The Next Phase of Life Insurance Policyholder Taxation Is Nigh

Kevin Wark () and Michael O'Connor ()
Additional contact information
Kevin Wark: Conference for Advanced Life Underwriting, Toronto
Michael O'Connor: Sun Life Financial, Toronto

Canadian Tax Journal, 2016, vol. 64, issue 4, 705-750

Abstract: January 1, 2017 will mark the beginning of a new era in the Canadian taxation rules governing exempt life insurance policies following an extensive period of consultation between the Department of Finance and the life insurance industry. The changes mark the first major update of the exemption test and policyholder tax rules in more than 30 years. Although these changes add some complexity to the understanding of the taxation of life insurance policies, they also provide greater certainty with respect to the tax treatment of policyholders in many situations. The new legislation will apply to policies issued after 2016, while the current rules will (for the most part) continue to apply to policies issued before 2017. However, pre-2017 policies may come under the new regime if certain prescribed changes are made to those policies after 2016. The authors of this article describe both the current rules and those that will apply starting in 2017, highlighting the main changes and planning opportunities or issues that may arise. The article begins with a primer on the significance, circumstances, and manner in which life insurance policies are exempt from taxation and the disposition rules that may trigger taxation of accumulating gains. The authors then review the changes to various rules affecting exempt policies and their impact on policies issued before 2017 and those issued after 2016. There are a number of examples of how the new rules will apply in practice to the many computations necessary to ensure exempt status. The authors also review new rules affecting the computation of proceeds of the disposition, the adjusted cost basis of a policy, partial dispositions, multi-life policies, prescribed annuity contracts, and the investment income tax.

Keywords: Insurance; insurance companies; insurance policies; life insurance; capital dividend account; tax-free (search for similar items in EconPapers)
Date: 2016
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