Changes To Insurance Policy Taxation – Could Your Family Be Affected?
The proceeds of Permanent life insurance have historically received preferential tax treatment under Canadian law. Individuals, particularly business owners, through their corporations have often used this advantage to shelter additional savings deposits and investment gains. Much like Registered Retirement Income Funds, changes to the tax treatment of Insurance policies effective January 1, 2017 reflect the fact that Canadians are living longer, increasing retirement needs, and policies are paying out later which delays the collection of tax revenues. Current insurance payouts have been based on a life expectancy of 85 years whereas starting in 2017 that expectancy is increased to age 90. It is important for clients with existing policies or who are considering tax advantaged strategies to understand the impact of these changes.
1. The maximum premiums and deposits to an exempt policy will be reduced. Based on an 8 year payment schedule, the total amount of premiums as well as “top up” deposits around the MTAR line will simply reduce the accumulated amount in policies available for tax free growth.
2. The “quick pay” period of certain policies will be extended. The government has moved to restore balance on the exempt test for policies which were “investment” oriented with a single large premium payment up front and declining insurance coverage over time. The dis-allowance of cancellation fees on these types of policies and lower contributions will again reduce the tax sheltering benefit.
3. The maximum cash value accumulations permissible in exempt policies will be lowered. For Corporate Owned Life Insurance policies, the strategy was actually to increase the taxable (non-exempt) portion of the accumulated savings since life insurance proceeds are credited to the Capital Dividend Account. On the death of the principal owner, life insurance proceeds payable to the corporation could be paid out as a tax free dividend to shareholding family members. With policy payouts now extended to age 90, the tax benefit that can be flowed through a company will be extended accordingly.
4. The taxable income portion of prescribed annuities will be increased.
By updating its life expectancy calculations, gross payments under an annuity won’t likely change to the holder, but the increased number of payments means that the portion returned as capital will decline.
As usual with tax changes, the government is grandfathering existing policies to a large degree. However, clients considering changes to their existing policies or purchasing new policies ahead of the year-end deadline should consult with their Northland advisor to review their situation.