A key challenge executors face when administering an estate is dealing with the banks where the deceased held their accounts. Banks don’t want to expose themselves to potential legal issues by releasing funds to someone who is not legally entitled to receive them and are also bound by privacy legislation not to disclose information about client accounts to an unauthorized person.

Executors can help smooth the estate administration process by being prepared and working with the bank’s dedicated estate settlement department. Arguing with a bank employee is unlikely to help the situation, so providing the information they request in a timely manner is your most efficient option. If the bank says they need a particular document from you, just give it to them and follow the procedures request.

As one of the first steps of the estate administration process, banks will ask the executor for a death certificate for the deceased. Funeral homes generally provide around 10 copies of the original death certificate, and executors can typically ask for more if needed. Executors will need to provide these certificates to a number of companies, including the Canada Revenue Agency, the estate lawyer, and the provincial court, as well as any bank, life insurance company, or investment company where the deceased had accounts. The bank will also require a copy of the Will and identification for all the executors.

In Ontario, probate is a legal requirement for any estates with a total probatable value in excess of $50,000 CDN. As a matter of course, banks will freeze all accounts of the deceased, upon notification of their passing, if they have any reason to believe that the probate threshold will be met. Banks generally require a certificate of probate from the executor to prove the Will is valid and that the executor is the authorized personal representative for the estate administration before releasing any funds. However, if the estate is small, a bank may exercise its discretion and not require the executor to obtain probate. In those cases, the bank will release funds to the executor but will likely require them to sign an indemnity to protect the bank from potential liability.

When the bank is initially notified that an account holder has died, it will freeze the deceased’s accounts. However, banks generally will allow certain payments, such as probate or income tax to government agencies or funeral fees to funeral homes. They may also allow for the payment of other immediate expenses, such as lawyer’s fees or utility bills. The bank generally will make these payments directly to the payee and not to the executor.

Once the executor has received their Certificate of Appointment of Estate Trustee, they will typically establish an estate account into which they can consolidate the deceased’s assets and make payments on behalf of the estate. Establishing a dedicated estate account is highly advised, since as an executor, you are personally accountable to the beneficiaries from the date of death.

In some more complicated cases, it may be advisable not to consolidate all the deceased’s accounts. For example, if a payment or distribution from the estate needs to be made to a payee or a beneficiary in another province (or country) and the deceased held an account in that province (or country), it may be practical to leave that account open to make these payments.

While the bank will help the executor as they administer the estate, executors should keep in mind that banks aren’t able to provide legal or tax advice. For that, executors should consider seeking advice from an estate lawyer or accountant. Banks may be experts on their own policies and procedures — regarding their own products and services — but do not look to them for advice on other matters related to the estate-settling process.

When the time comes to make distributions to estate beneficiaries, the bank will want a letter of direction signed by the executor (or executors) and a copy of the Certificate of Probate. The bank will then issue a cheque to the executor or to the estate, not to the beneficiaries directly. The executor will deposit the cheque into the estate account for later distribution to the beneficiaries.

Tips for making estate administration easier

Retail staff at the bank will typically refer the executor to their estate department. The executor should ask for a direct phone number for first contact with the bank’s estate department to save themselves from having to go through the main contact centre each time they call. Executors should also note the bank’s file reference number for the estate, because the bank will keep detailed notes of conversations with the executor. This will streamline things.

Executors should communicate with the bank in writing — either email or letter — whenever possible. When meetings occur in person or over the phone, executors should take notes so they can hold the bank accountable for any agreements made, and to prevent any misunderstandings later on.

Each time they meet with bank representatives, executors should take along identification and the estate file with all documentation. Executors should also be prepared to repeat the “story” of the estate — the key details about their estate administration — to bank representatives. It’s uncommon for a bank to assign a specific individual to one file.

How can you make your estate easier to administer, when the time comes?

The quality of your Estate Plan, in conjunction with your Last Will and Testament, will determine how difficult, time-consuming, and expensive your estate is to administer. For a preliminary consultation to discuss creating, updating, or formalizing your Estate Plan, contact us. We can potentially save your estate many thousands of dollars that will end up with the government (taxes), courts and lawyers without an effective Estate Plan. Probate is not mandatory for all estates, and our Estate Plans always aim to keep our clients’ estates out of probate, whenever possible.

