2017 Insurance Tax Changes (Bill C-43)

The federal government has passed new tax legislation (Bill C-43) to revise and modernize the exempt test and related rules that determine how life insurance policies are taxed. These changes take effect on January 1, 2017 and will provide greater consistency in the tax treatment of life insurance products by Canadian insurance companies. New policies issued after that date as well as certain changes made to existing policies after that date will be subject to the new rules.

The key tax changes include:
✓Less efficient use of exempt room which limits the cash value a life insurance policy can accumulate (lower overall tax-sheltered savings)
✓ Less tax free income from prescribed annuities
✓ Updated mortality tables for calculating the Net Cost of Pure Insurance (NCPI), which means lower deductible amount for policies pledged as collateral for business owners
✓ Lower Capital Dividend Account, thus lower tax free withdrawal for business owners
✓ Changes impacting policies insuring more than one life including potential taxation of a portion of death benefits


A policy will become subject to the new rules if at any time after December 31, 2016: In some situations grandfathering will not be affected by changes to a policy, even if medical underwriting occurs. Some examples include:
✓ The policy is converted from one type of life insurance to another (i.e. a term policy that changes over to a permanent policy will be governed by the new rules)
✓ Additional coverage that requires medical underwriting is added to the policy
✓ An additional deposit that requires medical underwriting is made on the policy
✓ Reducing a rating
✓ Switching from smoker to non-smoker rates
✓ Underwriting to change a dividend option
✓ Transfers of ownership
✓ Changes to beneficiary designations


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