Moving a Life Insurance Policy to a New Owner: The Tax Cost of Each Move

Most people think of a life insurance policy as something you buy once and then leave alone. The owner signs the application, pays the premiums and names a beneficiary. Years later, life moves: a company, a holding company, a trust, a grown child, a marriage that begins or ends. And someone asks a simple question: can we just put the policy in the other name?

You can. The insurer has a form for it. But the form is the easy part. In Canadian tax law, a change of owner is usually a disposition of the policy, and a disposition can create income for the person who gives it up. The rule that sets the price of that move was rewritten in 2016, and much of what is still repeated describes the old rule.

This page takes each common move in turn and states what the Income Tax Act says and what to ask. It does not tell you what your own transfer will cost. That answer belongs to your accountant, with the insurer's figures for the day of the move. Other estate topics are in the estate planning section.

Start with the word that drives every result.

What counts as a move for tax purposes?

For tax, a change of owner is usually a disposition of the owner's interest in the policy. Subsection 148(9) of the Income Tax Act lists a surrender, a policy loan, the maturity of a policy and a disposition by operation of law. A gift or sale to a new owner is one too.

Subsection 148(1) sets the measure. The owner includes in income the amount by which the proceeds exceed the adjusted cost basis just before the move. The adjusted cost basis is a tax figure the insurer tracks. It is not the same as the cash value, and in an older policy it is often lower.

The definition also leaves things out. Assigning a policy to a lender as security for a debt, other than a policy loan, is not a disposition. Neither is a payment under an exempt policy because the person insured has died. Both are covered further down, because people often mistake them for a change of owner.

What does subsection 148(7) say since 2016?

Subsection 148(7) applies when a policy is given away, distributed by a corporation, transferred by operation of law, or transferred to anyone the owner does not deal with at arm's length. The old owner is deemed to receive the greatest of three amounts: the cash value, the fair market value of anything paid, and the adjusted cost basis.

The first is the value of the interest, which subsection 148(9) defines as what the owner would receive if the policy were surrendered at that moment. The second is the fair market value of any consideration given for the policy, such as cash, a note or shares. The third is the adjusted cost basis just before the move. The new owner is deemed to acquire the policy at the same amount the old owner is deemed to receive.

The second and third amounts apply to dispositions after 21 March 2016. Before that, the rule looked at the value of the interest alone, which is why older articles treat the cash value as the whole story. It no longer is.

When a corporation acquires the policy, paragraphs (c) to (e) limit the paid-up capital, contributed surplus or capital contribution the move can create. Put simply, the excess above the cash value cannot become an amount that later leaves the company tax free.

Why can a policy be worth more than its cash value?

The cash value is what the insurer pays on a surrender. The fair market value is what a willing buyer would pay for the contract. When the person insured is in poor health, the death benefit is closer, and a buyer would pay more than the cash value for it. Before 2016, that gap could move to a related owner without tax.

The old pattern worked like this. A company bought a policy on an ill shareholder and paid a price close to its fair market value. The deemed proceeds were set at the cash value, so little or no tax was paid on the higher price. The rewrite of subsection 148(7) closed that path, because the fair market value of the consideration now counts.

What remains is a valuation question. When a policy moves between related people, or out of a company, someone may need its fair market value. That depends on the health of the person insured and the contract's terms, and no statement prints it. Ask your accountant whether a valuation is needed.

How do the moves compare side by side?

Each move has its own rule. Most fall under subsection 148(7) at the greatest of three amounts. A few, to a spouse or to a child who is the person insured, happen at the adjusted cost basis. A corporation adds the shareholder benefit question. The table sets out the rule, who may have income and what to ask.

The table is a map, not a calculation. It shows which rule the accountant reads first, not the size of any income.

What happens when you move a policy to your company?

You and a company you control do not deal at arm's length, so subsection 148(7) applies. You are deemed to receive the greatest of the cash value, the fair market value of anything the company pays you, and your adjusted cost basis. You include in income the part above that basis, and the company acquires the policy at the same amount.

Why do owners do this? Usually because the company's money has been taxed at corporate rates, so premiums cost fewer pre-tax dollars there. The trade-offs are real: creditor exposure, loss of personal control, and a death benefit that reaches the company, not your family. They are weighed on personal or corporate ownership of the contract. A price paid above the cash value is no longer a way to take money out without tax.

What happens when an operating company moves a policy to its holding company?

