124. USA Citizens In Canada Life Insurance Landmines

You are listening to the Wealth Without Bay Street Podcast, a Canadian guide to building dependable wealth. Join your hosts, Richard Canfield and Jason Lowe as they unlock the secrets to creating financial peace of mind in an uncertain world. Discover the strategies and mindsets to a financial future that you can bank on. All right, so what exactly happens when you have a US Citizen living in Canada and they want to get an insurance policy? What are the risks? What are the pitfalls? What do we need to know? When we're looking at some cross border issues around how taxation works on things like policies and that sort of thing, we often have people who reach out and they're interested in maybe getting started or getting a policy on a family member. But there is a bit of a cross border issue. We often have US Citizens living in Canada and vice versa. And so I'm joined today with my good friend Henry Wong, one of my amazing teammates who's a regular contributor here on the Wealth Without Bay street podcast. And we're going to be talking about this issue and Henry's going to walk us through some of those explanations. Now, we're not cross border tax specialists here. I most certainly am not and I would imagine Henry would profess that he is not as well. But we are going to just go over from a high level perspective, what are some of the, I guess, landmines that you could step into and blow a foot off if you're not, if you're not prepared to understand some of these key components. So thanks again for joining me today, Henry. I'm really excited about this topic. Where should we begin?

Yeah, no, I will just say, like you mentioned, we're not cross border tax specialists. We're also not cross border legal experts. But I'll say at least I myself have run into enough of these challenges knowing how to escalate it and working with the right who's or the individuals when it comes to bringing that. So this is really the, I think the goal of this record, this podcast, what we're going through is to talk about what, where you need to go and what needs to be done when you are, when you find yourself with, with a U.S. citizenship. And I think another one that we can also dive into is when, you know, becoming your own banker, the infinite banking concept and whole life insurance when it comes to Arnelson Nash came from the US and so we have a lot of individuals, especially Canadians, who initially thought they should buy US Life insurance. So I'll definitely talk about that aspect of it too. So yeah, I think that's where we can, we can go in terms of today, you know, the other, the other things that we hear about, or at least I have encountered, especially with our wonderful government, has been towards even exiting Canada. So I think all and all encompassing, we've got to look at it from, from the standpoint of life insurance and when it comes to Canada and how citizens are looked at, how, how it'll impact that. Okay.

Right now I think based on that, maybe a good place for us to start is probably on how we get taxed in Canada versus in the States based on, you know, kind of that citizenship aspect. And maybe that's a good place for us to kick this thing off.

Yeah. So the, the first thing is, and you know, I want to talk about that tool, right. The tool that we use is a life insurance policy. Now we prefer using a mutual whole life insurance policy, participating whole life insurance policy. Now there's different kinds of life insurance, whether it is a term insurance, universal life insurance, a whole life insurance. So you know, I'm not, we're not going to dive into all of those categories. But generally life insurance is a very wonderful tax advantage vehicle. However, depending on the individual circumstances, it can really create a tremendous tax headache. And tax problems can happen when the product which is labeled as life insurance doesn't meet the standards of the jurisdiction in which the owner is a resident. And why is a resident, the residency, such an important thing? Well, in Canada the residency is, or how Canadians get taxed is based on their residency, their citizenship. And a person who is a resident of Canada is subject to the Canadian income tax on their world wide income. And that residency means maintaining residence in Canada, having relatives in Canada, bank accounts and other social ties. So those are how those, how that definition is tied together. Then there's something called non residents and then deemed residents. So I'll call it kind of like temporary non residents. And you know, so a person is deemed non residents if they are in Canada for less than 183 days in a year. And so if that's the case, that individual gets taxed on only their Canadian source of income. So the amount of days will set whether you are a resident or a deemed deemed resident. Okay. And then of course then there's the non resident where you cut those ties. And one of those meaning if you're not in Canada, then you are not a resident and therefore you are not taxed in that way. When it comes to the US citizens, the US basis of taxation is very different. Well, similar, but very different. US Residents are taxed on their worldwide income, and non residents are only taxed on their U.S. income. So very similar to Canada. However, the determination of residency comes where a U.S. citizen or a green card holder is considered a resident for tax purposes irrespective. So geographical location does not impact that. So irrespective of where they are residing, as long as they are a US Citizen or a green card holder, they're going to be considered a resident for tax purposes. So that is a shining light in and itself to really understand which where are you a resident of and where do you get and when you become a resident, where do you get taxed from? Now a U.S. citizen living in Canada, it's going to be taxed in both systems. They have to actually file for both systems. Now there's treaties in place to kind of mitigate all of that. However, the topic we're going to go diving into is specifically using life insurance for said citizenship.