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Last year was challenging for investors, including segregated fund managers. With the prices of most equities and fixed income securities down, winning was a matter of minimizing losses and preserving as much capital as possible.

Canada Life Assurance Co.’s three seg fund families did this well, with Great-West Life Assurance Co. (GWL) recording the highest percentage of assets under management (AUM) ranked in the first or second quartile by Chicago-based Morningstar Direct for 2022 at 85.6%. London Life Insurance Co. had the third-highest percentage at 80.7% and Canada Life’s branded funds had the sixth-highest, 62.8%.

Canada Life’s vice-president of portfolio construction and analysis, Brent MacLellan, attributed this performance to strong stock selection and active management. Last year was a “risk off” period that favoured value investing, low-volatility stocks, the energy sector and higher dividend-yielding stocks.

The other stellar performer was Empire Life Insurance Co., which ranked second with 84.8%. Its seg family benefited from stock picks that came to fruition in 2022, said Paul Holba, senior vice-president and chief investment officer.

Here’s a closer look at some seg fund families:

Canada Life Assurance

The firm’s internal asset-allocation manager had “a strategic lower duration profile” for fixed income, MacLellan said. The underlying fixed income managers “were tactical in ensuring bond yields were higher than the benchmark.”
MacLellan attributed GWL’s and London Life’s strong showing to their large amount of AUM in five target-risk asset-allocation funds, all of which ranked in the first or second quartiles. He noted that these funds have “diversified exposure,” including to private credit and real estate. Those asset classes generally did better than public equities and credit in 2022.

The Canada Life family held proportionately less AUM in the asset-allocation funds. Nevertheless, its sixth-place finish was driven in part by above-average performance from three risk-managed funds. (This family is the only one open to new investors.)

Empire Life Insurance Co.

Empire Life’s managers focused on U.S. and Canadian equities, overweighting energy and underweighting tech.

Two winning stocks in 2022 were Maxar Technologies Inc., a space intelligence company based in Colorado, and Ross Stores Inc., a discount clothing retailer based in California, Holba said. Maxar’s stock doubled in December, when private equity firm Advent International Corp. announced it was acquiring Maxar. As for Ross Stores, Empire’s managers bought its stock in May, when low inventory pulled the price to around US$70. When inventory replenished, the price bounced back to US$115, about where it’s been trading since late November.

As for fixed income, managers held bonds with shorter duration than the benchmark and had a “very meaningful yield pickup” in corporate bonds, thanks to deep research into companies, Holba said.

Beneva Inc.

The company was formed when SSQ Insurance Co. and La Capitale Insurance and Financial Services Inc. began merging in 2020, a process completed on Jan. 1. Each insurer’s products will be rebranded as Beneva later this year.

Beneva uses only external managers for its products. This strategy, combined with rigorous manager and fund selection processes, contributed to Beneva’s 2022 investment performance, said Mathieu Roy, investment product development and strategy advisor.

Funds that performed well included La Capitale Low Volatility American Equity (TDAM) Fund, which outperformed its benchmark on a gross-returns basis by 15.5%; SSQ TD Global Dividend Equity GIF Fund, which outperformed by 13.6%; La Capitale Diversified Income Fund (Fidelity), which outperformed by 7.1%; and La Capitale Global Equity (AGF) fund, which outperformed by 4.2%.

On the fixed income side, strategies with short durations tended to outperform due to the rising interest rate environment. For example, the SSQ AlphaFixe Bond and Bank Loan GIF Basic fund outperformed its benchmark by 5.3%.

Industrial Alliance Investment Management Inc.

This fund family only had 33.2% of net long-term assets in funds ranked in the first or second quartile. Pierre Payeur, senior vice-president and head of fund management and oversight, said this was partly because the family has relatively more seg funds with higher guarantees — thus higher fees — than many of its peers. Payeur said if calculations are made using gross returns, the family had about 50% of its AUM in funds with above-average returns.

Payeur said 2022 was an active year for managing fixed income. Holdings of short-term municipal bonds and floating-rate notes helped boost returns, as did using short positions on short-maturity Treasury bills.

