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TECHNICALLY SPEAKING There is a bright side, though: grandfathering will be avail-


able for insurance policies put into place before December 31, 2016. This provides some lead time for CPAs, estate planners and other advisers to review their clients’ situation and imple- ment insurance planning strategies to capitalize on the current advantageous legislative environment.


Good things going When the sun comes up on January 1, 2017, notable alterations to the taxation of life insurance will lead to changes that are quite technical (see “Technically Speaking,” right):


. .


. .


it will take a bit longer to “quick or prepay” a permanent


insurance policy; whereas you might currently be able to prepay an insurance policy in about four years or less, depending on product design, it will take no less than eight aſter 2016; permitted exempt insurance policy cash value accumulation


will initially increase and then be less than the current regime until clients reach their early 90s;


for level cost products, the cost of insurance rates will likely increase; and if you purchase a prescribed annuity, more income will be


taxable, thereby reducing the net yield. Changes such as these always prompt client queries about


their existing policies. Don’t panic. Tax benefits for clients who have procured policies prior to January 1, 2017, will remain intact, as long as they don’t purchase additional cover- age requiring medical underwriting and as long as existing term insurance policies are not converted into permanent coverage aſter 2016.


Collateral damage Aſter 2016, an insurance policy’s annual net cost of pure insur- ance will be lower for standard mortality policies. As Joe came to


On January 1, 2017, the taxation of life insurance will give way to the following changes:


. .


. Differences in the calculation of the maximum tax


actuarial reserve (MTAR) line, of the net cost of pure insurance (NCPI) and of policy adjusted cost basis (ACB).


Limitations on the tax-free payment of the fund value upon the death of a first insured in a multi-life policy.


Changes that will lead to an increase of the invest- ment income tax (IIT) paid by insurers (with costs generally passed to policyholders). Updated Canadian mortality tables become the reference to determine the taxable portion of a prescribed annuity.


learn, this technical change will ultimately alter the computa- tion of the adjusted cost basis of an insurance policy. This rule change will lead to the creation of lower capital dividend accounts and ultimately lower tax-free distributable amounts in situations where life policies are corporately owned. The impact of these changes is illustrated in the graph below. In addition to altering capital dividend account values at


lower ages, the new rules will also do damage to an insurance strategy that Joe and other high-net-worth clients oſten call on. In this strategy, the cash value serves as collateral on loans used for investment purposes. If Joe uses the loan proceeds for busi- ness or investment purposes, he can benefit from collateral insurance and interest deductions. Presently, assuming he has acquired a level cost universal life


policy and his situation is structured for maximum benefit, Joe can deduct up to 58% of his premiums over the first 20 years


42 | CPA MAGAZINE | DECEMBER 2015


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