December 5th, 2021

Insurance Understood: Don’t make assumptions, plan ahead

By Steve Meldrum on December 5, 2020.

This past week, a relative asked my family and I to go on a walk in a local park. This seemed like a safe activity given the pandemic protocols recently introduced in Alberta.

Well, as we were driving there, my wife and I realized that we were not 100 per cent sure of the protocols for outdoor gatherings.

Of course we wanted to be safe and had even listened to the Premier’s announcement a few days earlier.

Our big question was, do you have to wear a mask or just keep distance, or both?

This got me thinking about life insurance owned by a corporation.

From my past articles, you will know about the benefits of owning life insurance within a corporation. However, reading an article once or asking a friend about it may not provide you with all of the information to make a good decision.

Certain types of life insurance policies build up equity, called CSV-cash surrender value.

That sounds like a great thing but upon death of an insured shareholder; there would be a disposition for tax purposes of that CSV. An exception to this would occur if the shares can rollover to a spouse but that is just deferring the issue.

So what is the solution? Life insurance shares. In short, they are a special class of shares that allow you to track the CSV, death benefit or both to a life insurance policy.

Here is an example of avoiding a potential tax problem.

A sole business owner owns 100 per cent of the shares. The corporation issues new shares for $1 that track the CSV of the policy to an adult child. The original shareholder dies and the death benefit is paid to the corporation.

Since the CSV is attributed to the life insurance shares held by the adult child, there is no disposition. The death benefit is paid to the corporation and can be paid out to the estate via the CDA-capital dividend account. Once the insurance is paid out there is no value to the life insurance shares.

The takeaway is to not make assumptions and to plan in advance.

Steve Meldrum B.Mgt. CFP CLU is the founder of Swell Private Wealth Ltd. For over a decade he has specialized in helping individuals and businesses expand protect and perpetuate their wealth. For further information or tailored advice, contact him at 403-487-0490, or connect on social media.

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