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On March 21st, Finance Minister Jim Flaherty tabled his 2013 Federal Budget. Some of the provisions of that document has or will have an impact on some life insurance products and/or strategies. However, let’s start on a positive note.

The Lifetime Capital Gains Exemption has been increased from $750,000 to $800,000 starting in 2014. For the years after 2014, the LCGE will be indexed to inflation. The Lifetime Capital Gains Exemption applies to capital gains realized by individual taxpayers on disposition of certain qualified property – shares in a Qualifying Small Business Corporation or eligible farm and fishing property. For those individuals who have already claimed the old limit of $750,000 they will be entitled to the difference from the increased amount.

Two sophisticated life insurance strategies were dealt a fatal blow by the March Budget. These were the leveraging strategies known as the 10-8 programs and the leveraged insured annuity. The government’s primary concern was the linkage of the loan to the policy and the ability to manipulate both the interest expense deduction as well as the tax deferred growth in the life insurance policy. Since the vast majority of Canadian insurance holders have never utilized these strategies only a small percentage of tax payers were affected.

It is important to note that owners of life insurance policies may still borrow against the cash value of their policy. This borrowing can be either by way of policy loan directly from the insurance company or from a third party lender such as a bank or credit union. If the borrowing is for the purpose of making an investment or for a business use, the interest on the loan will still be deductible as long as there is not a direct link between the loan and the insurance policy cash value. In other words, for straight forward borrowing using the life insurance policy as collateral it is business as usual.

The same is true of life insured annuities which do not include a loan component. Insured annuities, consisting of a life annuity with a no guarantee period and a term to age 100 life insurance to replace capital upon death are still viable and are an effective way of locking in higher guaranteed pre-tax interest rate returns on a fixed income investment.

The Budget also made a slight upward adjustment to the tax that will be paid on the receipt of non-eligible dividends by a shareholder. Non-eligible dividends are those that are paid by a corporation out of corporate income that is taxed at the small business tax rate.

Of some concern is a mention of the intent to review the graduated tax treatment of certain trusts, including testamentary trusts. Testamentary Trusts have long been a staple of estate planning. A Testamentary Trust is created by an individual’s will and is funded when death occurs. The Testamentary Trust enjoys a graduated income tax treatment much like an individual tax payer, whereas, other trusts, such as inter vivos trusts are taxed at the top marginal rate of tax. The Department of Finance has indicated it will consult on measures to eliminate benefits arising from the use of graduate rates of tax for trusts. That review is expected to take up to three months, so stay tuned for developments.

Originally announced in the 2012 Budget, this year’s Budget re-confirmed the government’s intention to adjust the exempt test for permanent life insurance. When implemented this will have the effect of reducing the amount of tax-deferred investment growth currently available in a life insurance policy. It has been suggested that there will be draft legislation later this year, with an effective date possibly in 2015 or later. We expect that there will be grandfathering of existing life plans for the application of the new exempt test provisions, so if you are contemplating the purchase of such plans, now would be a good time.

These certainly are not the only provisions of this year’s Budget but only those that involve life insurance products. If you feel that you are affected by them and wish to discuss, or if you wish to review your current insurance planning in light of these remarks, please call me.