Related corporations do not deal at arm's length, so subsection 148(7) applies here too. The operating company is deemed to receive the greatest of the cash value, any price paid and its adjusted cost basis, and includes in income the part above that basis. The holding company acquires the policy at the same amount.

The usual reason is creditor exposure. An operating company carries the trade risk and the lender. A holding company is one step away. The move can also change who receives the death benefit and the later capital dividend account credit. Where the policy should sit is the subject of the holding company and where the contract sits.

How the operating company is paid matters too. Cash, a note or shares each carry other consequences, and the paid-up capital limits apply to the company receiving the policy. Plan it with the accountant before the form goes in.

What happens when a company moves a policy back to a shareholder?

Two rules meet. A distribution from a corporation is a disposition under subsection 148(7), at the greatest of the cash value, the price paid and the adjusted cost basis, so the company may have income. And under subsection 15(1), a benefit a corporation confers on a shareholder is included in the shareholder's income.

The second rule is the one people forget. If the shareholder pays nothing, or only the cash value, the question becomes what the policy was really worth. When the person insured is ill, that can be much higher than the cash value. The gap is what the accountant looks at under subsection 15(1).

Owners often ask for this move when they sell the company, retire or wind it up. The related case, where the company pays and the shareholder owns from the start, is on when the corporation pays and the shareholder owns.

What happens when you move a policy into a trust?

Moving a policy into a trust for your family is usually a gift, or a transfer to a trust you do not deal with at arm's length, so subsection 148(7) applies. You are deemed to receive the greatest of the cash value, any price paid and your adjusted cost basis. The trust acquires the policy at that amount.

Under paragraph 251(1)(b), a taxpayer and a personal trust do not deal at arm's length if the taxpayer, or someone not at arm's length with the taxpayer, is beneficially interested in it. A family trust whose beneficiaries are your spouse and children will usually meet that test. So the transfer is measured at the greatest of three amounts even if nobody calls it a gift.

The tax cost of the move is only the first question. Later, the attribution rules, including subsection 75(2), may decide whose income a surrender creates, and the deed decides who signs. See a family trust as the policyowner and a policy in a trust, pros and cons by scenario.

What happens when a trust moves a policy out to a beneficiary?

When a personal trust distributes a policy to a beneficiary, the trust and the beneficiary usually do not deal at arm's length, so subsection 148(7) can apply. The trust may then have income on the part above its adjusted cost basis. How that rule meets the trust distribution rules is a question for the accountant.

The question arises most often near a trust's 21st anniversary. The Act has a general rule for distributions of capital property to a beneficiary. Whether a policy interest falls under that rule or under section 148 is not something to assume. Ask your accountant to read both with your deed.

The deed matters as much as the statute. It decides whether the trustees may distribute the policy at all, and to whom. Your lawyer or, in Quebec, your notary reads it first.

What happens when a parent moves a policy to a child?

Subsection 148(8) treats a transfer to the owner's child, for no consideration, as happening at the adjusted cost basis. No gain arises at the moment of the move. The condition is that the person insured is a child of the owner or a child of the child receiving the policy. The gain stays in the policy for later.

A common case is a policy a parent bought on a young child's life and later gives to that child, now an adult. The parent is deemed to dispose of it at the adjusted cost basis, and the child acquires it at that figure. The rule can also cover a grandparent who gives a policy on a grandchild to the grandchild's parent.

What moves with the policy is the future tax. If the child later surrenders the policy or borrows against it beyond the basis, the income is the child's. Who should own a child's policy in the first place, and when to hand it over, is the subject of who owns a child's policy. Your accountant confirms who counts as a child for this rule before you rely on it.

What happens when a policy moves between spouses?

Subsection 148(8.1) treats a transfer to a spouse or common-law partner during life, or to a former spouse in settlement of rights arising out of the marriage or partnership, as happening at the adjusted cost basis, if both are resident in Canada. The owner can elect out in the tax return for that year.

Subsection 148(8.2) does the same at death. When a policy passes to the owner's spouse or common-law partner as a consequence of the owner's death, and both were resident in Canada just before it, the move is at the adjusted cost basis unless the election is made. That subsection does not mention a former spouse. In both cases the spouse takes over the basis, and the gain stays inside the policy.

Separation is where these rules are used most and checked least. The policy moves, and the old designation stays for years. See divorce and the designation nobody changed and joint owners and the successor owner.

What happens to the policy when the owner dies?

If the owner is also the person insured, the policy pays the death benefit, and that payment under an exempt policy is not a disposition. If the owner is not the person insured, the policy keeps going and passes to a successor owner or to the estate. That move has its own tax question.

