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Finance Proposes New Exempt Life Insurance Policy Rules 

Canadian Tax Adviser

 

August 27, 2013

 

The Department of Finance released a 48-page package of amendments that would implement changes to the exemption test and other life insurance policyholder taxation rules (24 pages of draft legislation and 24 pages of explanatory notes) on August 23, 2013. Finance is providing a 75-day consultation period and asking for comments by November 6, 2013.

Note: These proposals relate to the changes announced in the 2012 federal budget and do not include the 10/8 or leveraged insurance annuity changes proposed in the 2013 federal budget.

 

Background
The 2012 federal budget proposed to implement several changes regarding the life insurance policy exemption test, which is the test that determines whether a life insurance policy is a tax-exempt policy. The budget proposed to modify the Investment Income Tax on life insurance where appropriate to neutralize impacts of the proposed technical improvements to the Investment Income Tax base.

 

Legislative proposals
According to the explanatory notes, the legislative proposals will amend several aspects of the rules relating to the tax treatment of life insurance policies other than annuity contracts, including:

 

  • Determining whether a policy is an exempt policy
  • Determining what types of transactions give rise to a disposition of an interest in a policy
  • Determining the tax treatment of a disposition of an interest in a policy (related to both the adjusted cost basis of the interest and its proceeds of the disposition)
  • Amendments to the Investment Income Tax as a consequence of some of the other amendments.

 

The proposals will also amend the rules applying to the determination of the capital element of annuity payments for certain annuity contracts.

 

According to the explanatory notes, Finance will introduce grandfathering for the principal legislative amendments.

 

For more information, contact your KPMG adviser.

 

 

 

 

 

Information is current to August 27, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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