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Recently, we were approached by an insurance advisory firm in the U.S. with whom we have worked in the past, regarding a new product which is not just competitive but also offers some unique benefits not generally available in Canada. In our own practice over the last few years, we have had several enquiries from clients and professional advisors on whether U.S. products are appropriate for Canadian residents. In a word, the answer is “no” but an explanation and some exceptions should be noted. The most obvious exception is insurability or capacity of insurance. We have assisted our clients to find coverage in the U.S. when they are deemed uninsurable in the Canadian market or they require more than is available here. Another could occur when it is certain that someone currently resident in Canada is moving to the U.S. and he/she wishes to establish insurance now in order to protect insurability.
But for the most part, Canadian residents should be engaging Canadian advisors and using Canadian products. Every tax system treats insurance products differently so this applies not just to U.S. insurance contracts but, in fact, all foreign contracts of insurance.
I am grateful to Peter Everett and Glenn Stephens of PPI for pulling together the following summary of issues that must be addressed by Canadian residents considering a U.S. insurance product. Although we have been discussing this matter for a few years now, this is the first and most complete discussion – in non-technical terms – that I have seen.
Canadian residents (individuals and corporations) considering the purchase of life insurance in a market other than Canada must take into account a few points before making the buying decision.
Some of the points to consider are the following:
1. Policies issued by foreign insurers may not qualify as ‘exempt policies’ for Canadian tax purposes, with the result that any cash accumulations in the policy are potentially taxable in Canada on an annual basis. On this point, Canadian residents will normally have to engage actuaries with an understanding of foreign policies and Canadian exempt policies to help them determine, on an annual basis, whether their policy is or is not exempt. This entails a professional engagement that has costs.
If a policy ceases to be an exempt policy for Canadian purposes in any year, it will no longer qualify as an exempt policy on a go forward basis and will be treated as if it had not been exempt from the time of issue. This treatment can lead to onerous tax consequences.
As well, an actuary will have to help the Canadian resident keep track of the adjusted cost basis of the policy. This is an important exercise as it has tax implications for surrendering the policy, taking policy loans and determining, in the case of a corporate beneficiary of the policy, the credit to the corporation`s capital dividend account.
2. Canadian residents acquiring foreign policies may also have to self-assess and pay premium taxes on the premiums they pay to the foreign insurer. (Each province charges a “premium tax” which is included in the premium of Canadian products.)
3. The creditworthiness and claims paying ability of a foreign life insurer is a consideration. In this connection, the availability of insurance to indemnify policyholders where a life insurance company is insolvent is a concern. A client should determine whether the foreign life insurer has a program such as Canada`s Assuris to protect the life insurance policies issued by the insurer.
4. If a foreign life insurer is seen by licensing authorities to be an unlicensed insurer in Canada, and the insurer fails to honor policy obligations, the agent who assisted the Canadian resident in acquiring the insurance could be deemed to be the insurer, and would thereby be liable for policy obligations. (see, for example, section 396 of the Insurance Act (Ontario)).
5. Premiums paid to non-resident insurers will almost always be denominated in the foreign currency, as will the benefits paid under the policy. This has significant foreign exchange consequences if the foreign currency is high when premiums are paid and low when benefits are paid.
Buying a foreign policy can be beneficial where there isn`t sufficient capacity in Canada to insure the risk, or where Canadian insurers are unwilling to underwrite a particular risk. However, this advantage has to be weighed against the real risks noted above.