On March 29, 2012, the Federal Minister of Finance, Jim Flaherty, presented the majority government’s budget, which included a number of tax initiatives that are particularly relevant to the insurance industry. These tax initiatives are reviewed in this Tax memo.
Life insurance policy exemption test
The budget proposes technical improvements to update and simplify the test that determines whether a life insurance policy is an exempt policy. Based on the exemption test implemented in the early 1980s, a life insurance policy is an exempt policy when the accumulating savings (or the accumulating fund) in the policy does not exceed the accumulating fund in a benchmark policy (or an exemption test policy).
Under current rules, the accumulating fund in an exemption test policy generally is calculated using prescribed mortality and interest rates, the rates used in determining the premiums, or the cash surrender value of the actual policy. The accumulating fund in an actual policy issued by a life insurer is measured using an amount that is equal to the greater of the cash surrender value of the policy and the modified net premium reserve in respect of that policy.
The budget proposes technical improvements that the government considers necessary to update and simplify the exemption test, and to improve consistency between the measurement of the accumulating fund in an actual policy and the measurement of the accumulating fund in the exemption test policy.
Read the Tax memo to learn more about proposed changes to the exemption test for life insurance policies.