Tax changes to Canadian life insurance policies

Insurance legislation under the Income Tax Act allows you to make payments (premium deposits) into tax-exempt life insurance policies in excess of the actual cost of insurance, up to a certain limit. The investments held in a tax-exempt policy can grow on a tax-advantaged basis (growth not subject to annual taxation).

After considerable review, the Canadian government has made changes to the Income Tax Act and Regulations as they apply to life insurance policies and annuities. These changes update a number of assumptions that will change the way life insurance policies are taxed. Effective 1 January 2017 new rules come into effect regarding the assumptions used to determine the amount of premiums that must be deposited for protection purposes and what is allowed for investment purposes in a policy (the “exempt test”). The new legislation updates the tools used to apply the test to each existing life insurance policy.

This will affect permanent life insurance in a number of ways:
•    Reduced maximum premium deposits permitted.
•    Extended duration of “quick pay” premium payment periods.
•    Lowered permissible maximum cash value accumulations.

The purpose of permanent insurance has not changed, and the many benefits that permanent insurance offers will still exist after 1 January 2017. Even under the new rules, life insurance remains a great planning tool and, for incorporated physicians, is still the most tax-efficient way to take money out of a corporation and give it to beneficiaries.

If you currently have a permanent insurance policy it will be considered issued before 1 January 2017. Assuming you do not change it in any material way (see below), your policy will be grandfathered from the new requirements. It will continue to be subject to the same exempt test applied under the old rules.

While the new rules grandfather existing policies, they also provide for a loss of grandfathering status if there are changes made to the policies after 1 January 2017. Examples of changes that could cause a policy to lose its grandfathered status include:
•    Adding insurance coverage to an existing permanent policy that requires medical underwriting, such as increasing a face amount or adding a term rider.
•    Converting a term-life rider on an existing permanent policy to permanent life coverage.
•    Converting a term policy to a permanent policy (even without medical evidence).

All new permanent life policies purchased after 1 January 2017 will be subject to the new regulations.

Contact your Doctors of BC insurance advisor or MD Financial insurance consultant to discuss your estate/financial planning and insurance needs to make sure you understand the implications of the new tax regulations and consider what actions would be most beneficial in your situation.

To book an appointment with your Doctors of BC insurance advisor, e-mail insurance@doctorsofbc.ca or call 1 800 665-2262, ext. 7914.
—Julie Kwan, CFP, CLU, GBA
Business Development Manager, Insurance