Shared ownership refers to a method of paying the insurance premium on a permanent life insurance policy and owning the policy on a joint basis. It is also commonly referred to in the life insurance industry as split-dollar.
There are a number of situations in which the shared funding concept can be utilized, in particular, in the business situation where the company and the business owner(s) share in the cost of the premium deposits. Nevertheless, many commentators have suggested over the years that this is a concept that often gets talked about but rarely gets implemented. This apparent reluctance to adopt this funding approach is likely due to the uncertainty of the tax consequences of these plans.
In the case where the corporation pays the bulk of the premium on a split-dollar policy, the concern is CRA may determine the shareholder be required to pay tax on the benefit in relation to the insurance coverage.
It appears that the Department of Finance will continue to show reluctance to adopt specific rules to value respective interests where the policy is jointly owned. Instead, CRA will continue to analyze each case applying general valuation principles in regard to the particular rights and obligations of the parties. The remarks made at the 1992 annual meeting of the Conference for Advanced Life Underwriting (CALU) by a senior official of CRA have been consistently repeated at subsequent sessions. He stated that the primary indicator of value of each party's interest in the policy is the premium that would be payable for comparable rights available in the marketplace under a separate insurance policy.
With this position from CRA, it is apparent that there is a greater sense of direction from the Department in regard to shared ownership arrangements and accordingly this program has and will continue to increase in popularity.
Planning, structuring and implementing any of these strategies requires knowledge and attention to valuation and tax issues as well as the legal formalities. Therefore, the financial security advisor must apply considerable diligence in the documentation supporting the sale to effectively market the concept.
A formal shared ownership agreement must be carefully drafted and signed. It requires skillful tailoring in accordance with the clients' specific needs and consultation with specialists, lawyers and accountants to ensure that the design is effective and that all the requirements are in place. Ongoing review and monitoring are necessary to keep pace with changing needs, tax legislation and circumstances.