On January 1, 2017, significant changes will become effective on insurance sold in Canada, impacting some planning strategies available in the marketplace. These new tax rules will affect various tax elements of policies such as the Exempt test, the ACB and NCPI on life insurance as well as the taxable portion of prescribed annuities. 
 
Compared to the current (G2) rules, the general formula for the ACB will not change. However, the underlying factors used in the calculation of the NCPI will, resulting in different ACB values for the same case under the new (G3) rules. This, in turn, will impact the amount of the tax-free capital dividend account (CDA credit) available on corporate owned policies.
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For example:

• Male 50 Non Smoker
• Death Benefit: $500,000 plus Fund Value
• Level COI
• Minimum premium for life
• 5% illustration rate in a Life Dimensions (Low Fees) plan from BMO^® Insurance.

​​The ACB on Level COI policies will take longer to grind down to zero under the new tax rules. This could significantly reduce the amount of eligible tax-free dividends for business owners (via their CDA balance).
 
In this example, under the G2 rules, the full value of the death benefit would qualify for the CDA credit by year 23 compared to only $427,350 (or about 15% less) under the G3 rules.
 
Time is running out! Policies that are issued on or after January 1, 2017 will be subject to the new (G3) rules. So, if any of your business owner clients are considering planning strategies that depend on the CDA, you may wish to let them know of these upcoming changes.


 

Get ready for 2017!
Learn more about the impact of the new tax rules by contacting your 

BMO Insurance Business Development Manager today.

 
MB 411 (2016/04/27)