A move at death to a spouse resident in Canada is generally at the adjusted cost basis under subsection 148(8.2). For any other heir, the accountant has to decide which rule governs. Subsection 148(7) covers a transfer by operation of law or to a person not at arm's length. Subsection 70(5) deems capital property to be disposed of at fair market value at death. And subsection 70(5.3) says that, for that rule, a policy on the deceased's life or on the life of someone not at arm's length is valued at its cash surrender value.

The practical step is simple: if you own a policy on someone else's life, name a successor owner with the insurer. It settles who signs next, though not the tax. The wider picture is on the deemed disposition at death and where the death benefit sits.

What is not a change of owner?

Three things are often mistaken for a change of owner. Naming or changing a beneficiary is not one: the owner keeps the policy. Assigning a policy to a lender as security for a loan is not a disposition under subsection 148(9). And the death benefit paid under an exempt policy is not one either.

Each has its own effects. A beneficiary change can affect creditor protection. A collateral assignment keeps the policy in your name until the debt is repaid.

When someone proposes "moving" a policy, ask which of these is meant. If the goal is to change who receives the money, a new designation may do it without any transfer. If the goal is to change who controls the policy, a transfer is needed, and the rules above apply. The difference between owner, insured and beneficiary is set out on who can own a life insurance policy.

What paperwork does the insurer need?

The insurer needs a written request on its own form, signed by the current owner and usually accepted by the new one. A company signs through authorised officers, and a trust through its trustees. Ask the insurer, in writing, for the cash value and the adjusted cost basis on the planned date.

Before you sign, ask the insurer four practical questions. Will the beneficiary designation stay as it is, or does the new owner need to make a new one? Does an irrevocable beneficiary have to consent? Is a successor owner already on file, and does it still make sense? And how will the insurer report the disposition for tax, if at all? Write down the answers. They are part of what your accountant needs.

How is a move different in Quebec?

The federal tax rules are the same in Quebec. The civil law around them is not. The Civil Code has its own rules on trusts, on who takes over a policy when its owner dies, and on designations that cannot be changed without consent. A notary or lawyer confirms how they apply to your move.

Three practical points follow. Ask whether an irrevocable beneficiary must consent to the change of owner. A transfer into a Quebec trust is made under a deed the notary or lawyer drafts, and the deed decides what the trustees may do. And ask your accountant what Revenu Québec expects alongside the federal return. The wider rules are on the Civil Code and the life insurance contract.

What should you ask before any move?

Ask before the form is signed. The accountant answers the tax questions with the insurer's figures. The lawyer or, in Quebec, the notary answers the questions about control, consent, creditors and documents. Bring the policy, the latest statement and the reason for the move.

For your accountant:

• Which rule applies to this move: 148(7), 148(8), 148(8.1), 148(8.2) or 70(5)?
• What are the cash value and the adjusted cost basis on the planned date, and will there be income?
• If a company is involved, what may it pay, and how do the paid-up capital limits apply?
• If a company gives the policy to a shareholder, does a benefit arise under subsection 15(1), and who values the policy?
• If a trust is involved, do the attribution rules, including subsection 75(2), apply later?
• If a spouse is involved, should the owner elect out of the rollover?

For your lawyer or notary:

• Does the trust deed, the shareholder agreement or the will allow this move?
• Does an irrevocable beneficiary have to consent?
• Will the move expose the policy to new creditors, or remove a protection it had?
• Should a successor owner, or in Quebec a subrogated policyholder, be named after the move?

Who this does not suit

Moving a policy does not suit someone who only wants to change who receives the money. A new beneficiary designation does that without a disposition. Nor does it suit an owner who has not asked for the insurer's figures, because the tax result cannot be known without them.

A move into a company or a trust does not suit an owner who wants to keep personal control. A move out of a company does not suit a shareholder who cannot pay fair market value, unless the benefit has been measured first. And a specially designed, high-cash-value, participating whole life insurance policy, whoever owns it, does not suit money needed in the next few years: the cash surrender value is below the premiums paid for a period, and dividends are not guaranteed.

What this page will not tell you

It will not tell you what your own transfer will cost in tax. That depends on the cash value, the adjusted cost basis, any price paid, the health of the person insured and the people involved, all on the day of the move. Your accountant calculates it with the insurer's figures and your documents.

It will not tell you whether to move a policy at all, or to whom. That is decided with your accountant and your lawyer or, in Quebec, your notary. This page explains the rules that apply. It does not apply them to you.