Family Wealth TransferGiving Money to your spouse and children

Although some people may think that giving money to their spouse and children is a natural life function, there are tax rules that actually, make this unattractive….

CCRA (Revenue Canada) is not enthused about

taxpayers in a high tax bracket, giving money away to family members who might be in a lower tax bracket.

The problem is that when a person does that, the income earned on the money would be taxable at a lower rate than the

taxable rate of the person who gave it away.

So, to combat this practice, thegovernment put in some rules called attribution rules.

Simply put, the income earned bythe family members you gave the money to, is taxed at your higherrate, as if you had earned that income, even

though youdid not receive that income.

The insurance industry has found some sections of the income

tax that can be used to defeat this problem.

It is subsection 148(8) of the act and it allows you to do some

interesting things.

Intergenerational Transfers A parent may purchase a life

insurance policy* on a child or a grandchild. The parent deposits funds into the plan to build up cash values for the ultimate benefit of the child. When the parent owns such a policy, it can be rolled over on a tax-free basis to the child at any time.

* Universal Life is ideally suited for this purpose..

This allows the parent to maintain control of the policy for as long as they feel necessary, and transfer it to the child when they are confidentof the child’s ability to handle the money.

Who is considered a child ?

A child can be any number of people:

Your childA grandchildA great grandchildSpouse of a child

Anyone under the age of 19 who is totally dependent you

for support and under your care and custody

And you don’t even need to give the policy to the person who is insured under the policy. If you insure your child, you could roll the plan over to your grandchild.

This rule is limited to rollovers during your (policy holder) lifetime, so you cannot arrange a transfer to a child at the death of the policy holder.

To solve this problem, you would arrange that a spouse be made a successor owner, or if you are confident in the ability of the child, the child itself could be the successor owner. As successor owner, the policy would automatically transfer to them and not form part of the deceased’s estate.

What does this allow you to do?

If a parent or grandparent has excess funds that they would like to accumulate for a child, they could purchase an insurance policy* on the child.

When the child reaches age 18, the plan could be transferred to them on a tax-free rollover basis.

The child could then withdraw funds from the plan and because they are over 18, there would be no attribution back to the parent. Any policy gain would be taxed in their hands.

*universal life is ideally suited for this purpose

This could prove an effective way to fund part or all of the child’s post secondary education, while providing shelter for the parent/grandparent’s contributions during the accumulation period.

Alternatively, the child could leave the proceeds inside the policy and enjoy tax sheltered growth of their cash values. Any future premiums paid by the

child would also grow tax deferred !!

Transfer money to your spouse during your lifetime If a taxpayer owns a life insurance policy with

cash values, normally any change of ownership would be a disposition of the policy for tax purposes. However, if the tax payer transfers the policy to their spouse, common-law partner or a former spouse in a settlement of rights arising out of their marriage, the transfer is treated as a tax-free rollover, as long as both parties are resident in Canada at the time of the transfer

The spouse who takes over the policy cannot just cash in the plan and take out the money because if they do, the income on the disposition will still be attributed back to the original owner (unless the transfer was made to a former spouse)

Family Wealth TransferGiving Money to your spouse and children

Thank You

Questions or commentsinfo@insuranceconcepts.ca