Insurance Understood: Suffering from the budget blues?

By Medicine Hat News on March 10, 2018.

I have noticed the cold weather is starting to give some people the winter blues. Have you felt like winter is dragging on with no relief? Hang in there since it can’t go on forever.

For the past while I have felt what I call the budget blues. Specifically with the government announcing so many tax changes, many of my clients have been worried and felt that their financial progress is frozen. However, there has been some clarity with recent announcements and I want to highlight how you can navigate through the budget blues.

First, there was no change to the tax treatment of exempt life insurance policies. There was some speculation that the benefits of a life insurance policy owned by a corporation would be negatively affected.This turned out to be not the case.

Secondly, the rules governing the capital dividend account (CDA) did not change.The CDA will continue to operate without change allowing for tax-free distributions of the non-taxable portion of capital gains and the death benefit of corporately owned life insurance.

Unfortunately, the measures introduced in the federal budget will limit the amount of passive investment income that can be earned in a corporation in any one corporate year.This amount has been set at $50,000.This was established by assuming a 5 per cent rate of return on $1,000,000 of invested capital.For every $1 of investment income earned over this threshold amount the small business income limit will be reduced by $5. Unfortunately, once a corporation reaches a passive investment income of $150,000 they will no longer be entitled to the small business tax rate. Due to space, I won’t go into further detail into the mechanics of this here. This measure will apply to taxation years beginning after 2018.

Strategies are available to help you plan ahead are still out there. Hang in there. There is now an even greater opportunity to review effective tax strategies to bypass the $50,000 annual passive investment income limit. Some of these may be riskier than others.One strategy that was certainly beneficial before has now become even more so is using life insurance.

Business owners of private corporations should consider the use of corporately-owned cash value life insurance. The opportunity to have corporate surplus grow in a permanent life insurance policy without generating passive investment income should not be overlooked. Combined with the CDA not being limited, nor any changes in the taxation of exempt life insurance products,permanent cash value life insurance should be viewed as a preferred investment vehicle for Canadian private corporations.

I know that the government has seemed relentless just like winter but there is hope still out there. I encourage you to have more detailed discussions with your professional team of advisors.

Steve Meldrum B.Mgt. CFP CLU is the founder of Swell Private Wealth Ltd. For over a decade he has specialized in helping individuals and businesses expand protect and perpetuate their wealth. For further information or tailored advice, contact him at 403-487-0490, steve@swellwealth.com or connect on social media.

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