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* Policy Loans used in Insured Retirement Plans (IRP's) as "Tax-Free Pensions" are subject to Canada Revenue Agency (CRA) rules in General Anti-Avoidance Rule (GAAR). If the policy fails in CRA's exemption test, serious tax consequences will result.
While the cash value of Universal Life policy or IRP offers limited tax advantage depending on the available Adjusted Cost Basis of the policy, the policy has to pass CRA's tax exempt tests which results in loans ("tax free retirement income") that are much lower than the agent's promise. If the policy fails in the MTAR test (Maximum Taxable Actuarial Reserve), the insured receive "bonus" which is taxable to comply with MTAR test.
On January 1, 2017, the taxation of life insurance will give way to the following changes:
- Differences in the calculation of the maximum tax actuarial reserve (MTAR) line, of the net cost of pure insurance (NCPI) and of policy adjusted cost basis (ACB).
- Limitations on the tax-free payment of the fund value upon the death of a first insured in a multi-life policy.
- Changes that will lead to an increase of the investment income tax (IIT) paid by insurers (with costs generally passed to policyholders). Updated Canadian mortality tables become the reference to determine the taxable portion of a prescribed annuity.
This 7-part video explains all about ACB, MTAR, and why IRP is not safe from GAAR.
