Considering that the proceeds of a life insurance policy are received tax free upon the death of the life insured, it is not surprising that the premiums of the policy are not tax deductible. There are two circumstances, however, where premiums would be deductible for income tax purposes:
- If the life insurance policy is assigned to a lending institution that requires the assignment as a condition for a loan, for either investment or business purposes.
- If the life insurance policy is donated to a registered charity and the donor continues to pay the premiums on behalf of the charity.
Life insurance policies used as collateral security for a loan
The conditions under which the owner of a life insurance policy would be entitled to a collateral insurance deduction are as follows:
- The loan advance must be made by a qualified financial institution that is in the business of lending money. This includes banks, finance companies, trust companies, credit unions or insurance companies. It does not include private lending arrangements such as with friends or family members; Read more
If you are the owner of a private corporation you should be concerned about the commentary that is coming from the Department of Finance. In the Federal Budget of March 2017, Finance expressed their concern that private corporations were being used by high income Canadians to obtain tax advantages that were not available to other Canadian tax payers. That concern has led to the release on July 18th 2017, of a consultation paper along with draft legislation. Finance is currently asking for input from interested parties and stakeholders and has stated that the consultation period will end on October 2, 2017. At this point, whatever happens after that date is anyone’s guess, but speculation is high that changes will be introduced to close what the Department perceives as abusive practices relating to private corporations.
Specifically, there are three specific tax planning strategies employed by private corporations that the department is most concerned with:
Sprinkling income using a private corporation
Income tax paid on income from a private corporation can be greatly reduced by causing that income to be received in the form of dividends by individuals who would pay tax at a much lower rate or not at all. These dividends are usually paid to adult children or other family members who are shareholders of the private corporation or to a family trust. By “sprinkling” the income in this manner the amount of income tax paid can be greatly reduced. Read more
By Brenda Spiering, Editor, Marketing and Communications Manager, Client Solutions, SunLife Financial
What you can deduct
Deductions from income and tax credits are reported on lines 206 to 485 of your income tax return. So, take some time to review them carefully. There may be steps you can take to maximize the amount you can claim.
For example, you have until March 1 (or a day or two later, if March 1 falls on a weekend) to top up Registered Retirement Savings Plan contributions that can be claimed as a deduction for the previous year. And claiming a tax deduction can often mean getting a refund come tax time.
The same is true of tax credits. Taking some time to pull together all of the required receipts to claim eligible credits can mean significant savings.
What’s the difference between claiming a tax deduction and a tax credit?
Tax deductions reduce the overall amount of tax you have to pay by reducing your annual income. That’s because they’re subtracted directly from your annual earnings.
For example, if you’re a salaried employee, you’ve likely had tax deducted all year from your paycheque based on your estimated annual income. By contributing to an RRSP and effectively reducing your income, you may end up in the position of having paid more tax than necessary and qualify for a refund.
Just remember, says the Million Dollar Journey blog, “If you’re getting a big tax refund at the end of the year, that money was basically an interest-free loan to the government.” A better approach is to make regular RRSP contributions and get your employer to reduce your tax payments at source.
Also, while you get a tax break on your contributions to an RRSP, you will be taxed on your withdrawals. This works well if you expect to be in a lower tax bracket in retirement (or when you draw the money out) than you’re in now. If not, you may want to consider contributing to a Tax-Free Savings Account instead.
Tax credits fall into two categories, non-refundable or refundable:
- Non-refundable tax credits (such as eligible tuition expenses) are applied directly to your tax bill to reduce the amount of tax you owe. They are not paid out directly. You must owe tax in order to claim them.
- Refundable tax credits (such as the federal GST/HST Tax Credit) are government tax refunds. They are paid out automatically, often in a series of payments throughout the year, to anyone who files a tax return who qualifies.
More details on non-refundable and refundable tax credits are available from The Financial Consumer Agency of Canada.
For more information on what you can deduct and where to report tax credits and deductions, visit the Canada Revenue Agency.
Original Source: Are you paying more tax than you need to, By Brenda Spiering, Marketing and Communications Manager, Client Solutions,SunLife Financial
Don’t Put Off Your Decision to Buy Life Insurance
2016 is an opportune year to buy life insurance. New laws affecting the taxation of life insurance come into effect on January 1, 2017. After this date new policies will not perform as well as they do currently.
The good news is that the proceeds of life insurance policies paid at death still remain tax free. What has been affected is the amount of cash value that may accrue in a policy and the tax-free distribution of death proceeds from a life insurance policy owned in a corporation.
How will this impact your existing and future policies?
Adjustment to the Maximum Tax Actuarial Reserve
Whole Life and Universal Life policies are valuable vehicles in which to accumulate cash value. The limit of how much can be invested is governed by the Maximum Tax Actuarial Reserve (MTAR). If the cash value ever exceeds the MTAR limit, the policy is deemed to be “offside” and will be subject to accrual taxation. Read more