an immigrant to Canada, the new resident must comply with Canadian tax legislation. Canada taxes based on residency; therefore, it taxes anyone resident in Canada based on their worldwide income. Canada’s tax system has a broad definition of what constitutes a “life insurance policy.” In general terms, where a product provides a death benefit or constitutes an annuity arrangement, there is a strong indication that it could be a life insurance policy for Canadian tax purposes.
Life insurance purchased in another country will be subject to the Canadian tax laws. This means the foreign insurance policy might be considered exempt
(not taxed on an annual basis) or non-exempt (taxed on an annual basis), as defined in the Income Tax Act. Unfortunately, these rules are extremely complex and cannot be easily understood or assessed by a consumer. Therefore, in situations where the life insurance policy has significant cash value built up, it may become important for the individual to retain the professional services of a consulting actuary to opine on the policy’s exempt status. During the course of engagement, the consulting actuary could also determine the policy’s adjusted cost basis under Canadian tax law, which could be useful for certain policy transactions that the individual may contemplate in the future and that could have Canadian tax consequences.
As an added complexity, it is important to note that all Canadian tax measurements, including the exempt test, would need to be performed in Canadian currency. Unfortunately, this means that significant fluctuations in the value of the currency in which the policy is denominated could put a policy “off-side” and non-exempt because of year-to-year increases in Canadian dollar equivalents.
It should be noted that since Canada taxes its residents on worldwide income, the individual could be exposed to taxation on foreign life insurance policies held in foreign trusts or foreign corporations, depending on the circumstances. It is important for individuals residing in Canada to fully report these types of arrangements. As such, a discussion about the individual’s complete insurance portfolio can be helpful to identify issues that, on the surface, may appear irrelevant but could have tax consequences.
Understanding the potential tax consequences associated with a life insurance policy when an individual relocates to Canada will help minimize unexpected surprises and ensure the long term viability of the individual’s estate plan in which the insurance plays a role.
E.O. & E.
This commentary is published by the Institute in consultation with an editorial board comprised of recognized authorities in the fields of law, life insurance and estate administration.
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Contributors to this edition:
James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.