Question

Karl and Marie are happily married and have a daughter, Sally. Many years ago, Karl was married to Tara. After Tara and Karl divorced, they did not keep in touch since they did not have any children together. Karl owns a policy on his own life which was issued in January 1990. He also owns the following life insurance policies which were all issued after he took out the policy on his own life: Marie's life with no CSV Sally's life with a CSV of $23,000 Tara's life with a CSV of $10,000 Karl is not in good health and is trying to make decisions about his life insurance policies. He may need to dispose of a policy to repay medical bills and transfer policies so that he is not the policyholder. Before making any changes, Karl wants to make sure that he is minimizing the tax implications. Which of the following tax considerations should Karl keep in mind when making changes? a) Karl's life insurance policy was issued in 1990. He should dispose of this policy first because the ACB is generally higher than newer policies. b) Karl is able to roll over Sally's life insurance policy to Marie. Marie will have a policy gain of $0 even though she paid him a consideration for the policy. c) Karl is the policyholder for the policy on Marie's life and has decided to keep the policy in his name but it will automatically roll over to Marie upon his death with tax consequences. d) Karl's policy on Tara's life can be transferred to her for a consideration and her ACB will be the same as Karl's ACB.

Answer 1

a) Karl's life insurance policy was issued in 1990. He should dispose of this policy first because the ACB is generally higher than newer policies.

b) Karl is able to roll over Sally's life insurance policy to Marie. Marie will have a policy gain of $0 even though she paid him a consideration for the policy.

c) Karl is the policyholder for the policy on Marie's life and has decided to keep the policy in his name but it will automatically roll over to Marie upon his death with tax consequences.

d) Karl's policy on Tara's life can be transferred to her for a consideration and her ACB will be the same as Karl's ACB.

Step-by-step explanation:

a) Karl's decision to dispose of the life insurance policy issued in 1990 first is accurate. Generally, the Adjusted Cost Base (ACB) of older policies is higher, and disposing of this policy may result in lower tax implications compared to newer policies.

b) The rollover of Sally's life insurance policy to Marie without triggering a policy gain is a valid consideration. This is possible under the Income Tax Act, allowing for the tax-deferred transfer of policies between spouses.

c) Karl's decision to keep the policy on Marie's life in his name, with an automatic rollover to Marie upon his death, carries tax consequences. The transfer at death is considered a disposition, and any accrued gains on the policy would be subject to taxation.

d) Transferring Karl's policy on Tara's life to her for a consideration with the same ACB is accurate. The tax consequences for Tara would be based on Karl's ACB, ensuring a seamless transfer without additional tax implications.

In summary, Karl's considerations align with tax-efficient strategies for managing his life insurance policies, taking into account ACB, rollover provisions, and potential tax consequences upon death.