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Fair Market Valuation (FMV)

Fair Market Valuation (FMV)

for Advisors

What is a Fair Market Valuation?

What is Fair Market Valuation?

The Fair Market Valuation (FMV) of a life insurance or critical illness policy can be used for the purposes of valuing policies transferred to a corporation prior to March 22, 2016, for valuing a corporation’s shares, for divorce calculations for marital property, for transfers from corporately owned to personal, for US Citizens owning Canadian policies residing in Canada and vice versa, and for charitable giving.

GBL is a recognized leader in FMV.

Is your client a good candidate for FMV?

An actuarial calculation and certification is recommended to determine the FMV on your client’s insurance policy in the following situations:

  • A business owner or incorporated professional wishes to transfer a personally owned policy to the corporation so that future premiums can be paid with corporate dollars;
  • In circumstances where there is gifting of insurance policies to registered charities, a Fair Market Valuation ensures that a tax receipt is issued for the maximum allowable amount;
  • A corporation freezes or transfers assets from an operating company to a holding or sister company;
  • The sale of a business where the business owns insurance policies;
  • A marriage breakdown.

What factors impact FMV of a Life Insurance Policy?

Typically, the value of a life insurance policy is based upon a very simple process: term policies are held to have no value, and permanent policies are said to be worth the cash surrender value (CSV) of the policy. However, where determining a full actuarial value, the FMV method is used. Canada Revenue Agency defines FMV in CRA Information Circular 89-3: “FMV is defined as the highest price obtainable in an open and unrestricted market between knowledgeable informed and prudent parties acting at arms-length, neither party being under any compulsion to transact.”

A number of variables can give rise to a FMV being considerably higher than the CSV, for instance, the health of the insured. If the individual has suffered a deterioration of health that would give rise to a rating or result in the life insured becoming uninsurable, then the FMV could be closer to the death benefit. Other variables impacting the FMV include conversion provisions and changes in the current pricing of a similar policy.

Key Takeaways on Transfers to a Corporation

  • The policy becomes an asset of the corporation and is therefore exposed to creditors, so it does not enjoy the same level of creditor protection as many personally owned policies do.
  • The CSV of the policy is considered a passive asset of the corporation. Care should be taken that the policy does not impede the owner’s use of their capital gains exemption on the sale of their company.
  • If the shares of the company are subsequently sold, the business owner may wish to transfer the policy to personal ownership, with potential income tax consequences.
  • Holding companies are preferred vehicles for owning life insurance policies rather than operating companies.
  • It is recommended that a policy transferred to a corporation for the FMV should not be cancelled within a short timeframe following the transaction.

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