Some of iA’s holdings on the equities side did well — specifically Bombardier Inc., Canadian Pacific Railway and Cenovus Energy Inc. Bombardier reported strong revenue growth due to increased demand and prices for regional jets, and Cenovus benefited from high oil prices. These factors allowed both firms to decrease their corporate debt, which some investors had viewed as too high. CP benefited from regulatory approval of its merger with Kansas City Southern Railway Co.

iA offers a series of global asset-allocation funds that invest in illiquid assets such as commercial mortgages, private debt, private equity and infrastructure, as well as publicly traded fixed income and equities. “In addition to earning a certain liquidity premium, several of these securities are less exposed to market sentiment and benefit from stable revenues or income through long-term contracts or business models,” Payeur said.

Manulife Investment Management Ltd.

Manulife, which placed 12th, is a bottom-up stock-picking firm. Managers don’t chase short-term gains, but position themselves for the next five to 10 years, head of product management Sanjiv Juthani said, so 2022 was a year to buy or add to holdings of high-quality companies.

“Managers focus on companies with strong recurring revenue and cash flow,” Juthani said. A few examples are Toronto-Dominion Bank, CGI Inc. and Amazon.com Inc.

Juthani said TD is a “high-conviction holding” where managers see “lots of future upside.” CGI is a Canadian multinational IT consulting firm with a strong management team. The stock has performed well in the past six months. Amazon has strong opportunities across the board and the big drop in its stock price in 2022 provided a buying opportunity.

As for fixed income, Manulife’s managers “were quite active to take advantage of market dislocations,” Juthani said. That will continue. For example, as central banks pause rate hikes, the teams may reduce exposure to floating-rate loans.

New rules may allow more executors without a legal background to apply for probate

The Ontario government’s simplified probate process for estates valued at $150,000 or less will make administering small estates less costly and easier for estate trustees (as executors are known in Ontario), estate practitioners say.

Probate, known as estate administration tax in Ontario, is the process whereby a court validates a will and confirms the executor’s authority to administer the estate. While not all wills need to be probated, banks and other financial institutions generally don’t release money held in the deceased’s accounts until the executor obtains probate.

Ontario’s new procedure for small estates, which came into effect on April 1, involves a simpler application form and removes the requirement for certain supporting documents.

The new process will make applying for probate “more accessible to people without a legal background so that they can do this themselves,” said Matthew Urback, partner with Shibley Righton LLP in Toronto.

Legal fees, which start at $1,500 for even “a very simple estate,” can deter executors from applying for probate, said Krystyne Rusek, an estate lawyer with Pallett Valo LLP in Mississauga, Ont. The standard probate procedure is time-consuming and challenging for laypeople to navigate on their own, she said.

According to the Ontario government, about one in four probate applications in 2020 were for estates valued at $150,000 or less. The new process won’t affect the province’s estate administration tax, which remains set at $15 of every $1,000 of estate assets above $50,000. (In 2019, Ontario eliminated probate fees on estate assets below $50,000.)

The simplified process also means executors won’t have to post a bond when there are no minors or vulnerable individuals who might have a financial interest in the estate. The posting of a bond acts as a form of insurance for interested parties against the executor’s misadministration of estate assets.

Executors will be issued a Small Estate Certificate with the same legal effect as a Certificate of Appointment of Estate Trustee issued under the standard process, but the executor’s authority will be limited to the estate assets listed in the application. If other assets are discovered, the executor may have to file an amended application to deal with those assets, as long as the estate’s total value remains below $150,000. If the newly discovered assets push the value above that threshold, the executor would have to apply for a standard certificate.

Executors for small estates may choose to apply for probate under either the small estate or the standard process.

While the new procedure has many benefits, it could expose estate trustees to risk — if, for example, an interested party commences litigation against the estate or if it is later discovered that the deceased held foreign assets.

“[An executor] should investigate and determine the assets and liabilities of the estate before applying for this [simplified probate procedure],” said Sanjana Bhatia, director of tax and insurance planning with Sun Life Financial in Waterloo, Ont.

