Changes to permanent life insurance exempt test rules coming:
With lower allowable contribution limits to Tax-Free Savings Accounts and higher tax rates, Canadians may be looking for new ways to shelter their money. An alternative is through permanent exempt life insurance policies, but they better move quickly because of new rules coming into effect January 1, 2017.
The last time tax rules on life insurance underwent a major revision was almost 35 years ago. But Canada’s income tax laws on life insurance policies are changing as of January 1, 2017. The changes stem from a 2012 decision to change the exempt test of life insurance policies, sharply reducing the maximum cash value accumulations that are allowed to build up tax-free. In particular, the rules propose to limit how much can be put into a policy over and above the premium needed to pay for the basic death benefit. Currently, if the policy is deemed exempt from tax, anything over the basic amount can grow without tax within government limits. Starting early next year, the tax-free amount will be reduced.
Another change deals with policyholders who use their policies as collateral security for investment loans. Currently, policyholders are able to deduct some of the premium for the policy. However, after this year, the amount of that deduction will be reduced significantly, on the changes to the Income Tax Act.
Capital dividend account credit
Also affected by the new tax changes is the capital dividend account (CDA) credit for life insurance owned by corporations, states the report. Right now, the proceeds paid on death to the corporation can be paid out to shareholders and/or their estate’s tax-free and can reduce or eliminate capital gains on death. But next year, the CDA credit for level cost of insurance (LCOI) policies will be cut considerably from where it is now.
Small business owners
This legislation will change the planning we do with your small business owners who are looking at philanthropy as part of their estate planning strategy. Other proposed changes in budget 2015 include a long list of anti-avoidance rules and buy-sell arrangements with life insurance.
If a policy is applied and has an effective date of 2016, it would be grandfathered. It is still up in the air whether the Ministry of Finance will agree to allow the current tax-exempt rules to apply to a policy purchased in 2016 but not settled until 2017.
We want to talk to current clients who have term insurance about the possibility of taking advantage of the current tax-exempt benefits of a permanent policy before the end of the year. We want to bring to our client’s attention,who have purchased term only because they can’t afford permanent insurance, might be better off with the current tax advantages.
If this applies to you please give us a call to discuss your situation.