The Impact of Recent Tax Changes on Life Insurance Policies

Transcription

1 The Impact of Recent Tax Changes on Life Insurance Jim Bird, CFP, CLU, J.D., LL.B., TEP Director Individual Insurance Sales Southwestern Ontario Region Brief History of Life Insurance Taxation Prior to December 2, 1982 G1 Life Insurance Policy Not subject to exempt test Conversion to an annuity is not a disposition December 2, 1982 December 31, 2016 G2 Life Insurance Policy Exempt test based on 20 pay endowment at age 85 Surrender charges can be used to increase tax shelter deposit room Net Cost of Pure Insurance (NCPI) used to reduce Policy Adjusted Cost Base (ACB) and based on net amount at risk and insurer s assumptions January 1, 2017 G3 Life Insurance Policy Exempt test based on 8 pay endowment at 90 Surrender charges no longer part of deposit room calculation NCPI mortality table modernization and calculation based on fixed assumptions 2 1

2 Bill C-43, enacted December 2014 Changes the taxation of life insurance policies Effective January 1, 2017: issued before 2017 are grandfathered under current rules Will lose grandfathering if: a) Converted (i.e. Term conversions) b) Coverage is added with medical underwriting after December 31, 2016 If grandfathering is lost, the whole policy falls under the new policyholder rules 3 Exempt Test Changes Results will be: 1. Greater consistency: Between companies Between products 2. ACB s will be higher and stay positive for longer 3. Less efficient MTAR hugging Will need more face amount to shelter a given amount of cash value 4. Lower optional deposit room After years 4 2

3 Why do we care about the NCPI and ACB on a policy ACB on any given policy is premium paid minus net cost of pure insurance (NCPI) NCPI comes from a tax regulation table (Changed January 1, 2017) Credit to a corporations Capital Dividend Account (CDA) is calculated as death benefit minus the policies ACB With corporate policies we would like to grind the ACB to zero as soon as possible so that the tax free portion of the death benefit is as large as possible. 5 Comparing ACB s Minimum Funded UL, Male 50 HS Current New Male, 50, Healthstyle 3, $1,000,000 LCOI Manulife UL, premiums = $13,012/yr for life 6 3

4 Comparing ACB s Minimum Funded UL, Male 60 HS Current New Male, 60, Healthstyle 3, $1,000,000 LCOI Manulife UL, premiums = $22,530/yr for life 7 Comparing ACB s Minimum Funded UL, Male 70 HS Current New Male, 70, Healthstyle 3, $1,000,000 LCOI Manulife UL, premiums = $41,617/yr for life 8 4

5 Ontario 2016 Personal Tax Rates Income $90,563- $140,388 $140,389- $150,000 $150,001- $200,000 $200,001- $220,000 $220,001 plus 2013 Top MTR / 0ver $509,000 Interest and Salary Capital Gains Eligible Dividend Noneligible Dividend 43.41% 21.70% 25.38% 33.49% 0% 46.41% 23.20% 29.52% 37.00% 0% 47.97% 23.98% 31.67% 38.82% 0% 51.97% 25.98% 37.19% 43.50% 0% 53.53% 26.76% 39.34% 45.33% 0% 46.41%/ 49.53% 23.20%/ 24.77% 29.54%/ 33.85% 32.57%/ 36.47% Capital Dividend 0% Corporate Insurance Insurance Proceeds Tax Free Opco / Holdco Regular Retained Earnings Capital Dividend Account Taxable Dividend Tax-free Capital Dividend Family 5

6 Corporate Owned Insurance & Tax Rates C.C.P.C. Individual S.B.D. $500,000 15% Investment Income 50.2% H.M.T.R % After tax 85% After tax 46.47% Non Ded Expense $10,000 Non Ded Expense $10,000 Pre-tax Corp $11,765 Pre-tax Personal $21,519 Ownership of Life Insurance - Planning Considerations Corporate insurance should name the corporation as the beneficiary Document insurance purpose and intentions Use life insurance shares to direct to a specific individual, if needed Remember the cash value of the life policy is an asset that may impact estate planning and corporate valuation Policy has a fair market value that may exceed the cash surrender value (IC 89-3) Future change of ownership? Creditor protection not available on corporate insurance Change in residency? CDA subject to tax if paid to US shareholder / Death benefit may be included in value of estate Buy/Sell define use of insurance and methodology 12 6

7 Transfer of a Life Policy Transfer of a life policy is a disposition subject to subsection 148(7) For transfers of policies from a shareholder to a corporation after March 21, 2016 the proceed of disposition to the shareholder and the adjusted cost basis (ACB) to the corporation is deemed to be the greatest of: the value of the interest at the time of disposition, The fair market value (FMV) of the consideration, if any, given for the interest in the policy, and The ACB to the policyholder of the interest immediately before the disposition time. 13 Corporate owned insurance transferred to shareholder 14 7

8 Transferring an insurance policy from a shareholder to a corporation 15 Include Professional Advisors 8

9 Thank You. 9