On January 1, 2017, new rules for taxation of personal life insurance policies came into effect. In 2014, Bill C-43, received royal assent but its new rules on life insurance took effect this week. This marks the first change to taxation of life insurance since the 1980s.3oexfdxo6k

Key changes include:

  • Lower tax-sheltered savings limit
  • Changes to the “250% Rule” that may allow lump sum deposits in the later years of a policy
  • Less tax free income from annuities
  • Lower tax free withdrawal room for business owners
  • Changes to the rules on multi-life policies, which may affect the tax advantages of such plans

Plans issued prior to December 31, 2016 are grandfathered to the old rules, but any plans issued in the future will be subject to the new rules. A policy might lose its grandfathered status if it is converted from one kind of life insurance to another or if additional coverage is added to the policy. Changes that will not affect the grandfathered status of a plan include changing the beneficiary designation of the plan, transferring ownership, or switching from smoker to non-smoker status.

Life insurance is commonly used in estate planning to supplement the assets of an estate and to avoid certain tax liabilities. It is important that lawyers practising estate law are aware of these changes. For those whose life insurance policy is a central or significant piece of an estate plan, it may be prudent to seek tax advice to understand how these new rules might affect their plans.

Thank you for reading.

Ian M. Hull

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