These new rules will have a significant impact on estate planning using life insurance.
Life Insurance is currently one of the only tools available to draw money out of a corporation tax-free. The CRA however has determined that the tax benefits of life insurance policies are too generous so there will be significant changes coming in 2017 that will impact taxation and restrict the amount of money that can flow out of a corporation in a tax-preferred manner.
Life has changed over the past 35 years since 1982 when the legislation was established regarding tax treatment of life insurance policies. Longer life expectancy combined with interest rates and inflation conditions have led the government to review the tax benefits of insurance policies.
CHANGES TO CONSIDER
• no more 1 pay or single deposits used to pay up a life insurance policy
• 8 years will be the quickest payment term to pay up a policy
• differences in the calculation of the maximum tax actuarial reserve (MTAR) line, of the net cost of pure insurance (NCPI) and of policy adjusted cost basis (ACB)
• Adjusted Cost Base will be higher and last longer
• Term Policies will have an Adjusted Cost Base
• limitations on the tax-free payment of the fund value upon the death of a first insured in a multi-life policy
• changes that will lead to an increase of the investment income tax (IIT) paid by insurers (with costs generally passed to policyholders). Updated Canadian mortality tables become the reference to determine the taxable portion of a prescribed annuity
• if you purchase a prescribed annuity, more income will be taxable, thereby reducing the net yield
WHO DOES IT AFFECT?
These changes impact high net worth clients who use life insurance to help with tax-planning. The major impact is on million dollar policies with large lump sum investments from an operating or holding company.
Corporate Legacy Builders and individuals that:
- have a corporation with a large amount of retained earnings
- need to draw this money out of the corporation
- have a significant amount of money they want to pass onto their children and/or Charity
Grandfathering will be in place for insurance policies that are completed before December 31, 2016
Tax benefits for clients who have procured policies prior to January 1, 2017, will remain intact, as long as they don’t purchase additional coverage requiring medical underwriting and as long as existing term insurance policies are not converted into permanent coverage after 2016.
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