There's a lot to unpack there. And so just to tighten it up again is basically if you're a US Citizen living in Canada or, you know, green card holder, as you identified you, you will have to file basically an IRS tax return regardless of where you live. Even though, you know, if you were maybe born in the US but you've been lived your entire life in Canada, and you're effectively a Canadian as far as you, you're concerned, but you still have that USA citizenship tie, you are tied to their tax system and you can't separate that tie unless you were to give up that citizenship. So you're being taxed based on the citizenship, less so based on resident. There's a definition of residency, but really it's the citizenship that's the connection. Whereas in Canada you're being taxed based on residency and the residency definition not based on your Canadian citizenship. So I think that's kind of the fundamental difference as I, as I'm reading it. Am I catching that correctly, Henry?

Yeah, correct. And I guess what I can share is I'll just kind of share my screen on a very simple diagram for people who kind of just tune in and watch it live, which, sorry, watch it on video. But if we look kind of look at the citizenship. So if we look at Canadian life insurance, just by itself, Canada, believe it or not, there are actually Canadian exempt rules that allow the tax, sorry, the life insurance to be tax exempt. Now an individual can introduce things by themselves to create tax consequences for them, but we don't, we don't typically advise our clients on that aspect, or at least we Let them be aware of those exposures when they make those decisions. Then, you know, in all sense and purposes, if it's a Canadian citizen that owns the Canadian life insurance, it therefore falls into the Canadian exempt rules. Everybody's a happy camper. Now, if we look at US Life insurance, while US Life insurance has US Exempt rules and it's applied for US Citizens, everybody's a happy camper. Where things get really muddy is when that US Citizen owns Canadian life insurance, or vice versa, the Canadian citizen owns the US Life insurance. Again. So something can kind of some undesirable consequences can happen through that. So I just kind of had a really simple diagram that for people tuning in on video, can at least see what that flow or that diagram thought process looks like.

I like that you've got the exploding landmine image there attached to it. For, for the, for the US Person owning Canadian life insurance and vice versa, you know, and, and so with that in mind, we, because we do, we meet with people, we get connections. And it's interesting. I mean, we have, being that we're one of the closest border relationship nations, I think, in the world with, with how integrated we are almost from a societal standpoint between U.S. and Canada, all the similarities we have, it's extreme. It's becoming more and more common, especially in a globalized world where we're seeing these kinds of things come up. And so I know I've experienced a number of these, you know, in my tenure and doing this, Henry. And you've, you've, you've bumped into a couple of them as of many of our colleagues. And so we're going to be talking about some of these pitfalls. And then what are some of the things you can do around these pitfalls? And there's a few kind of options that are available to be as best positioned to be on board. And I think we'll talk a bit about this, but I just want to kind of get this out up front is that in order to have. So again, let's say you have a U.S. citizen and they want to get Canadian insurance. The key thing is because you're, you're, you're tied to the IRS tax system as well as the Canadian tax system, that insurance product that you're, you're, you're just receiving, it must meet the exempt testing to maintain its exempt status in both countries. So the exempt rules are different in each country. And therefore the policy or the structure of that policy has to be. They go through an annual exemption test. And so it has to maintain that being below the line in both countries over the life of that policy to avoid creating any, you know, putting yourself in one of those landmines that we've talked about.

Yeah. And so the first one we'll kind of tie into and talk about is in terms of the U.S. tax issues affecting a U.S. person owning a Canadian life insurance policy. So this is again, most typically when a Canadian has, sorry, a US Citizen has moved to Canada and is living in Canada but has not relinquished their US Citizenship, they still have that US Citizenship. Alternatively, this can also happen where I see, let's say there's a child who is going to university abroad to the US let's say to one of the universities there, and then eventually finds a career there and then essentially lives there permanently. So again that. And they may have a policy existing already, but again that transferability to when they become that green card holder or citizenship from there, that again is another time where that evaluation comes in. So I just kind of want to paint some of those scenarios of where that happens. So let's kind of first talk about those issues. The first issue is something called the U.S. estate tax. And there's another relation to it called the gift tax. Now, I'll kind of outline all of these three points. First, then there's the US Exempt test for the insurance policies. Then there's something called the US Federal excise tax on premiums for those non US Insurance policies. So the first thing is talking about the US Estate tax and the gift tax. The estate tax is an insurance planning concern as a policy's death benefit may impact a U.S. person's estate tax liability. I'll kind of dive into explaining what estate tax is in US and then there's also the gift tax is a concern for a US Person funding a policy on their life while it's owned by someone else or another entity. Again, which is often done as part of the planning measures when it comes to estate tax. So when we talk about estate tax, the death benefit of a life insurance policy owned by a U.S. person may be subject to U.S. estate tax. And this is the case whether the policy is issued by either a Canadian or a U.S. insurer. But there's a lot of generous exemption and planning measures available to eliminate or reduce a US Person's estate exposure. And just to kind of contrast that compared to Canadians.

