This guide provides information on the Federal income tax position of individuals who own Quilter International investment linked life insurance and capital redemption policies but in the future become resident in Canada for tax purposes. This includes:
- Canadian nationals returning to Canada or
- Foreign nationals moving to Canada.
Quilter International life insurance policies include:
Collective Investment Bond (CIB), Collective Investment Plan (CIP), Executive Investment Account (EIA), Executive Investment Bond (EIB), Executive Investment Plan (EIP), Investment Account (IA) and Wealth Management Plan (WMP), International Select Bond (ISB), International Portfolio Bond (IPB), European Wealth Bond (EWB), European Portfolio Bond (EPB)
Quilter International capital redemption policies include:
Collective Redemption Bond (CRB) and Executive Redemption Bond (ERB), International Select Bond (ISB), International Portfolio Bond (IPB)
Investing in Quilter International policies
Quilter International policies give your clients real freedom over how they invest and control their money. Backed by years of investment expertise and financial strength, our flexible policies allow clients to invest in a wide range of assets, in a stable, tax-efficient environment that adds value to their choices.
Quitler International is based on the Isle of Man and in Ireland, both tax efficient locations where Quilter International is currently not liable to income tax, capital gains tax or corporation tax on assets linked to policies; so your client’s investment will be able to grow virtually tax-free. It’s possible that withholding tax may be deducted from some of the dividends in their country of origin but once inside the policy they can accumulate tax free.
Taxation in Canada
Tax residence in Canada
The Canada Revenue Agency (CRA) uses a number of steps to establish if an individual is resident for tax purposes in Canada.
The first step taken by the CRA is to establish if an individual has residential ties with Canada. These will include having a home in Canada or whether the individual’s spouse and dependents are in Canada.
The CRA will also take into account secondary factors that include having a Canadian passport, driving license or personal property located in the Country.
If your clients have not established significant residential ties to be considered a resident, but stayed in Canada for 183 or more days in the tax year, they may be considered a deemed resident of Canada.
A full explanation of “residence” is beyond the scope of this guide but your clients can apply to the CRA for an opinion on their residence status. You can find more information on the CRA website www.canada.ca
Taxation of income in Canada
Canada has a progressive tax system so the more income earned the greater the tax payable. Capital gains are included as part of annual income but generally benefit from a 50% reduction before assessment.
Income tax is payable on worldwide income which will include annual accruals within Quilter International policies. Any chargeable increase in the policy value over the policy year must be included in your client’s annual tax return.
Canadian resident taxpayers may be eligible for a foreign tax credit under one of Canada’s bilateral tax treaties, in order to avoid double taxation on the same income.
The CRA administers the Federal tax system as well as collecting provincial taxes on behalf of their governments, except for Quebec. Federal income tax is charged as shown in the table below, on top of which your clients will pay the provincial rate depending on where they live.
For the tax year 2018, the progressive rates of income tax are as follows:
Tax bracket in CA$
Up to 46,605
46,606 – 93,208
93,209 – 144,489
144,490 – 205,842
205,843 and over
Taxation of Life Insurance Policies in Canada
For the purposes of Federal taxation in Canada, Quilter International life insurance policies and capital redemption policies are considered to be within the definition of life insurance in the Canada Income Tax Act.
Exempt and non-exempt life insurance policies
In Canada a distinction is made between life insurance policies primarily designed to pay a death benefit and those used for investment purposes. The effect is to change the tax position of the policy owner and for Federal income tax purposes life insurance policies will be either exempt or non-exempt.
To be exempt, the policy must meet an exempt policy test which imposes a number of restrictions on how much the policy value can grow each year and the rate of increase in the death benefit payable. Most policies issued by insurance companies in Canada are exempt policies and the insurance company is responsible for meeting the exempt policy test.
Exempt policy taxation
Life insurance companies in Canada must account for taxation on the underlying funds of an exempt policy and the policy owner benefits from tax deferral until they surrender the policy. Gains arising on surrender are included in the income of the policy owner for the tax year in which they arise.
Non-exempt policy taxation
A non-exempt policy will be a single premium policy primarily for investment with a limited death benefit. Policy owners will be subject to accrual taxation on the annual growth in the policy year. They must include in their income for the tax year the annual gain achieved by the policy calculated at the policy anniversary.
Quilter International policies are considered to be for investment and do not comply with the exempt policy test. Policy owners who become tax resident in Canada must thereafter include in their annual tax return, the yearly growth in their policy.
When your client moves to Canada, they will be deemed to have made a disposal of their policy which changes the adjusted base cost to the fair market value of the policy on the date they became resident.
Tax on surrender, part surrender and maturity of an investment linked non-exempt life insurance policy
When your client surrenders their policy the policy gain is subject to income tax. As income tax will have been paid annually on the accrual in the policy, the adjusted base cost is increased by the addition of the previous chargeable amounts. The chargeable gain will be the difference between the surrender value and the adjusted base cost, proportioned for partial surrenders, and this is then taxed at your client’s personal income tax rate.
Tax on the death benefit payable from a non-exempt life insurance policy
The death benefit payable from an Quilter International life insurance policy is generally the surrender value plus an additional capital amount. For example, policies typically pay 101% of the surrender value with some regional differences.
When the policyholder of a non-exempt policy is the last life assured and dies as a resident of Canada, the estate of the deceased will be subject to taxation on any accrued gain of the policy up to the date of death.
The additional capital sum assured payable on death, the 1% amount added to the surrender value, is not taxable in Canada, no matter whether the beneficiary is resident or not resident in the Country.
For example, during the year of death the accrued gain within the policy is £10,000 and the surrender value at the time of death is £200,000. The death benefit is £202,000.
In the above example, the personal representatives must include income of £10,000 in the final tax return for the deceased’s estate. The £2,000 payable in addition to the surrender value is not taxable.
Offshore Investment Fund Property Rules and capital redemption policies
The Offshore Investment Fund Property Rules (OIFP) are contained within the Income Tax Act. These anti-avoidance rules are designed to discourage residents investing in funds situated outside Canada with the objective of reducing or deferring their tax liabilities.
The OIFP rules consider whether the taxpayer has an interest in a foreign entity that invests directly or indirectly in a portfolio of assets and one of the main reasons for investing is to obtain a tax advantage - a reduction in the annual income of the taxpayer which would not have been possible if they’d invested directly in the portfolio investments.
Whilst capital redemption policies do not depend on lives assured. The Canada Revenue Agency (CRA) has expressed opinion that similar policies paying an amount on maturity but don’t depend on human life, are for tax purposes, within the Income Tax Act definition of life insurance.
However, if the CRA decide to tax an Quilter International capital redemption policy under the OIFP rules, the policy owner resident in Canada may be subject to a deemed interest charge on top of the annual policy growth.
Other Quilter International policies
The information provided within this document will apply to other Quilter International policies in the manner described.