How life insurance can help HNW clients saying goodbye to Canada

International immigration expert cautions clients to avoid 'jumping out of Canadian tax pot and into another tax fire'

How life insurance can help HNW clients saying goodbye to Canada

For many high-net-worth Canadians, life insurance is used as a tool for estate planning – as a way to equalize assets between heirs, for example, or a tax-efficient way to increase the impact of their charitable donations upon death. But life insurance can also be used to mitigate another type of deemed disposition.

“The decision to become a non-resident of Canada can trigger another type of deemed disposition. You can think of it as if you’re ‘dying’ to the Canadian tax system,” says David Lesperance of Lesperance & Associates. “HNW Canadians who decide to emigrate in this way can use insurance the same way they’d use insurance upon death.”

Bracing for the Canadian exit tax

According to Lesperance, the decision to become a non-resident is a deemed disposition for capital gains purposes. For affluent Canadians who have plans to move elsewhere on a permanent basis, he says private placement life insurance (PPLI) can be used to help deal with that “exit tax” upon departure.

While the deemed disposition from the exit tax creates a tax liability, Lesperance says, it doesn’t create liquidity. With the use of PPLI, clients can get the liquidity they need to post assets as they move to another jurisdiction.

“There’s a number of things you can do to help minimize that exit tax beforehand – pouring as much as you can into your principal residence to take advantage of the principal residence exemption, estate freezes, and so on,” he says. “After all those normal planning manoeuvres, you can set up a PPLI policy to prepare for that exit tax.”

PPLI can also be used to address another challenging aspect of tax planning for high-net-worth Canadian families moving to the US. Aside from extricating themselves tax-efficiently from Canada, Lesperance says HNW clients should also be careful not to expose themselves to significant taxes as they make their move somewhere else.

“If you're going to jump out of the Canadian tax pot, you want to make sure you don't jump into another jurisdiction’s tax fire,” he says.

Estate tax planning, US-style

For many HNW Canadians who go to the US, Lesperance says the country’s peculiar approach to calculating capital gains can be an unpleasant surprise. Unlike many jurisdictions where the cost basis for assets is their fair market value, the US tax system bases it on the price at which a taxpayer acquired an asset.

“You might have bought Apple at $1 a share, and now it’s worth $220. All that appreciation happened before you ever came to the US,” he explains. “Unless you do some tax planning and restructuring of assets, the US will try to tax you on all that appreciation based on all the appreciation from that $1.”

Under the US system, Lesperance says taxpayers can also take advantage of a unified tax credit to exempt a portion of their assets from the gift and estate tax, for which the maximum tax rate is 40%. The unified tax credit exemption amount increases in value every year; currently, it stands at $12.9 million.

“Most people in the US don't pay estate tax because their estates are worth less than $12.9 million. And if you've got a spouse, you can double that,” he says. “So you're talking about really high-net-worth people who end up being subject to that tax.”

Once they’ve maximized their unified credit exemption, Lesperance says high-net-worth Canadians-turned-US residents can cover the remaining estate tax liability with the addition of PPLI.

For HNW clients with international migration plans, Lesperance says there’s a broad spectrum of PPLI options to consider – whole life, term life, and independent, to name some – and it often takes a team of specialists from various domains to determine what’s appropriate.

“Often you’ll have a Canadian tax lawyer, and another tax lawyer in whatever jurisdiction the tax professional is going into. And there’ll be an insurance professional who’ll get the right policy to match the client’s need,” he says. “Once we’ve designed the plan, then we’re able to project manage and build it.”