Canadians don't necessarily have a estate tax, but they have something called deemed disposition. And we, I think we've. So we've had an episode talking about deemed disposition for a business owner. And the tax ramifications on deemed disposition, meaning once you pass, everything that you own will be declared at fair market value, whether or not that's what you paid for it. And the government is going to receive their share of that amount, that all of that's going to be included in your income to be taxed at. And that can be very heavy. It could either be 50% or 70% depending on your position. Nonetheless, it's a lot. Now US tax, estate tax is levied on the taxable estate of that person. That taxable estate is very similar. There's a fair market value on all of the assets in the deceased estate and then there's some allowable deductions like funeral costs or whatever. And then afterwards there's more ramifications. But what I'm kind of really specifically highlighting is how life insurance plays a factor on that gross estate. So life insurance proceeds so upon death those proceeds of that policy owned by that individual who's passed away. If there's incidence of ownership, meaning they can change the beneficiary surrendering like whatever fact pattern that exists, surrendering or cancel the policy, assigning the policy, revoking the policy, pledging the policy or obtaining a policy loan, which is a lot of the stuff we talked about when it comes to becoming your own banker. All of that, you know, makes it, it makes the fact pattern incident payments of those proceeds payable to the estate. The second one is also where it would be payable to the estate is when a corporate owned life insurance policy on the life of the deceased US Person, the death benefits received by the corporation would increase the value of that corporation and consequently the value of the shares go up and as a result the death benefit or part of that increases the US person's gross estate. So again, whatever all of that, either the life insurance proceeds by way of the incidence of ownership or by way of the value of the company going up is going to increase their estate value. Again, this is all in the US specific tax system.

Interesting about that, that the corporate, the corporate one is that you, you know, you've created additional taxation by accident.

Right.

Really ultimately, you know, the need of that insurance was there. You wanted to have that. It's solving a problem and unfortunately the problem it solves creates some other problem. Right. And it's one of those things where again these, these, these tax codes that we have to deal with both in the US and Canada are, they're just there's so there's so many moving parts and it's very difficult to be an expert in all those areas. So that you do need to have people with specialized knowledge. And so again, it's so beneficial that we have you here. Henry, just talking through, even from a high level perspective, how these things can show up for people in both countries.

Yeah. And you know, just to kind of divert a little bit about my personal experience growing up, you know, I would hear a lot about the American system, the tax system, and it always seemed like they paid a lot less taxes. Right. However, however, after my own experience doing all of this, working with clients or working in a startup and all of like just my past experience, I will tell you one thing. I definitely do not enjoy the US tax system. There's a boatload of forms that needs to be filled. There's a lot more guidelines and rules that have to be followed. Canada. As much as the Canadian tax system is burdensome the way that it is, it's not as rigid and rigorous like the US system is. And I'll say in terms of dollar for dollar, the amount of taxes that get paid, I think it's pretty actually even. I mean I haven't done a very deep dive comparison analysis nor do I want to. I'm just saying that misnomer that Americans pay a lot less tax, I would challenge that. I don't, I don't believe that's fully true, especially from my experience. And you know, could you imagine. So one of this, there's a 1099 miscellaneous form. So anytime you do certain things. So in the US there's like a form that you need to fill. It's called a 1099 miscellaneous for any payments out of the bank to a vendor for six over $600.

Just seeing the volume of $600 and having to do that is something I do not enjoy doing.

Miscellaneous tax form. That sounds like a catch all event. Basically.

