Life Insurance Rules “Modernized”

The Income Tax Act contains rules pertaining to the taxation of income earned on the savings in a life insurance policy. The tax treatment differs depending on whether a policy is classified as an exempt supply or not.

On August 23, the federal Government released draft legislative proposals that, if implemented, purport to modernize the exemption test and other rules regarding life insurance policies.

The “exemption test” is used in order to determine whether or not a policy is exempt; it measures the extent to which a life insurance policy is protection-oriented, and therefore an exempt policy, or savings-oriented, and therefore a non-exempt policy.

Non-exempt policy income is taxed as interest income on an accrual basis, whereas income earned through an exempt policy is subject to a 15% minimum tax levied on the insurer.

Some of the important changes that would occur if the proposed new rules were implemented include altering the tax treatment of life insurance policies by changing the exemption test and changing the rules regarding dispositions of an interest in a policy.

To submit comments on the draft legislation, send them to the Department of Finance at via email, or to the Tax Policy Branch, Department of Finance, 140 O’Connor Street, Ottawa, Ontario, K1A 0G5.