Transfer of a life insurance contract: how does it work?

When people who bought life insurance many years ago find themselves with a contract that no longer meets their needs, or a company changes owners, transferring life insurance seems to be the most suitable solution. But concretely, how does this transfer take place?

Quebec law authorizes the transfer of life insurance

Quebec civil law allows life insurance to be transferred to a third party with or at arm's length from the contract holder. This possibility is interesting given that the insurance needs evolve according to the family situation and the state of the finances of the household, and that it is sometimes impossible to take out a new life insurance contract for reasons of too much cost. high, health problems or old age. The best solution in this case is to transfer the interest of a current contract to a new owner, during the lifetime of the beneficiary of the contract or upon his death.

Contract transfers between natural persons

    Arm's length transactions: these are transfers executed between unrelated persons, which are governed by subsections 148 (1) and 148 (9) of the Taxable Income Act. In essence, the beneficiary of the transfer must pay the contract holder the disposal price as defined by these articles, which holder must include in his taxable income the amount communicated by his life insurance company.
    Non-arm's length transactions: transfers between parents, married persons, between a person and a corporation, a trust or two corporations are also governed by the rules of the ITA and more specifically subsections 148 (7) and 148 ( 9) which stipulate that the holder of the life insurance is entitled to the value of the contract, corresponding to the surrender value of the said contract less any advances on the contract. This value is considered zero when the cash surrender value does not exist, as in the case of term life insurance.

Transfer a contract from an organization to a person

Companies often have life insurance policies covering the heads of shareholders or key employees. However, they need to change these contracts in the context of changes in the organization and in particular in the case of a change of owners, a reorganization, or even a retirement.

The joint stock company can transfer the contract to a shareholder or partner: in this case, it is considered to be an arm's length transaction and both parties are taxed. The tax impact to the business is the gain on the contract, which is the difference between the proceeds of disposition and the adjusted cost base. In turn, the shareholder or employee will be taxed on the taxable benefit, in other words the difference between the fair market value and the amount paid.

Transfer a contract taken out by a person to a company

As part of estate planning or corporate restructuring, it may be beneficial for a shareholder to transfer their life insurance contract to a company they control. In this case, the provisions governing transfers between persons dealing at arm's length apply. The shareholder will be taxed on the difference between the proceeds of the distribution and the adjusted cost base.

When the contract no longer meets the needs of its owner, transferring life insurance is often the best possible option. However, any transfer generates important tax consequences that you should be aware of. Because contrary to popular belief, this transaction generates a taxable gain unless it is carried out between spouses or between parents and children as defined by the ITA.