Yeah. I just don't enjoy the US tax system at all. And this is coming from my perspective, but going back to the estate tax. So in US there's an estate tax exemption and that exemption is if the value of your estate. So all of those assets at the fair market value in 2022, the value is a little bit over 12 million. So if your estate's value is less than 12 million, there is no estate tax that you need to pay. However, there's some legislation that has come in that as of January 1, 2026, that 12 million reduces to 5 million. So you know, I'm not, I'm not a U.S. citizen, I don't follow the rules that specifically but that's a little bit troublesome to, to be aware of and notice. But you know, I just thought I would bring that up. So the, the exemption is in place to shelter tax on estates and taxes on annual gifts. So again, gifting is the amount of money and I'll kind of talk about the gifting aspect of it. But the, the estate taxes, taxable estate amounts, there's a graduated scale with that too. And that estate tax is payable from 18% to 40%. But you know, again there's a lot of mechanics that go into calculating all of that. But I just kind of want to set the stage for the listeners to be aware of. The next component is that gift tax. So the U.S. gift tax applies to properties gifted by a U.S. person to another person. And there's some notable exceptions like those to a U.S. citizen spouse or to a charity. But there's annual exclusions on an amount of 16,000 USD. So this is for 2022 and it applies to each person to whom a gift is made. And in the case of a non US spouse, that exclusion is up to $164,000. So that amount of a gift, which is more than that annual exclusion is also subject to a gift tax. And any gift tax payable may be sheltered using that U.S. estate tax exemption amount, that $12 million amount. But again, so that's just some things to keep in mind of when you have a US Citizen owning a Canadian life insurance policy. That's just one of the issues which is the estate tax and the gift tax. The next one is talking about the US Exempt test. So generally, so like I mentioned before, each life insurance policy on the carrier has met those respective countries exemption rules. And generally life insurance policies issued by Canadian insurers are designed to meet those rules and vice versa with the US So the growth accumulated inside those policies aren't subject to annual taxation. If a Canadian. Now once you cross that line, if a Canadian insurance policy doesn't comply with the US Exempt test rules, the annual growth in the policy may be subject to annual taxation in the US because the US system looks at these policies that don't fit the US Exempt rules and they have now fallen into a different consideration for, for them that this US Income tax issue exists whether the policy is owned directly by the US person or through a corporation. And you know, I won't go into the US structure of corporations, but for a corporate owned policy with a U.S. person, shareholder growth in that policy is taxed differently depending on what that corporation is considered as. So Again, there's definitions on how those corporations are considered, but not the, not the point of it here. So the, when Canadians purchase that U.S. life insurance, the income tax rules, they set up these long, complex definition of what qualifies under that income tax, the income tax rules. And the other part to just kind of point out is it's, this determination is made on a per policy basis. So the amount of policies you have, each of those policies need to be evaluated. And some people, so like us that we work with our clients, will own multiple policies. Again, Canadian citizens owning multiple policies. But again, this, this is just something to just be very, very mindful of. And the, the, the exempt test is a hypothetical policy defined under the Canadian Tax Income Tax act that sets out that maximum accumulation of that value value that's allowable in that policy. Again, this is all, again, all our policies, Canadian insurance companies who issue Canadian policies to Canadians fall into meeting all of these definitions. But if the accumulation doesn't fall into what's allowed in that exempt policy, then it gets subject to those tax and all of those rules there. So what I'm trying to really say is there's not really an easy way to tell if a policy qualifies as life insurance in Canada. Canadians shouldn't also purchase foreign life insurance policies unless the insurer can write, in writing that it qualifies. And you know, just from personal experience, they also will share kind of their insight, but they're not going to be able to give you a definitive answer on whether or not it actually qualifies too. So people moving to Canada and already own foreign life insurance should ask their insurer if it qualifies or where a policy doesn't qualify. They should definitely consult a tax professional specifically specialized in cross border, specifically specialized in life insurance about their options.

And one of the things that ends up happening there is ultimately this is where the services of a professional actuary are engaged. So that cross border specialist or whatever, if, if again, if there's somebody moving and transitioning large amount of assets one country to the other, et cetera, typically when insurance is involved, they will engage the services of a professional actuary and there's a fee for that service. Like any professional, they're going to charge a fee for what they do and they will assess a number of factors in relation to that and they'll look at the exempt test in this country and in this country to see where things kind of qualify. And you know, that can become pretty expensive on a per policy basis. It could be anywhere from, let's say two to maybe as high as $5,000, you know, in a fee on a per policy basis to assess, you know, that, that policy structure to see if it qualifies. Now once an actuary has that data, you know, if it needs to get updated, you know, on a regular basis, let's say every five years, to see that a policy is still maintaining its exempt status because they've already done some of the initial work, it was probably reduced level there. But these things get tested on. It's an annual exempt test. That annual exempt test is being done by both countries and they're doing it in their respective rules. Right. So we're trying to see that on an annual basis does this particular policy maintain it under the exempt requirements in the US and in Canada. So it can get a little tricky. And so talking about those exempt tests, you know, in the, in the States, Henry, they have a cash, they have two primary tests they do as a cash value accumulation test and then there's a guideline premium test. And again, we're not trying to unpack the entire US Situation here, but really what it says is, you know, is this policy accumulating too much cash value relative to the size of the death benefit in a, in a given period of time. And if that's the case, hey, this thing is no longer an insurance contract. Really what you have is an investment over here and therefore it should be taxed in a different format because it's no longer fitting the description of insurance. That's kind of the general, you know, if we were to put a big fat paintbrush on how they're, how they're assessing these things, they're trying to say, look, this thing is insurance. It should stay insurance. It's not some investment vehicle that you're using to try to, you know, you know, make bazillions of, you know, annual returns on etc. So it needs to maintain the status and the premise by which the foundation of that insurance is designed upon.

Yeah, no, and that's a really good point. I'm just going to segue a little bit in terms of a lot of the comments or questions when it comes to what we do here in giving people control of their own banking system and control of the banking function in their life. One of the most common questions we ask is how can I front load my policy? Well, this is one of those things why we can't frontload the amount of money into our policies because the policies are designed already in Canada to already mitigate those, sorry, to fit into those exemption rules so it doesn't fall into the investment product. And so, and then you, so US has its own exemption test and you, you made it very clear that at least in US there's those two guidelines that they look at the cash value accumulation and that premium test relative to the death benefit for US perspectives. Now what I also did want to just tie in is when, so specifically for the US Citizen owning a Canadian policy, the policy, when it doesn't meet that US Life insurance definition, that income is included as ordinary income for the policy owner and that's going to be subject to that, to a U.S. tax amount. And that tax is essentially kind of phantom. Right. So it's not really income for the individual, but they're going to get taxed for it, so they have to pay for that. So when, when they're kind of determining that accrued income that the income that's building up on a non compliant policy, it's going to get taxed. It's, it's really important. Here's, here's where it comes down to. It's really important to get some form of certification to show that there is exemptions in place. And you have to do that every, every year on every policy that can add up.

