by Andrew Guilfoyle & Adam Shapiro & Zachary Schwartz
New income tax rules for life insurance will come into effect at the end of the year, with significant impact on estate plans. Here are strategies ahead of time for your clients.
Joe, a 50-year-old, nonsmoking at our wealth management firm, recently came to us seeking counsel on a number of estate-planning issues. Since life insurance was going to plan an important role in his plan, we informed Joe that the income tax benefits of certain insurance strategies would be diminished if his plan were implemented after 2016. In particular, Joe was evaluating an investment in a $5-million universal life insurance policy. He did not have a specific 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 after 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 he new shareholders of the holding company should Joe die any time after 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 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 after age 90.
Unfortunately, as Joe came to realize, the pending income tax changes will diminish some the tax advantages practitioners have come to take for granted in life insurance and annuity products.
Reprinted from CPA Magazine, December 2015, with permission of the Chartered Professional Accountants of Canada, Toronto, Canada.
Any changes to the original material is the responsibility of EPR Canada Group Inc. and have not been reviewed or endorsed by the Chartered Professional Accountants of Canada.