BEST BEFORE 2017
New income tax rules for life insurance will come into effect in a little over a year, with significant impact on estate plans. Here are strategies ahead of time for your clients
by Andrew Guilfoyle, Adam Shapiro, Zachary Schwartz illustration by Michelle Thompson
benefits of certain insurance strategies would be diminished if his plan were implemented aſter 2016. In particular, Joe was evaluating an investment in a $5-
J
million universal life insurance policy. He did not have a spe- cific timeline for completing his plan, but he was interested in having the policy owned by his holding company. Joe wondered how his planning would be affected if he decided to wait until aſter 2016 to implement this insurance program. We explained that the current Canadian income tax rules on
life insurance would enable his holding company to distribute up to 100% of that $5-million death benefit tax-free to the new shareholders of the holding company should Joe die any time aſter he turned 73. But new income tax rules for life insurance will take effect on January 1, 2017. These new rules will have a significant impact
OE, A 50-YEAR-OLD, nonsmoking client at our wealth management firm, recently came to us seeking counsel on a number of estate-planning issues. Since life insurance was going to play an important role in his plan, we informed Joe that the income tax
on estate plans. Under the new rules, if Joe were to die at age 73, his holding company would be able to distribute only $4.175 million of the death benefit proceeds on a tax-free basis. In Ontario, the tax cost of distributing the remaining $825,000 would be in excess of $300,
000.The full $5 million would only be accessible to Joe’s heirs if he were to die aſter age 90. Unfortunately, as Joe came to realize, the pending income
tax changes will diminish some of the tax advantages practi- tioners have come to take for granted in life insurance and annuity products. As an important player in Canada’s permanent tax shelter
troika (the others are one’s principal residence and TFSAs), life insurance has long performed a critical role in protecting, pre- serving and creating wealth for Canadians. For a while, however, there has been a desire by legislators to create tax rules that leſt less room for interpretation during the product design process. Moreover, improved life expectancy, combined with interest and inflation rate conditions very different from those of 1982, led the government to believe that the tax benefits of insurance were a tad too generous.
DECEMBER 2015 | CPA MAGAZINE | 41
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