The Federal Minister of Finance has revised the tax rules for life insurance policies, so new regulations will come into effect January 1, 2017. All policies issued prior to then will be grandfathered under the current tax rules which will prove very beneficial for current policy owners. To take advantage prior to these changes applying, policyholders should be get a review done this year (2016). This would include exercising any conversion privileges with your existing term policies.
Life insurance is one of the three allowable tax shelters, the others being your principal residence and TFSAs. With these changes the allowable overfunding of permanent policies above the base premium cost will be reduced, and the time frame to quick-pay policies will be lengthened out. These changes will have a significant impact on corporate farms or larger privately held businesses looking to maximize the tax-free cash they can withdraw from their businesses under the current rules.
Passing on the maximum estate value: Take the example of John, aged 50 and a non-smoker. When looking for help with a number of estate planning issues, it was found that permanent life insurance could be used to provide tax-sheltered growth of the significant amount of funds in his holding company. Under the current rules, a $5 million dollar insurance policy owned by the holding company would allow the full $5 million of proceeds to be paid out tax-free to his children, who would be the new company shareholders on his death any time after he turned 75. But if he waits until 2017 to apply for the policy, and he was to die at age 73, only $4.175 million of the death benefit proceeds will be allowed to be paid out tax-free. The remaining $825,000 will be subject to the top marginal rate of tax at that time. In order for the full amount to be paid out tax-free he would have to live past age 90.
What if you currently own term insurance? Most term insurance policies give you the option to convert all or part of the coverage to lifetime protection without having to provide any health-related information. Any conversions completed in 2016 will qualify under the old rules, so anyone who owns term policies should review it with their insurance advisor to see what is in your best interests.
Using annuities for low or no-tax income: Annuities have also been targeted by CRA, so after 2016 the annuity payouts will be facing higher taxation. The current rates are based on 1970 mortality tables, while new rates will be based on 2000 mortality rates. Simply put, we’re now living longer, and CRA feels the tax breaks allowed under the current rules are too generous.
If you are considering using life insurance to enhance capital tax-free withdrawals from your corporation, or build tax-sheltered cash to leverage for retirement income, or to conserve or equalize your final estate value, you need to do it this year!
As well, seniors who are having difficulty generating adequate retirement income from low GIC and bond rates should consider annuities to enhance monthly income before the end of the year.
Take the time to sit down with an experienced financial advisor and discuss how to end up with more cash in you or your heir’s pockets instead of CRA’s!