If estate assets — whether foreign or domestic — are discovered after probate has been granted, then the regular probate process gives the estate trustee more authority to deal with those assets and any litigation that arises with respect to them, Bhatia said.

Urback said he hopes the streamlined probate process will encourage more people to take on the role of executor, particularly in cases where the primary person originally named in the will can’t or won’t accept the role. In those cases, it can be difficult to find someone to take on the job if the estate is small. “It’s too onerous and they feel it’s not worth it,” Urback said.

However, Rusek wonders whether beneficiaries of small estates will begin to expect executors to apply for probate themselves rather than seek legal advice now that a simplified process exists.

Executors may have “to make a decision as to whether to do this alone without any legal guidance or whether they’re going to seek representation and legal assistance where they could be later questioned by beneficiaries about that expense,” Rusek said.

She said she expects estate lawyers could use the simplified probate application process on behalf of clients when administering small estates, where appropriate. “That’s going to be a cost saving to clients,” she said.

By: James Langton May 27, 2021

Bonds and equities continued to offset each other during recent market volatility

Even in extreme market conditions, diversification across asset classes remains a “free lunch” for investors, according to research from Morningstar Indexes.

In a new report, the firm examined the performance of bond and equity market indexes during the Covid-19 crisis — finding that diversification continued to work.

While equities markets around the world plunged with the onset of the crisis, bonds acted as a safe haven for investors.

“The Morningstar Canada Core Bond Index actually gained more than 1.7% in the first quarter of 2020,” the report noted.

Conversely, in the first quarter of 2021, with rates rising as the economic recovery gained strength, fixed-income assets suffered.

“Canada core bonds saw an unusually steep quarterly loss of 5%, and their global counterparts also plummeted,” the report said.

Yet these losses in bond markets “were more than offset by strong gains for equities,” the report said.

“Diversification has often been called the only free lunch in investing,” the report noted, as building a portfolio with uncorrelated assets can produce better risk-adjusted returns over the long term.

This proved true in the latest market crisis, the report said. “When the pandemic came around, bonds also did their job. They diversified equity market risk, damped volatility, and preserved capital.”

“Spreading one’s bets is typically a good strategy, particularly in Canada due to its relatively narrow sector representation and small percentage of global market capitalization,” said Dan Lefkovitz, strategist at Morningstar Indexes, in a release.

Proper documentation can help protect your intent of beneficiary designations

In early 2020, the Ontario Superior Court made a decision that has increasingly been a focus of attention: Calmusky v. Calmusky.

In that case, the entitlement of a named beneficiary to receive the proceeds of a Registered Income Fund (RIF) was challenged. The designation had been made in favour of an adult child, one of the sons of the deceased RIF owner. There was no obvious “price paid” by the son for his father’s having designated him as the beneficiary. The court decided, in those circumstances, there was a legal presumption that the beneficiary received the death benefit on the basis of a “resulting trust” — that is, in trust for the estate. In other words, it was not money for the son to keep personally but rather it was to be handed over to the estate, unless he could prove to the court that his father intended for him to have the money as his own. He was unable to do so. And so, the court ruled that the death benefit was estate property.

The court’s holding, in the Calmusky decision, that a presumption of a “resulting trust” should be applied on the facts of that case, for the benefit of the estate, runs against what is generally accepted by estate planning lawyers and those practicing in the area of insurance and pension law. For them, unless a designator specifies that the beneficiary is to hold the proceeds for an estate or for someone else, the proceeds are for the beneficiary to keep. Note that in Calmusky the beneficiary was an adult, and it was key to the decision that the designation was made for no consideration (e.g., the beneficiary did not in any way ”pay” to become the beneficiary, or was not somehow ”owed”). The presumption of a resulting trust will not be made if the beneficiary is a minor.

The approach taken by the court in Calmusky applies, in principle, to more than just RIF designations, and so would include traditional life insurance. The court’s approach would also apply to more than just so-called ”two-party” contracts, where the product owner is also the life insured. In the case of a ”three-party” contract, where the life insured is someone other than the owner, the beneficiary would hold the proceeds payable on death in trust for the owner. Again, we are considering an adult beneficiary who had not ”paid for” or somehow had “earned” the beneficiary designation.

