Life Insurance policies used to be a staple component of good tax planning in Canada. They still form an important part of planning, but more thought is now required. Many critics thought that the old tax rules were too generous and the CRA has made some changes to the exemption tests. The changes profoundly affect the ability to use life insurance to shelter gains on personal and corporate wealth. There is also going to be higher taxation of annuities which will reduce payouts to be more in line with other investment vehicles (this change is due to the use of more accurate mortality rates).
These changes level the playing field between investment vehicles and removes the advantage life insurance companies had over other companies offering investment savings plans. For example, life insurance with cash surrender value used as collateral is going to have less of the premium eligible for a tax deduction. Also, life insurance owned by corporations will be affected as less of the receipt can be distributed tax-free in most cases.
What the CRA now has to work with is a new definition of the “benchmark policy” and new assumptions about when something is an “Accumulating Fund” policy. There are some other changes to tests and assumptions as well, but the details are complicated and not what taxpayers need to be aware of.
When buying a policy, you should see whether the policy will meet the Exempt Test or whether it will be considered an Accumulating Fund. The good news is that policies issued before January 1, 2017, are grandfathered, but this can be lost. Grandfathering can be lost if the policy is converted into another type of policy after the cut-off date, or where coverage that requires medical underwriting is added to the policy after the cut-off date. The bad news is that you have to be much more careful about aligning your policy with your other financial circumstances.
Why pay more in tax that you need to, talk to Faris CPA today and get peace of mind.