Now there's a kind of a point that you made about, the point that you made about that being ordinary income. You know, that's where it now is looking at, okay, what's your, what's your tax bracket or tax rate in that given country? Right? So whose tax system are you paying into? And you know, so if you're, if you're offside, you have a Canadian policy, you're offside in the US Tax rules. Now you're going to be reporting that, that gain in that cash value growth as ordinary income in the, with the irs and they're going to tax you appropriately on that income. So again, it's, it's a, it's, it's kind of a, it's a big bag. It's a, it's a bit of a mystery in that you know how it's all going to play out. But the, the key is that you want to be walking into something like this with your eyes wide open and we're identifying a lot of these problems. Okay. Because when you understand what the problems are, it's easier to find the solutions to the problems. It's hard to find a solution to a problem if you don't even know there's a problem. Right. So with, with Henry's education here and giving us A good overview of this. We're, you know, if, if you know someone who's a U.S. citizen or has children that are us, that are dual citizens, et cetera, you might be able to point them in the direction of this resource so they can do some really good learning to start to pinpoint where they might fall in, you know, fall flat on their tax face when it comes to, you know, different income that they may have to report at a future date.

Yeah, and the other last kind of part I want to share in terms of a US citizen owning a Canadian life insurance policy is, especially when it comes to a corporation, a life insurance policy owned by the corporation where the beneficiary is a Canadian citizen can extract when that life insured passes away, Canadian citizens will be able to extract the death benefit proceeds will be paid into a capital dividend account and as, and sorry, a capital dividend account amount will be created and money can come out of that capital dividend account tax free in the form of capital dividends. However, it's only available to Canadian resident shareholders. So of course this becomes a problem to US Citizens owning shares into that corporation. And of course when you own shares into that corporation, the US system recognizes that this individual also owns Canadian shares in that investment. The third issue to talk about when a U.S. citizen owns Canadian life insurance is the U.S. will impose a separate tax. It's a 1% federal excise tax on premiums paid on life insurance, sickness accident insurance and other annuity contracts, essentially foreign insurance. So again Canadian insured products. And generally the person who pays that premium pays the excise tax and then they also file the related tax return. And in us it's a form 720. And if this person fails to pay the tax. So this is the, this is a, this could be a surprise catch all for a lot of people. The US IRS considers the tax to be recoverable either from the policy owner, the broker, the advisor, the life insured and or the insurer. Ultimately the IRS wants their payment. They don't care who's it from, and all of those parties can face a penalty. So the IRS wants their money.

What's really interesting about that is, you know, again, in Canada, and you know, I might be stealing your thunder a little bit here, but we also have a premium tax in Canada that's paid on Canadian policies. The difference is the average everyday Canadian has no idea it's happening because it's pre calculated into the insurance premium. So if you're getting an insurance policy, it doesn't matter if it's term insurance or critical illness or disability or light a whole life insurance or universe life. Like the structure of the insurance really doesn't matter. There's a tax that's getting paid. The insurance company is paying it on your behalf and they're baking that tax cost directly into the premium. So all you see is the premium. And so, you know, just, you know, a way to look at that. Another way of assessing that is there's a hidden tax inside of every insurance premium you're paying right now. Canadians. So we talk a lot on here about taxes that are being paid. We have a little playlist called Wealth Without Big Government. Thanks Henry, for, again for that, that tidbit there to create that playlist. That's where this is going to end up going, by the way. And so every time doesn't matter how many insurance premiums you've got, there is a cost of taxation that's going directly to the federal coffers, that's being paid by the insurance company that that policy is with. They're paying it really not even so much on your behalf. They're paying it because it must be paid. And they're trying to simplify the process so that you don't have to directly be responsible for paying for it. You're instead indirectly responsible. So the tax is always there. It's another way that we're being taxed as Canadians, but we just didn't even know it was happening.

