In the highly competitive insurance industry, many insurance companies are seeking new ways to access the additional capital needed to achieve worldwide status. Over the past few years, some of these companies have been in the process of demutualizing their companies to become public companies.

For policyholders, the process of demutualization means they were offered either cash or shares for their unit holdings. If your insurance company demutualized and you received benefits, you need to consider the current and future tax implications of this investment.

Public insurance companies

Before demutualizing, these insurance companies were owned by the policyholders. When greater working capital was required, the companies were limited to obtaining funds from policyholders or the income generated from investing the policyholders' premiums. By demutualizing and creating a public company with shareholders rather than unit holders, these insurance companies can now take advantage of their newly created pubic company status.

For insurance companies, the benefits of going public include:

• worldwide standing and recognition on recognized stock exchanges
• access to capital markets to raise additional funds
• the ability to merge with, or acquire, other insurance companies
• an enhanced image to attract top management, and
• the ability to remunerate management with stock options.

Tax implications for unit holders

When an insurance company demutualizes, the unit holders are generally given the option of receiving cash or equivalent shares for their units. If you received either, you need to consider the impact on your personal income tax.

Cash for units

If you received cash, the amount received is considered a taxable dividend and is added to your income for the year. The taxes that will be paid on this amount will depend on your personal income tax rate. In most instances, the amount received will be taxed at a preferential dividend rate.

Stock for units

There are no immediate tax implications for those taxpayers who elected to take stock. Like other situations where investors purchase stock, the taxpayer will have the right to vote and the right to receive dividends when declared by the newly formed public company. As well, as a shareholder you can now buy and sell shares.

Dividends Received

Dividends received on these shares are treated the same way as other dividend income. The insurance company will send you a T5 slip that indicates your dividend income.

Selling stock received

The cost base of the shares received is zero. If you sell the stock you receive, you will be taxed on the entire amount as a capital gain. For example, if you received 200 shares that were initially listed at $25 a share (a total value of $5,000) and later decide to sell them when they reach $30 a share, your proceeds will be $6,000. Your net profit is $1,000. As an investor, you may conclude that under the capital gains rules, you would be taxed on 1/2 of this gain. But since the cost for those shares was zero, the tax will be calculated on 1/2 of the entire gain, that is 1/2 of $6,000, less the brokerage fees.

Purchasing additional shares

If you buy shares in addition to those you received upon demutualization, the average cost rules for determining gains and losses will apply in the same way as when you purchase and sell non-insurance company shares.

Offsetting the gain and resultant tax

Before you sell any shares you have received, discuss your tax situation with Logan Katz LLP to determine any planning that may reduce the tax on the sale of the shares. You should also discuss your investment strategy with your investment advisor.

Overall, look at your tax position today to determine whether, based on your current taxable position and your investment strategies, it would be better to hold the shares and sell them at a later date when the net result after taxes will be more advantageous.

The above provides general information only. It should not be regarded or relied upon as accounting or taxation advice or opinions. Logan Katz LLP Chartered Accountants would be pleased to provide more information or specific advice on matters of interest to you.

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