Changes to the "exempt test" for life insurance policies

What are the impacts? Now is the time to review your needs!

March 2015


Our insurance legislative environment is known to be fairly stable. However, for the first time in many years, major changes to the legislation will modify the landscape of tax-exempt life insurance contracts and prescribed annuities. In its 2012 Budget, the Federal government proposed changes to the “exempt test” of life insurance policies. On August 2014, the revised proposals were released and will become effective as of January 1st, 2017.

Permanent life insurance has historically been given a favorable tax treatment by the government and, in particular, enabling policyholders to deposit money in their contracts to avoid lapses (due to failure to pay premiums) and thus protect their families. As you know, not only did families take advantage of this great tax instrument but so did the wealthy individuals and their corporations.

Without getting into the fine print of this legislation, assumptions before 2017 were based on a mortality table where the male life expectancy was 72 years old. The new table will bring the expectancy to 80 years old. The main impacts of this change will be:

  • Reduction of the maximum premiums and/or deposits permitted in an exempt policy;
  • Lengthening of the “quick-pay” period;
  • Lower permissible maximum cash value accumulations inside exempt insurance policies; 
  • Increase of taxable portion of prescribed annuities.

For example, according to our calculations, prescribed annuities will have an average increase of 10% on their taxable portion. The adjusted cost base (ACB) of policies could increase up to 40% (possibly bringing lesser death benefit proceeds).

Policies bought before January 1st, 2017 will be grandfathered. If you need a permanent life insurance policy or want to convert a term policy into a permanent one or simply think of buying such a coverage, you should not wait after 2017 to do so.

So, now is the time to take advantage of this opportunity. Do not hesitate to talk to your Investment Advisor for more details.

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