All death benefits from life insurance policies in Canada are received tax-free by the designated beneficiaries.
In situations where a corporation is the beneficiary, this tax-free receipt would be included in the corporation’s Capital Dividend Account (“CDA”) under sub-section 89(1) less the Adjusted Cost Basis (“ACB”) “to the corporation”.
In a typical creditor protection scenario, a holding company would be the owner of a life insurance policy and the operating company would be the beneficiary. As a consequence of the above ownership/ beneficiary structure, the ACB to the recipient beneficiary would be zero.
A tax free Capital dividend could then be distributed to the shareholders.
Subsection 57(1) of the proposed March 22, 2016 federal budget reads as follows:
Subparagraph (d)(iii) of the definition capital dividend account in subsection 89(1) of the Act is replaced by the following:
(iii) the adjusted cost basis (as defined in subsection 148(9)), immediately before the death, of:
(A) if the death occurs before Budget Day, the policy to the corporation, and
(B) if the death occurs on or after Budget Day, a policyholder’s interest in the policy
** (note – we have italicized key areas)
For deaths on or after March 22, 2016, the credit to the CDA will be reduced by the ACB of the policy regardless of who owns the policy.
The above proposed changes have not been grandfathered for policies in place prior to March 22, 2016 but have grandfathered for those who passed away before March 22, 2016.
The above proposed budget amendments, in conjunction with the previously announced changes to exempt life insurance coming into effect Jan 1, 2017, appears to indicate Finance’s intent on slowly taking away “that which looks too good to be true.”
If any of your clients have a need for permanent life insurance, the time to purchase it is now.
If you have any further questions, please do not hesitate to contact us at DiBrina Financial Group.
Advantages of Buying Life Insurance now vs Post Jan 1, 2017
Cost to buy same coverage will be between 13% and 20% less than buying the same policy in 2017
Death Benefit and Cash Values at life expectancy will be on average 10-13% more today than in 2017
For those who own a life insurance policy inside their corporation
The amount of CDA that flows out tax free on death to the estate will be reduced by :
Issue Age Percentage Decline
On an age 50 – $1 Million corporately owned life insurance policy, the net advantage of buying a policy today rather than in 2017 at life expectancy will be 15%:
Additional Premium $143,100 in 2017
Additional Tax on Death $7,600 in 2017
Reduction in Death Benefit $208,269 in 2017
Net Advantage $358,970 Today