Life insurance introduces an extra layer of complexity into financial planning for Americans who move to Canada or Canadians who move to the U.S., whether they have an existing policy or are considering buying a policy in their new home jurisdiction.
“Top of the list is the U.S. estate tax issue,” says Matt Altro, president and chief executive officer of MCA Cross Border Advisors Inc.
When a U.S. citizen who is insured on a life insurance policy dies, the death benefit is added to that person’s taxable estate, no matter where they were living at the time. In 2024 and 2025, the amount of the estate’s worldwide net worth that exceeds $13.61-million is subject to a 40 per cent estate tax. (After that, the temporary exemption increase passed by Congress in 2017 will sunset, halving the exempt amount, unless new legislation passes.)
The “go-to solution” for a newly purchased policy, Mr. Altro says, is to leverage the use of an irrevocable life insurance trust so the death benefit is excluded from the taxable estate.
However, when transferring an existing policy into this type of trust, there’s a three-year waiting period before the death benefit can be excluded from the taxable estate. The transfer may also trigger a deemed disposition resulting in taxable income inclusion, as well as U.S. gift tax issues. It’s also important to calculate whether annual gifts to the trust to pay premiums will fall within a U.S. citizen’s gift tax exclusion room.
Sometimes, it makes more sense to allow an existing policy to lapse and buy a new one to put into a trust so that the three-year waiting period doesn’t apply. But Mr. Altro says this may not be the case if, based on age and health, premium payments are significantly higher or the insured no longer qualifies.
Beyond the death benefit
Another issue, says Carson Hamill, associate portfolio manager with Raymond James Ltd. and financial advisor with the firm’s U.S. parent, Raymond James (USA) Ltd., is the investment component of a Canadian permanent life insurance policy may cause it to be classified as a Passive Foreign Investment Company (PFIC) under U.S. tax law.
For U.S. citizens living anywhere in the world, the tax on policy gains for PFICs is “harsh,” Mr. Hamill says, and the reporting requirements can be arduous.
A further burden on U.S. citizens living in Canada who buy Canadian permanent life insurance is the 1 per cent excise tax levied on insurance premiums paid to non-U.S. companies.
U.S. citizens living in Canada can generally retain U.S. permanent or term insurance protection they purchased in the U.S., although Mr. Hamill recommends confirming this with the issuer to ensure the policy will remain valid. To avoid PFIC tax and excise tax, he says those who need additional coverage should consider Canadian term life insurance rather than permanent life insurance – although the death benefit will still be subject to U.S. estate tax if the individual is the policy owner.
“With the majority of cross-border individuals, we recommend term [life insurance] because it’s simple. A lot of our cross-border clients never know when they’re going to go home, [and] if they don’t know exactly, then don’t waste the money on permanent [life insurance, which] can be expensive,” Mr. Hamill says.
Buyer beware
One more issue to factor in – and this applies to both Canadians buying U.S. policies and Americans buying Canadian policies – is the effect of currency fluctuations on the cost of premiums and the death benefit, Mr. Hamill adds.
A Canadian who buys a life insurance policy in the U.S. and then returns to Canada and starts earning Canadian dollars will have a choice: continue to pay premiums in U.S. dollars for a death benefit in U.S. dollars or switch to a Canadian policy that’s cheaper but with a smaller death benefit because it’s priced in Canadian dollars.
“It’s obviously very important for individuals to be aware of the risks of buying a policy from another country and thus possibly not exempt from taxation,” says Michael Pereira, partner, cross-border tax at KPMG Family Office with KPMG in Canada. “It’s advisable to work with the insurance company to determine whether the policy will be exempt based on where an individual is located, and then try to fall within the tax guidelines.”
He says some insurance companies understand the potential tax issues but others don’t, which makes the choice of provider very important.
Because of all the complexities, Mr. Pereira says it’s a good idea for financial advisors to add a cross-border tax advisor to their team – someone who understands the intricacies of the rules in Canada and the U.S. as well as the options, such as trusts, to mitigate taxes. That’s especially true for high-net-worth individuals with high-value life insurance policies.
“It would be a mistake to assume that the tax laws would be the same in both countries and that a life insurance policy will be treated the same way in each country,” he says.
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