Changes in taxation of life insurance policies

Our insurance legislative environment is known to be fairly stable. However, for the first time in many years, changes to regulations effective January 1st, 2017 will affect the taxation of Canadian life insurance policies and reduce their tax efficiency.

Current rules

A permanent life insurance has historically been given a favourable tax treatment by the government enabling policyholders to earn tax free income on the funds within the policy. The sheltering can help make the insurance more affordable. Most permanent life policies sold in Canada qualify for this tax exempt status. The current rules to calculate the policy’s tax exempt status have been in place since 1982. They have recently been updated to reflect more recent actuarial (risk) assumptions and to ensure consistency in the industry and the products.

Updated regulations

The main impacts of these changes will be:

  • More sheltering in the first decade of a policy and less over the long term
  • Increased number of premium payments
  • Decreased cash value
  • Increased tax payable on prescribed annuities

Generally, policies issued before January 1st, 2017 will be grandfathered. Therefore, if you are considering changes to your existing insurance policies or need a permanent life insurance or want to convert a term policy into a permanent one, you may want to review your estate planning and insurance needs before the changes come into effect. You should not wait after 2016 to do so as you could lose a significant tax advantage. 

Now is the time to seize this opportunity. Our insurance specialist can help you determine if you have the right coverage, build value for your heirs and maximize the tax efficiency of your policy. Do not hesitate to contact us for details.

Insurance services are offered through Richardson Wealth Insurance Services Limited in BC, AB, SK, MB, NWT, ON, QC, NB, NS, NL and PEI. Additional administrative support and policy management are provided by PPI Partners. Insurance products are not covered by the Canadian Investor Protection Fund. Richardson Wealth Limited is a member of Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.