First post on this forum, please be nice . The following is new territory for me so thought I’d throw it out here.
I recently was referred a client whom I have no prior involvement with on a discrete matter. A summary of the facts as I know them is as follows
- Corporation (“Corp”) has a shareholder who is a professional (“Shareholder”).
- Corp has a whole life policy (the “Policy”) on the life of Shareholder. Premiums are paid for by Corp.
- Subsequent to entering into the Policy, the Policy was assigned as collateral for a loan taken out by Shareholder (i.e. debtor = Shareholder; guarantor = Corporation).
- Shareholder used the proceeds of the loan to make investments.
- Shareholder is close to retirement and cannot afford the premiums (i.e. Corporation stops being active and thus has no revenues to pay the premiums).
If Corp surrenders the Policy for its Cash Surrender Value (“CSV”), I assume this should trigger a taxable gain (CSV less ACB)? If that is the case I assume the insurance company provides what the ACB is? The gain then is a capital gain or full income gain? I’m still digging through the research/legistlation but something suggested to me that its taxable at 100% not at capital gains rates.
Then, if the CSV is used to pay off the loan taken out by Shareholder then this should trigger a shareholder benefit. Corp doesn’t have a large shareholder loan payable to channel the funds through and I don’t see any other avenues. Anyone run into this before?
The other possibility is to dispose of the investment made under point 4. above. That would trigger tax on the dispositions. Also, I haven’t been able to track down the total portfolio of investments. Part of it seems to have gone…missing…
Any thoughts would be appreciated. Thx.