Yeah, an excise, an excise tax is kind of like a very specific tax applied on again a product or service or a good, like a good. But so for us, they're gonna, because you've purchased an international insurance, they, they want, they want their piece for that. And I think it's just a whip. Again, I, I'm not gonna speak on the policy and however it was designed, but obviously if they are saying why are you buying Canadian when you can buy locally in US that's, that could be one of those reasons. But the, the last part, I guess just to kind of share is some tips. Now these tips are really for informational purposes and they're, they shouldn't be taken as any tax or legal advice. What's really important is if you are a US citizen owning a Canadian life insurance policy, you have your, your cover, you have to that the system of impact is the US IRS system and the legal system there. So you need to have US legal and tax counsel for specifically assessing your personal circumstances. And what I'm sharing is only highlighting the problems so you know who to escalate to, to have an informed basis of that discussion for your own personal circumstances. So the first kind of planning tip when it comes to settling or looking at life insurance for a US Citizen living in Canada is first rely on that basic U.S. estate tax exemption. 12 million is a lot of money. Not everyone has that. But just know that at least that's in 2020. That's the 12 million amount that you just in a nice way have to be very careful on. For a lot of business owners, this number is actually not hard to meet. So just be very, very mindful of that. And of course, you know, there's other ways to kind of make things a little bit simpler, but just recognize that 12 million, anything less than 12 million has no estate taxes payable because there's an exemption for that. The second one is using a non US Person to own it. So where possible, consider arranging for a non US person to be the owner of the policy, like a non US person spouse if it makes sense. You know, let's say even if you're, you have a child who's going to go abroad for school in the US tax system, then have the parent own the policy while the life insured is the child. However, this, so by doing it this way, then this is going to solve the estate tax issue, the US estate tax issue, and the US exempt test issue. But it still doesn't avoid the excise tax, that 1% tax issue. So I want to make sure that's also very clear. Now when things are designed this way, if possible, you have to ensure the policy doesn't transfer to the US person. So just using that sun as the example, it doesn't transfer the sun if the policy owner dies first, that otherwise, if that's the case, this may result in a policy gain for Canadian tax purposes. And in cases where the life insured is a US Person just by virtue of residency, so they're not a US citizen or a green card holder and plans to return to Canada in the foreseeable future. You can have, you know, it's, that's where you want to have that U.S. person, that parent, own the policy. And at a later date, the policy can transfer to that life insured, let's say the sun under the Canadian intergenerational rollover rule, when they come back to Canada and are no longer a US Person. For corporate situations, there aren't many opportunities to have a corporate policy owner where a US person is or might be a shareholder, particularly since the Canadian capital dividends are not tax free. For tax purposes. And this is where I'm not going to dive into super detailed here because it gets really, really advanced. But this is where you use what's called an irrevocable life insurance trust. And you can use that and it can be set up in Canada to purchase a life insurance policy, ideally as the original owner. And the irrevocable life insurance trust, or the ILIT would be the owner, the payer and the beneficiary of the policy. The death benefit would be paid to the islet, and if structured properly, it wouldn't be included in the estate of that deceased US Person. But again, the islets don't address the excise tax issue on the premiums. So they also don't address the exempt test issue, which would apply where the ILIT was a US Beneficiary. So ultimately, general, ultimately, when it comes to that US Situation of a US Citizen living in Canada.

What has to happen is really a, an honest look of the individual's circumstances and whether or not the individual may even consider relinquishing their US Citizenship. Until then, the most simplest solution for meeting life insurance needs as a general, you know, thought for people to think about and, and consider is getting term life insurance policies. Since they don't result in income tax, US Income tax, they don't accumulate cash value. And ultimately that's kind of the way around this using term insurance. The other way to look at it for at least what I would look at is what I normally would look to place is a convertible term insurance for possibilities of future conversion to a whole life policy. And again, because we focus on becoming your own banker, that's the platform that allows us, so we want to place a policy that we can convert to a whole life policy. Ultimately, after everything that I've said, no matter what, that 1% tax on premiums is impossible to avoid. So even if you paid term insurance, you're still going to need to file and pay that 1% tax on premiums. So just I want to make sure that's very, very clear.

