Editor and tax expert explains how 'The Book' has elevated the industry and helps address complex planning questions
The fact that life insurance offers potential tax-planning benefits is no secret to Canadian wealth professionals, but even the most seasoned veteran may sometimes struggle to determine how and when it should be used. For those who regularly face such thorny questions, one time-tested reference has long served as the definitive go-to guide.
“My team calls it The Book, and I think everyone in the industry calls it that,” said Florence Marino, assistant vice president of the Tax & Estate Planning Group at Manulife, who is also one of the editors of Canadian Taxation of Life Insurance. First launched 20 years ago, it’s now recognized as an authoritative text across the industry, and even has pride of place in the library of the Supreme Court.
Growing the pie
“Most of us on Manulife’s Tax, Retirement, and Estate Planning Team came from external accounting and legal practices,” Marino said, recalling her early years working at the company. “We knew about tax-free death benefits and tax-exempt growth inside an exempt policy, but we didn’t necessarily know all the ins and outs of the taxation of the product.”
As novices to Canadian life insurance, they had to work and study diligently before finally getting a firm grip on the unique and often complex rules that govern its taxation, particularly in specialized planning contexts. Once they did, they decided to share what they had learned with their peers practicing law, accounting, and other related professions.
“We also wanted to educate and elevate the professionalism of the industry as a whole, including advisors who sell life insurance and planners working with small-business owners and high-net-worth individuals,” Marino said. “And I can tell you over the past 20 years, I’ve seen that happen.”
Describing her company as a “leading force,” Marino said Manulife has consistently supported and nurtured her team even back when no one would have thought of Canadian life insurance taxation as a subject worth writing about. Now, they regularly will write articles and speak at conferences to share their expertise.
“We’ve always approached it from the view that by sharing information, we will grow the pie for everyone in the industry, and we’ll get our fair share,” she said.
Creating a living reference
There’s no doubt that The Book contains a wealth of information. Now on its tenth edition, Canadian Taxation of Life Insurance weighs in at 763 pages; without the appendix, it’s 550 pages. Updated every two years since its initial launch, it has captured major changes to certain planning strategies and products, 10/8 plans, and leveraged insurance annuities in 2013; amendments to the tax consequences of transferring life insurance policies in certain non-arm’s length situations in 2016; and a host of other legislative shake-ups that have transformed the business of life insurance-based planning.
That said, readers looking for cookie-cutter formulas to apply to each of their tax-planning questions on life insurance will likely be disappointed. As Marino explained, there are numerous factors that must be weighed with respect to every decision, the most important of which concerns the ownership consideration, or where the insurance should be held.
“It’s often in a complex kind of corporate structure,” she said. “You might have clients that have trusts, partnerships, and corporations, and The Book isolates all the issues and opportunities of ownership of life insurance … so that it can be best integrated into the client’s situation and aligned with their planning goals.”
The problem isn’t something you solve once and walk away from, she stressed. Over time, the client’s circumstances may change: maybe a corporation is going to be amalgamated with another, or is going to be dissolved; maybe a trust is making a distribution and is being wound up. In those instances and others, an entirely new set of variables comes into play.
“The Book provides comprehensive information relating to all these circumstances surrounding ownership considerations and placement,” Marino said. “All the alternatives, what you should be doing, what you should be considering, what are the negatives and positives … that, to us, has been the most important discourse so that [the insurance] actually accomplishes the goals that the client has prioritized.”
A renewed focus on planning
These are the types of questions that are weighing more on Canadians, she said, as the COVID-19 crisis prompts them to “get their planning house in order.” In the weeks since the pandemic hit, there’s been a surge in interest among individuals to get life insurance, and update their wills and powers of attorney; business owners are looking more seriously at implementing business succession plans and ironing out buy-sell agreements; and in the family business setting, estate freezes and re-freezes are cropping up as topics for deliberation.
“A corporation earning active business income pays tax at lower rates than an individual at the top tax bracket, so using corporate dollars can be very efficient,” Marino said. “And because Canada’s tax system allows for integration between a corporation and the individual shareholder, generally the proceeds of the life insurance policy can be distributed to shareholders, including the deceased shareholder’s estate, as a tax-free capital dividend.”
While many business owners might have potentially been putting off or not addressing their planning issues because they’re too busy, the “mortality and health risks looking them in the face” have spurred a new sense of urgency. And as people consider different forms of life insurance to secure them against potential risks in the future – whether it’s key person insurance, personal insurance, business loan insurance, or anything else – Marino is urging people to remember one thing.
“Life insurance is an important tool in estate planning, but it’s not just in tax planning; it’s in real-life planning,” she said. “It supports and keeps afloat individuals, families, and businesses at a time when they can least withstand the impact of an unforeseen event. This is why it has a special tax regime, and that to me, is really a precious thing."