Life insurance still a valuable tool for limiting tax burden, says expert

Glenn Stephens of PPI Advisory discusses changes to tax legislation and effect on corporately-owned life insurance

Life insurance still a valuable tool for limiting tax burden, says expert
Life insurance may not have the tax limiting ability it had in the past, but policies remain a useful tool for Canadians keen to reduce payments to the CRA, explains PPI Advisory’s Glenn Stephens.
Since coming into power in 2015, the Trudeau government has introduced new legislation targeting those who use life insurance policies to decrease their tax burden. Most notable was the limit on tax-sheltering in life insurance policies, enacted on January 1, 2017, which saw a spike in sales late last year as Canadians rushed to purchase plans under the old rules.
Another key part of the legislation involved corporately-owned life insurance. Previously, the Capital Dividend Account (CDA) allowed business owners to extract funds from their private corporation tax-free. Canada Revenue Agency duly changed the law so the death benefit from life insurance policies using that provision now has a reduced tax-free capability.
This topic was discussed in detail at the STEP Canada Conference held in Toronto earlier this week. In a panel hosted by Chris Ireland of PPI Advisory, Paul Gibney of Thorsteinssons and Glenn Stephens of PPI Advisory outlined what exactly the new rules meant for individuals planning to transfer their life insurance policy into a corporation. 
“Prior to the budget, for many years it had become very common for individuals who owned a policy to transfer to a corporation and take back a significant amount as a promissory note or as a cash consideration from the company without paying tax,” says Stephens. “There was nothing improper about it, and people were making increasing use of this provision until Finance stepped in in 2016 and took away that ability.”
As vice-president Planning Services at PPI Advisory, Stephens provides tax and legal support to PPI associates across Canada. The intricacies of the tax code are therefore a speciality, making him well placed to detail why individuals would decide to transfer a policy.
“If you have a policy in your corporation, the policy proceeds are received tax free by the corporation,” he says. “Most of the proceeds have been credited to the Capital Dividend Account, which enables the shareholder to take out the proceeds on a tax-free basis.”
The Federal Budget of 2016 tightened rules on the CDA, but regardless, life insurance policies are still a vital component of any financial plan when it comes to limiting tax, says Stephens.
“The transfer of policies into a corporation is still worth doing in many cases, but the advantages are not what they are prior to 2016,” he says. “We also talked (at STEP) about where policies are already owned inside a corporation and you want to change ownership. Those rules can be very onerous and the Income Tax Act doesn’t properly address them.”

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