Now what comes up for me with all this description, Henry and we talked a little bit about the irrevocable life insurance trust. And the other thing that you had mentioned is, you know, you can also consider owning a policy on or having a Canadian citizen. So we're talking about, you know, a policy generated, a Canadian policy for Canadian life insurance company have that being owned by Canadian citizen individuals. Someone that's not a dual citizen doesn't really have that connection or TIE to, to U.S. citizenship. And, but if, if the U.S. citizen is a person who kind of wants to really, they're the driving force. They're the one that actually wants that policy, then there is a way that you can maintain a measure of control over the policy by being what's called an irrevocable beneficiary. So an example would be you have a husband and wife, couple or a spousal couple. And one, so one spouse is Canadian. The other spouse is a dual citizen or a, a US Citizen. The Canadian person gets the policy on their life. So they're the life insured and they're the owner. And then the U.S. person, you know, whether, however they want to arrange their funding requirements as a, as a household is kind of up to them. But the US Spouse ends up being an irrevocable beneficiary. So as an irrevocable beneficiary, that beneficiary cannot be removed without the irrevocable beneficiary agreeing to be removed. Any policy loans or any material changes to the policy can't take place without the signature and permission of the irrevocable beneficiary. So, you know, if, if, if the spouse who's Canadian has the policy, they're the owner, they all sudden want to take a policy loan for 50 grand and go to Vegas. Well, the irrevocable beneficiary has to sign to agree to that. Now, if they're involved in that Vegas trip, maybe they would agree, but if they're not involved, they probably would not sign that paperwork. So it does provide a measure of control without having direct control or maybe full control. So that's, that's another thing to be aware of. Kind of similar to the same vein of the irrevocable life insurance trust without having to, you know, manufacture that whole trust arrangement. But as you say, that Excise tax at 1% is, is something that is always going to be a sticking point with people who are the U.S. citizenship. And, you know, I wanted to speak a little bit about a conversation I had with an actuary on this. About a year and a half or two years ago, I had a gentleman who was looking at getting a policy kind of in that same spousal arrangement I just identified. And the end result was that they weren't ready to proceed because, you know, really what should have taken place is they would have had to get an actuarial assessment done. And the cost of that actual assessment based on their, their household income. It didn't make sense if they were doing, you know, maybe $100,000 a year policy. And they were a business owner, they had resources available to them. It might have made more sense for them to say, you know what, we are going to pay $3,500 to do an assessment on a policy structure that should be able to maintain through the life of both, you know, of both countries. And then you could design something on a fairly conservative nature that would, that would fit that ballpark. And some interesting things that I learned in that conversation is that in, and this is very much in general, so we're not making any recommendations here for anyone. This is all generalized. Kind of knowled was that shorter pay policies in Canada would have a high probability of going offside. So a 10 pay or a. In Canada you can even get an like an 8 pay policy or even 20 pay policies. Typically they will, they would go offside in the, in the consistent based on the current rules, the current exempt testing that's available as of as of today, 2022. And then you know, indicating that, you know, if it fails in the future, as in if it failed that, that testing, it may mean stopping to fund the premium for a while or surrendering paid up insurance to bring it in line with the testing. So there could be some, I guess I'll use the terminology manipulation of the policy to bring it back into, into the proper exempt testing. So there are some things that could be done there to, to in theory fix, fix it but nevertheless that there, there's certainly some things to be aware of in that additionally grandfathering applies based on when the policy was sold. So there is some, some measurement of grandfathering rules. So you may have an existing policy, you may, you may have something in place now. And so there's some things to be considered around when that policy was initially sold relative to where you are in life today. And again, could anyone speak to that? Well, yeah, an actuary, someone who's across the border tax specialist. So again you're getting into specialized knowledge category but there's just some high level things to kind of be aware of there and that it's a very tricky area of insurance. It's a tricky area of tax law. It's a, it's a tricky area to be in. And ultimately these are the things that we have to deal with and contend with when we make decisions to become, become a person who's a port, a part of two countries. Ultimately you know, we're only focused on US and Canada obviously today. And really if you went abroad to other countries and nations, you may, you may experience you know, even similar things. And I think, you know, one thing I would like to maybe touch base on in, in this, we really roughly spoke about it. And I don't know if, you know, you want to extend on this a bit, Henry, is, you know, people who are thinking about exiting Canada, paying an exit tax and just saying, you know, I kind of want to, for the most part, cut ties with the country of Canada because as you identified earlier, there seems to be a bit of a growing trend of individuals who have some measure of dissatisfaction with the last, oh, I don't know, 12, 24, 36 months of life in Canada. Some of the, let's say, rules, restrictions, confinement that's taken place across the nation to some degree and that hasn't sat very well with many people. And so they are actively exploring options on how they might, they might leave Canada. And so what would you like to share in relation to that further on this topic?

Yeah, on the larger scheme of things, I think there's a lot of grassroots movements towards exiting Canada to another country that would treat them well. I kind of, again, I haven't gone through that exploration process, but I will just say with the commonalities of what you just mentioned of what went on, every other country went through the same thing and used the same policies and maneuvers and things along that line. So you're faced with the same problem. You're still, it's unfortunate that problem still exists. So just kind of first we'll share my comments on that part. The second one that I would share is when you decide to leave Canada, if you officially cut ties from Canada, this is really important is they will consider everything that you own, deemed to be disposed today. You may not have sold it like your home, you may still own it, but it will be sold. So what will happen is everything at its fair market value, whatever the value it is today relative to the cost that you have. So whatever you have, whatever that value is today compared to that costs that you have, that's going to be included in your income. Again, depending on the type of it is, it could be capital gains, could be income like an rsp. If you own an RSP and you decide to cut ties with Canada and leave all of that is going to whatever's in your RSP is going to get included in your income. And if you had investment properties, then 50% of that, so all of that is going to get included into your income as one shot. And that's also very important to consider when you're making that type of decision. So don't do anything rash. If, if your, your plans are to cut ties with Canada, then you want to kind of strategically design things in a way where all that doesn't kind of come in at once. So may maybe explore the deemed this, the deemed residency first leave Canada for a short period of time and before you kind of really do that full cutting of ties because that, that is not going to be very favorable in your perspective.

