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Upcoming Tax Changes to Life Insurance Policies: How Will You be Impacted?

21/10/2016


As a professional, you have likely heard the word, either through emails, reports or your advisors that as of January 1, 2017 there will be significant changes to permanent life insurance policies. Often we will read the headlines and assume the changes do not apply to us. However, if you have not considered whether you need a policy or you have not talked recently with your financial advisors about your existing policies and insurance needs, we are strongly suggesting reaching out. There are some significant advantages that will expire at the end of the year and should be reviewed with your advisors and considered as soon as possible.

The tax treatment by the Canada Revenue Agency (CRA) of life insurance policies has been in effect since 1982 with very few changes. The new rules come as an effort from the Canadian tax regime to create modernized legislation which takes new products and updated mortality rates into consideration. This is being accomplished by revising the pure insurance calculations, reviewing the determination of whether a policy is tax exempt or not and assessing the maximum amount that may be paid into as premiums.

Many professionals and their corporations are using permanent insurance policies as part of their overall investment and estate planning strategy. These long-term investment strategies are used both to provide coverage in the case of death for family members and assist with tax consequences of deemed dispositions of holdings within professional corporations. The ability to use corporate dollars to fund the plans, along with the ability to grow in a tax exempt environment, has meant that the value of policies have been able to produce better than average returns which therefore increases the accompanying values.

The legislated changes will reduce the potential future benefits by:

  • Decreasing the amount of funds that can accumulate inside a tax-exempt life insurance policy.
  • Reducing the funding room available.
  • Changing the calculation of the capital dividend account for corporate owned policies, which will result in less tax free funds available or extraction from the corporation.

It’s important to note however, there are also some advantages to the legislative changes, the most significant of which will be the ability to contribute a greater amount in earlier years or could result in a higher ACB (adjusted cost base) of the policy thereby reducing the potential gain if surrendered while still living.

As we gear up for another Canadian winter, it’s fair to say that the New Year is fast approaching. As you meet and review the upcoming legislative changes, here are some actions you may want to consider:

  • Changing term policies that you already have existing to permanent insurance
  • If you have a UL policy existing consider increasing deposit amounts
  • Review the need for a new permanent insurance prior to the end of 2016

Note that new policies may require medical and health assessments and therefore time is very short to a plan assessed and issued prior to January 1, 2017

To ensure you are able to capitalize on every opportunity presented with the policy changes, contact both your insurance advisor along with your local MNP tax advisor. Tammy Wylie, CPA, CA, CPA, CGA, is the Leader of the Professionals Services Practice for the Northwestern Ontario region. She can be reached at 1.866.623.2141 or [email protected].