Legislative changes will affect tax-exempt life insurance

by Ryan Smith03 Jun 2016
Legislation in the House of Commons will change the tax-exempt status of life insurance, according to the Prince George Citizen.

Currently, almost all life insurance policies in Canada are tax-exempt. Tax-exempt life insurance gives Canadians investment choices where annual investment growth isn’t taxed “within policy limits and while the investment remains in the exempt policy,” according to the Citizen.

The new legislation will reduce the maximum amounts policyholders can pay into exempt policies, lower the amounts that can be accumulated and sheltered in exempt policies, and increase the taxable portion of income from prescribed annuity contracts, the Citizen reported.

“The legislation will impact one of the few tax-exempt savings options Canadians have beyond traditional registered accounts and Tax-Free Savings Accounts,” said RBC Wealth Management advisor Mark Ryan, writing for the Citizen. “In short, the maximum tax-exempt savings room for the same policy (age, amount and other basic factors) will be somewhere in the range of 30% lower after December 31, 2016.”

The legislation will govern policies sold after Jan. 1, 2017, and in most circumstances won’t affect existing policies, Ryan wrote. He recommended that those who were able should consider funding a tax-exempt policy before 2017 to maximize its tax-shelter potential.

Ryan stressed that it was important to read the fine print before funding a policy. Term insurance policies issued before 2017 and converted after 2016, for instance, will not be grandfathered in under the current rules.