Now another question that comes up around this same topic, Henry, is you know, people who, they're, they're leaving Canada, they're exiting Canada, they're going to live abroad. You know, people like to live abroad sometimes. You know, there's things, other things that get to people in Canada like, oh, I don't know, winter snow. These are things that also give people a reason to maybe want to live somewhere else for a period of time. And so in relation to that, you know, people who have set up insurance policies that have high cash value, whole life insurance policies, et cetera. And you know, as long as you, in general, again, in general, broad terms, the insurance carrier wants to make sure that you, you know, that's still yours, you still own and control that they're the owner of that contract, but they want to make sure that you're, you're paying that contract primarily ideally from a Canadian bank account. So you may need to keep a Canadian bank account. That may not be enough sufficient tie to maintain you being a resident. You can still be a non resident and maintain a Canadian bank account. It's also makes it easier if you're receiving policy loans and things to receive them to that. They don't really want to send a check to you in some mailbox, you know, attached to a banana tree in Costa Rica necessarily. Right. So you're going to want to receive that as probably a direct deposit into your, into your Canadian bank account and then maneuver it through whatever mechanism you need to get it into the country that you do reside. The issue that I think is important to understand is if you do decide to move abroad, whether it's for retirement reasons and lifestyle, like whatever that reason is, doesn't matter if you wanted to get new policies, you wanted to grow your system, you, you had an influx of capital, something like that happened. You're now, there's now going to be a difficulty in certainly in doing that in Canada, in order to be able to do that in Canada. There's a lot of questions on an insurance application and residency is one of those things. Do you plan to leave Canada in the next 12 months. Like there's a number of things that kind of come up. So looking at getting another one into your system can be more difficult. Having convertible term insurance or having a guaranteed insurability option on, as an example, on children and things, these are ways that you can be able to initiate that. However, there still could be, although you can still get a policy, how that policy's structure looks like when you go to initiate that conversion or what have you and you're no longer in the country, that there could be some modifications that are, that are made there. Especially when it comes to like adding additional like paid up insurance riders and things. You can always earn dividends on that whole life policy because you're, you're a part owner of the company. But how you, your structure, the policy may have to shift a little bit based on living out of another country. And so just just to be aware, it could buy some of the options available to you as far as growing your overall banking system, certainly in the country of Canada and there's a lot of countries who simply don't have a corresponding similar option that you can use wherever you go. So that's, you know, kind of a, I guess a little bullet point I'd like to leave people with, you know, on our call today that great to explore other countries. It's amazing, wonderful to do that. Just be aware and recognize other things that you might want to do. Everything's going to be a give and a take relationship. You want more sun and more beaches. That's cool. You might have to give up less banking system. You know, like, like growing your banking system might, might be reduced relative to this other decision is kind of what I'm getting at.

Yeah. It comes down to the changing of the structure of the premiums, how it'll be funded and like you mentioned, expansion of your system as you decide to journey on to explore the world and do things outside of Canada, then that this is, this is your system. When we, when we design these systems for Canadians in Canada, it's for Canadians in Canada that that's your system that you plan on relying on. That has to be a consideration for you to think about because that's your system and you need to know how your system is going to work when you are, let's say, out and about enjoying the rest of the world.

Excellent. Any final thoughts you'd like to leave everybody with today? Henry? We covered a lot. This is a very meat and potatoes heavy kind of a conversation. So everyone's going to be so full with the knowledge that we've given them today, that they're going to go have to, you know, sit on a couch and put their feet up and take it all in. But I'd love to just get maybe your final thoughts on our topic today.

Yeah, it's, it's not a, it's not a fun topic. It's maybe we'll put you to sleep. I hope it doesn't. However, anytime a US Person is the proposed policy owner, a shareholder of the proposed policy owner, or the life insured, at least one of the three US Tax issues that we've gone through, the exempt test, the excise tax, the estate and gift tax will be an issue. These issues are very, very complicated. And when I say very complicated, it's, you know, compounded because the US System is also very complicated and there are planning options that may facilitate a life insurance solution. In any case, the key takeaways if US Citizenship is involved, the client has to engage that actuarial assessment. Also U.S. legal and U.S. tax counsel need to be involved. And just by Richard, you mentioned 3500 for just as a starting quote as approximate quote US legal. You also have to consider the cost of the U.S. legal and the U.S. tax council. Again based on your relative position, the assets that you own, everything that that price can go up too. So when it comes it's not as simple as oh, let's just get a life insurance. There's other considerations to make sure you don't go offside on these policies that you you need to unfortunately bear to pay to make sure you don't go offside because going offside could just be as damaging as as it in general.

Excellent. Well thanks again Henry. I really appreciate this and for our listeners you will see some more content popping up on the screen here shortly and we encourage you to to keep on your journey of learning. Probably check out some of the other great content we've done with Henry and he's as he explores complex tax issues and I was able to simplify it for the Canadian advantage. So again, thanks for tuning into Wealth About Bay street and we hope to see you again back here on our next episode. Thanks for listening to the Wealth Without Bay street podcast where your wealth matters. Be sure to check out our social media channels for more great content. Hit subscribe on your favorite podcast player and be sure to rate the show. We definitely appreciate it. And don't forget to share this episode with someone you care about. Join us on the next episode where we continue to uncover the financial tools, strategies and the mindsets that maximize your wealth.