September 2016

Making use of current tax rules on insurance while you can!

Earlier this spring, I referenced the 15 % interest rate Canadians used to get on GICs back in 1982.   With rates currently closer to 1.5 %, and people generally living longer than they did in 1982, the Canada Revenue Agency has re-written the rules, which take effect on Jan. 1, 2017 and change the game considerably. As of Jan. 1, 2017, the amount of money a new insurance policy can hold as tax advantaged over the long term is much less generous than it is today.

This change creates some interesting planning strategies and opportunities that we can begin to implement today:

Purchase a life insurance policy on your child or grandchild

Children are usually easily insured compared to adults, and policy ownership can also be passed to children from parents or grandparents with no tax consequences. This means you can set up and pay for a policy, and upon your passing, the child will inherit it. There’s no tax consequences to your estate, and the child would have a life-long asset that would likely provide more tax advantages over the long term than anything they could obtain as an adult and under the new tax rules. 

Ive have done this with my kids. I set up policies when they were born and will have them paid up by the time they turn 10 years old. Im also able to voluntarily contribute more money into their policies, which will grow on a taxadvantaged basis. When the kids are adults, I can hand the policies over without tax consequences on my end and theyll have a wonderful asset for their future, and the future of their children.

Use an annuity to buy yourself a pension

If you use non-registered money to purchase an annuity, youre effectively buying yourself a pension plan with an incredibly low rate of taxation. Should you wait until Jan. 1, 2017, prescribed annuities will still be tax effective but not nearly as much as they currently are in most situations. 

This can be useful if youre collecting a Guaranteed Income Supplement or if youre subject to Old Age Security claw back. Since much of the annuity is non-taxable, you can reduce your after-tax cash flow much better than you can with almost any other type of investment.

Some companies have recently offered cash-refund annuities. Many people dont realize annuities are insurance products. This means if you die the unspent portion of certain types of annuities can be returned to your estate or go directly to your beneficiary without being subject to probate fees, if appropriate.

Use an annuity to one-timefund a life insurance gift 

Taxation on some non-registered life annuities will increase in January 2017. If youre a senior, the difference in taxable income may be substantial. You can use the insurance proceeds as a charitable gift, offset your estate’s income-tax bill directly or just pass funds down to your beneficiaries. This can be a great “set it and forget it” way to transfer wealth.

The information provided is based on current tax legislation and interpretations for Canadian residents and is accurate to the best of our knowledge as of the date of publication. Future changes to tax legislation and interpretations may affect this information. This information is general in nature, and is not intended to be legal or tax advice. For specific situations, you should consult the appropriate legal, accounting or tax advisor.