Group Life Insurance Benefits from US Employer

[stewak2]

Dual citizen commuting to work in USA.
Employer provides GLI benefit = twice salary.
In Canada, a Canadian employer's premiums are a taxable benefit and would show up employee's T4. In US, only the portion of the premium applicable to coverage above $50,000 is taxable and reported on W4.
In Canada the death payment from a Canadian plan is not taxable since the premiums were paid out of after tax dollars ( effectively ).
What would the situation be for death payment from a US Employer's GLI plan with regard to CCRA ? Would the first 50K be taxable and the remainder tax free ( since is in effect paid for out of after tax dollar, similar to logic for Canadian plan?

[nelsona]

The payout would not be subject to income tax in either case.

The insuarance payout is not taxable in canada or US simply because it is an insurance payout. The fact that the BENEFIT was considered taxable or not is a separate issue.

The payout would be subject to estae tax of course.

[stewak2]

The beneficiary would be surviving spouse...I was under the impression that in this case benefit would not be taxable in her hands.
This would be the case whether I bought the life insurance on my own or it was employer provided? Or do I have this seriously wrong?
It makes a big difference, obviously, in how much coverage is needed.

Also, CRA does seem to make it clear in their documentation that if the GLI beneifts were paid by employer and NOT reported as taxable benefit then the payout is taxable. Same for stuff like LTD, if premiums are not taxed then benefit payouts are.

[nelsona]

Note what I said. My response stated that the benefit would not be subject to INCOME tax. Since you are the owner of the Life insurance (ie. your spouse did not buy it), it will be part of your estate, thus "subject" to estate tax. If your spouse is a US citizen, her huge estate tax exemption should make this a moot point.
But If your spouse is NOT a US citizen however, her limit is FAR less, and when combined with all your other assets at time of death, there may be some estate tax liability.

It is the chief reason why spouses of USCs get USC.

Best way to mitigate this? Have spouse buy a policy on you.

Cdns regularly take out life insurance in Canada anyways, to reduce the impact of deemed disposition on death, and this makes even more sense for a Cdn spouse of USC.

As to the INCOME taxability of the US payout, I'll dig a little more.....

[stewak2]

OK, my wife is Canadian citizen (only ) and Canadian resident.
The benefit is payable to her, which would mean no Canadian income tax.
Since she is not USC or US resident, no US income tax although IRS does not tax life insurance payouts anyway.
There is no estate tax in Canada, just deemed disposition of all assets, right? So I'm not sure what my Canadian estate tax, if any, on payout would be, assuming it is taxed in my estate's hands.
Virtually all of our assest are jointly held so she would get the house, cottage, car, bank accounts. 401K and old RRSP name her as beneificiary so no issue there, either, I think. Excepting the 401K, all the assets are in Canada.

US Estate tax clearly would apply to me, since I am USC, but as you say the exemptions are large. Or am I missing something? Is there a penalty because the beneficiary of the estate as specified in will is non-USC?

[stewak2]

I looked at the US Estate side in more detail.
I see what you mean in that since my spouse is not USC, then assets cannot be transferred to her (even if jointly held ) to defer estate tax on them until her death. The so-called "martial deduction" cannot be used.
So all assets I have an interest in regardless of whether jointly held or not are going to be subject to US Estate tax.
The current exemption in 2009 is 3.5M, and the total value of my estate, including life insurance payout, would be (well) under that, so I think I am OK.
Sound reasonable?

[nelsona]

Yes. She dose NOT qualify for the FULL marital exemption, although what she would get is pretty sizable. Then again, so will your estate when you fianlly kick-off. Its not unusual for a person in ther 40's or 50's to have assets (including 1+ million in insurance) well over the non-USC limit. And, depending on estate tax law changes, that exemption may drop to 1M in 2011.

In any event, Cdn tax that your death would trigger could be used against any US estate tax.

[stewak2]

Thanks. I should plan on dying in 2010, no estate tax....
After that, as you say, who knows.

If you find out how CCRA would view the first 50k of a US sourced
employer GLI benefit payout, where income tax has only been paid on the portion of premiums covering > 50K, I would be interested to know.

[nelsona]

First tell me where you found that non-deducted premiums result in cdn tax, that will give me a starting point.

[stewak2]

Here's one link:
http://www.rppbenefits.com/employee_ben ... ation.html

The discussion of GLI is clear that premiums paid by employer are taxable and need to show up on T4. Doesn't say what happens if some or all are not reported ( on W-4 in this case ). Later the section on disability benefits is quite clear that unless premiums were paid for with after tax dollars the benefits themselves are taxable. Makes sense, I guess, but I wonder what happens in my case. Maybe I should just calculate the estimated premium on the first 50K and report it as additional income in Canada. Would not be a significant amount of money and might save $25k if in worst case I die while employed.

[nelsona]

As I suspected, the link you showed does NOT state that life insurance payouts are taxable. Disability insurance is NOT life insurance.

I would not be fiddling with your return.