Corporate Life Insurance

Bill C-43:  What does it mean for corporate-owned life insurance policies?

On January 1st 2017, Bill C-43 passed and is now law. The new law reduces tax-sheltering options to Canadian business owners looking to add a corporate-owned, tax-exempt, permanent insurance product to their portfolio.  Despite the new law, can corporate-owned insurance remain a good tax shelter for business owners and will this unique product continue to play a valuable role in estate planning?

Why Bill C-43?

Prior to Bill C-43 a corporate–owned insurance plan was able to release a higher amount of tax free dividends on the death of the insured to its shareholders via the Capital Dividend Account (CDA).  With the new law into place, the tax free amount has been reduced somewhat.  The credit to the corporation’s CDA is determined by the amount of insurance death benefit minus the adjusted cost base (ACB).

For example, let’s say a corporation receives a death benefit of $1 million, and the ACB of the death benefit equals $150,000. What this means id that the 1 million minus $150,000 can be distributed to shareholders tax-free via the CDA. If you want to release the remaining $150,000 (ACB) then it would be released as a non-eligible dividend and taxed at 47.47% in Ontario.

What’s an adjusted cost base?

In simple terms the ACB amount is determined by the amount of total insurance premiums paid minus the net cost of pure insurance (NCPI). For most policies, the ACB gradually increases every year and will exceed the NCPI. As the NCPI continues to grow in later policy years, the ACB decreases. The ACB will eventually reach zero once the insured surpasses his life expectancy.

When the 2017 tax changes were made this affected the calculation d the mortality tables which in turn affected the NCPI. The new law reduced this annual amount which in turn increased the ACB and took longer for the ACB to reduce to zero. Therefore, once Bill C-43 was implemented new polices issued after December 2016, the ACB will be higher and will take longer to grind down to zero.

The good news is that this new law does not affect policies issued before the new law passed. These policies will be “grandfathered” under the old rules.

How Bill C-43 works

A quick example:  A male age 60 purchases a Universal Life insurance policy owned by his corporation Under the old rules the ACB could be wound down to zero at the age of 80-82. With the new rules the ACB will take longer to wind down to zero by another 8 to 12 years. A lot will depend on the type of insurance policy purchased, mortality costs, and how premiums were paid.

Despite the new tax law, corporate-owned insurance continues to be a preferred vehicle for Canadian corporations to releases tax-free capital dividends on death to its shareholders or beneficiaries. The amount of CDA available to beneficiaries is still substantial compared to doing nothing and leaving corporate assets inside the corporation.

Contact us to learn more about Bill C-43 and how it affects your corporate life insurance.

(Note: In general, when someone dies there is a deemed disposition of the shares in their holding company. Therefore, there would be a capital gains tax at death on the fair market value (FMV) of the holding company. The gain is reported on the deceased’s final tax return and payable by the estate. The assets are then transferred to their beneficiaries. To avoid double taxation on the distribution of corporate assets you have to look at post-mortem planning. It is important that the business owner’s professional advisors be involved when making these decisions if winding up an estate. It really depends on each situation and the planning done at death. With proper planning using redemption and loss carry-back as well as pipeline planning, you could have a net result of removing either the dividend or capital gains taxation at death respectively).