In response to Calmusky, industry and professional associations have made their concerns known to Ontario, calling for a legislative fix. To date and to our knowledge, no other court in Ontario has followed the Calmusky approach. But for the time being, the prospect that another court might cite Calmusky and rule accordingly does remain a possibility. That court could be outside of Ontario, in some other common-law province or territory (not including Quebec). Already, in certain provinces, there is “Calmusky thinking”.

Preventative measures you should take:

• Properly document your intentions to make a gift, if such is the case, when designating a beneficiary (especially when designating an adult beneficiary, ”for free”, even if that beneficiary is your spouse; the rules around gifts to spouses and whether any presumptions apply can be complex, and can vary by jurisdiction — it is safer to treat a spouse like any other adult beneficiary).
• This documentation would provide evidence to overcome any presumption the beneficiary was intended to hold the death benefit for an estate, or for someone other than the beneficiary personally.
• Keep a copy of the documentation with your policy and/or your will.
• Make your family members aware of your estate plans and how you intend to distribute your assets.
• When designating a beneficiary for your assets, be aware of possible tax implications for your estate and obtain appropriate professional advice as part of your tax and estate planning.
• Otherwise, if tax liability issues have not been addressed, a court in any particular case might find it equitable to draw back at least a portion of the registered assets into the estate, to cover any associated tax liability.
• Review your designations, make any necessary changes, properly document and provide explanatory notes.

Implementing the above measures can help ensure that your wishes are carried out as intended. Need help? Please contact me.

A well-designed Estate Plan, in conjunction with an RTO plan, will reduce your tax obligations throughout the rest of your life — and beyond — keeping more available for you to utilize during your lifetime and reducing the estate’s losses to taxes and fees upon your death.

If you found the information on this page useful, please give me a quick “like” or share it with someone else who may find it helpful:

For a no-cost preliminary consultation to determine what would be involved with reducing or eliminating your estate’s exposure to litigation, probate, the Estate Administration Tax, and other probate fees, contact me. I specialize in Estate Planning and Retirement Planning and offer financial planning services across Ontario. My office is in Kingston, Ontario, and I am happy to speak with anyone on the phone, or meet in person with anyone in the surrounding area.

For tips on how to Avoid Probate in Ontario, click here

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The information provided is based on current tax legislation and interpretations for Canadian residents and is accurate to the best of our knowledge as of January 2021. Future changes to tax legislation and interpretations may affect this information. This information is general in nature, and is not intended to be legal or tax advice. For specific situations, you should consult the appropriate professional advisor.

Ontarians will now be able to apply for probate and receive probate certificates by email after the Ontario government announced several changes to the application process last week.

Previously, an application for a Certificate of Appointment of Estate Trustee – as probate is known in the province – either had to be submitted in person at a court office, or sent by courier or mail. Between March 23 and July, while courts were closed due to Covid-19, applications were temporarily limited to courier or mail only.

The decision to allow electronic submissions is meant to address persistent backlog issues and is part of a wider initiative by the government to update the estate and will process in the province.

In a tweet announcing the change, Attorney General of Ontario Doug Downey wrote: “I am committed to modernizing the estates and wills sector to make it easier for Ontarians to manage the estate process with less hassle and address the probate application backlog.”

Effective Oct. 6, applications for probate, supporting documents (e.g., affidavits, consents and proof of death) and responding documents can be filed by email to the Superior Court of Justice.

However, hard copies of original documents filed in support of the application (e.g. wills, codicils, bonds, ancillary certificates) still need to be sent by mail or courier, or delivered in person. Estate administration tax payments (probate fees) and any filing fees must also be sent by mail or courier to the court office or paid in person.

The option of applying for probate by email “is going to streamline things a fair amount,” says Keith Masterman, vice president of tax, retirement and estate planning with CI Investments Inc. in Toronto. Masterman characterizes the backlog as a “perennial” problem that was likely exacerbated by the Covid-19 pandemic.

“I think the biggest change is that the certificate of appointment of estate trustee will be emailed back to you,” Masterman says. “That will save some time. That’s a great start.”

Electronic applications for probate must be sent to the email address for the court office in the provincial jurisdiction where the deceased lived. If the deceased didn’t reside in Ontario but owned property in the province, then the application is sent to the court office where the property is located.

The government has also introduced a new information form that must be completed and emailed to the court together with the probate application.

Applications filed prior to Oct. 6 may be resubmitted by email without the application losing its position in the queue, the government’s guidance says.

Ontario is currently reviewing estate law in the province more broadly.

Among other measures, the government is considering making permanent a temporary measure introduced during Covid-19 that allows for virtual will signings; repealing the section of the law that revokes a will upon marriage; and raising the dollar value for what’s considered a “small estate.”

In August, Downey sent a letter to the estate practitioner community asking for feedback on these issues.

This year, the Ontario government also eliminated probate fees on the first $50,000 of an estate and extended the filing deadline for the estate information return to 120 days from 90 days.

By: Rudy Mezzetta, October 15, 2020

This might be the most useful savings account in Canada

A 131-year-old insurance company has out-innovated everyone in making savings accounts more useful for everyday banking.

New and nimble financial technology companies – fintech – have brought some cool products to personal finance. But the Manulife Advantage Account, offered through the banking division of insurer Manulife Financial Corp., shows there are still some flickers of creativity in the old guard of financial services.

The Advantage account fills a gap for people who bank online and want to park their savings in an account that provides both a decent rate of interest and some utility for paying bills and accessing cash.

Keep a minimum of $1,000 in the Advantage account and you can do unlimited banking for free. Among the included transactions are debits, Interac e-transfers and withdrawals through 3,700 ATMs in the Manulife and Exchange networks.

The Advantage account is technically savvy, too. With paperless account opening, you can get an account up and running on your mobile phone or tablet without mailing anything. There’s also a mobile app that allows you to log in using your phone’s fingerprint reader as a password replacement, and to deposit cheques by photographing them.

The Advantage account was relaunched in February as part of Manulife Bank’s push to raise its rather modest profile. “Manulife Bank is banking’s best-kept secret in Canada,” CEO Rick Lunny said in an interview. “Frankly, I don’t think too many Canadians have even heard of us.”

Manulife Bank started out 25 years ago as something that Manulife Financial’s adviser network could offer to clients. Until now, the bank’s singular contribution to personal finance has been Manulife One, a combined mortgage and chequing account. The benefit here is that cash in your account — say, your paycheque — counts against your mortgage debt and thereby helps cut your interest costs. The Manulife One account also functions as a line of credit that lets you re-borrow what you paid down on your mortgage.

Manulife Advantage looks especially sharp in comparison to what the online banks Tangerine (owned by Bank of Nova Scotia) and Simplii Financial (owned by Canadian Imperial Bank of Commerce) have to offer. Both offer separate no-fee chequing accounts, which means there’s an intermediate step before paying bills or making purchases.

Manulife Advantage lacks the fintech halo of uniqueness, but it has something that is arguably better in the form of brand recognition for the Manulife name. Mr. Lunny said one in three Canadians already has a relationship with Manulife Financial through its insurance products or its group benefits and retirement plans in the workplace. “When you’re a startup, you don’t have that sort of trust and loyalty,” he said.

Whether or not you’ve tried a fintech app, you owe these scrappy upstarts some thanks. The threat they pose is motivating the old guard of personal finance to up their game and offer useful innovations like Manulife Advantage.

For more information about Manulife’s Advantage Bank account click here.

Originally published April 19, 2018, by Rob Carrick, personal finance columnist

By: Mark Burgess, May 28, 2020

Despite strong market conditions last year, do-it-yourself investors’ satisfaction with their firms declined, a report from J.D. Power says, as platforms missed opportunities to connect during client onboarding and improve their mobile experiences.

Investors’ satisfaction with self-directed firms declined to 717 from 726 the previous year, according to the J.D. Power 2020 Canada Self-Directed Investor Satisfaction Study, which ranks investor satisfaction on a 1,000-point scale. Questrade topped the rankings with a score of 736, followed by BMO InvestorLine (731) and Desjardins Online Brokerage (730).

Almost half (46%) of DIY investors experienced a problem with their firm’s website. Younger investors the were most put off by these disruptions, with 26% suggesting they would switch firms after not being able to access a website.

The survey found that when problems occur, satisfaction is much higher among investors who work with a human to solve it than among those who use firms’ self-service digital channels.

“The recent flurry of new account openings and increased trade volumes are obviously good for self-directed firms but have also exacerbated some client experience issues that existed before the pandemic, especially around the availability and navigation of digital platforms,” said Michael Foy, senior director of wealth and lending intelligence at J.D. Power, in a statement.

Self-directed firms facing more competition from low-cost robo-advisors will need to resolve website problems quickly if they want to keep new clients, Foy said.

The study said firms are missing an opportunity to improve satisfaction and brand loyalty with mobile apps and through the onboarding process. Platform tutorials contribute significantly to customer satisfaction, the report said, yet most new investors didn’t get an online tutorial or information about downloading the app.

Find the full survey results and study here: https://canada.jdpower.com/financial-services/canada-self-directed-investor-satisfaction-study

For more information, or to discuss investment options, contact me.

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These tax-advantaged savings vehicles can result in a tremendous tax headache

Many Canadians with life insurance assume their policies will provide tax-free funds to support their beneficiaries. In the cross-border context, however, these generally tax-advantaged savings vehicles can result in a tremendous tax headache.

U.S. life insurance may appear attractive due to lower rates or greater potential returns in the policy’s cash value or death benefit.

In the worst-case scenario, however, estates are left to deal with additional taxes and penalties from years of unreported income over the life of an insurance product, and the beneficiaries end up with much less than what was intended.

For a life insurance product to be considered life insurance for Canadian and/or U.S. tax purposes, it must qualify under a series of complicated provisions and tests in their respective tax laws.

Tax problems can arise when a product that’s labelled as life insurance doesn’t meet the standards of the jurisdiction in which the owner is resident (when a Canadian resident purchases U.S. life insurance, for example, or when a U.S. citizen, green card holder or resident purchases Canadian life insurance).

This column discusses the potential tax problems when Canadians purchase U.S. life insurance; future columns will examine the potential tax problems when U.S. citizens who live in Canada purchase Canadian plans.

How to tell if a policy qualifies

The Canadian income tax rules set out a long, complex definition of what qualifies as a life insurance policy under Canadian income tax rules. The definition is so complicated that it requires an actuary to interpret.

The determination is made on a per-policy basis; therefore, the same person may own some policies that qualify and some that don’t.

In simplified terms, the determination is made by comparing each individual policy with the exempt test policy (ETP). The ETP is a hypothetical policy defined under the Canadian Income Tax Act that sets out the maximum accumulation of value allowable within a policy.

A policy has to be tested against the ETP at each policy anniversary. If the accumulation within a policy exceeds what is allowable, it is no longer an exempt policy for Canadian tax purposes and will become subject to tax.

In short, there’s no easy way to tell if a policy qualifies as life insurance in Canada. Canadians shouldn’t purchase a foreign life insurance policy unless the insurer can certify in writing that it qualifies. People who move to Canada and already own foreign life insurance should ask their insurer if it qualifies. Where a policy doesn’t qualify, they should consult a tax professional about their options.

Canadian tax on non-exempt policies
If a Canadian resident purchases a U.S. life insurance policy that doesn’t meet the Canadian definition, that policy won’t be tax exempt in Canada and the policyholder will have to pay Canadian tax annually on the income that accrues in the policy.

However, determining the amount of included income is not easy, as the amount is determined with respect to the policy’s premiums, cash surrender value and the present value of the death benefit. As a result, the policyholder may be subject to tax on an annual basis without any cash to pay the tax.

As the accrued income within the non-exempt policy will be subject to annual Canadian taxation, this would increase the Canadian cost base of the non-exempt policy. At the death of the insured, the death benefit of the non-exempt policy will be subject to tax if it exceeds the policy’s cost base.

Because of the different definitions of life insurance in the two countries, Canadians buying foreign life insurance should ensure the product qualifies under the Canadian definition to avoid complicated and expensive tax problems.

Charmaine Ko, JD, LLM, is a cross-border tax lawyer at Polaris Tax Counsel in Vancouver.