The life insurance industry is a tax haven. It was a way of sheltering money from taxation long before RRSPs came into existence and is a strategy used by the wealthy. It is essentially a plan that allows you to deposit money into a life insurance contract and to shelter all of the growth and all of the investment from income tax. The Canada Revenue Agency allows insurance companies to issue policies and maintain their tax shelter status under certain conditions. These insurance plans are considered exempt under Sections 12.2 and 148 of the Income Tax Act. You must pay for a minimum amount of life insurance to keep the plan tax-exempt. The life insurance industry has developed these tax-exempt products for years and can help you meet several objectives.

First, regardless of the amount that you have sheltered from tax, the entire amount of the cash and/or the death benefit (depending on the type of contract) is paid tax-free and probate-free upon death. It is a great way to pass on wealth to the next generation tax-free. Second, it allows you to grow and protect your wealth inside a tax-free insurance contract. While your account grows there is no taxation, and you can choose from a wide range of investment options. Third, the life insurance contract can provide you with tax-efficient retirement income and, if structured properly, can provide you with tax-free retirement income. Under a special arrangement, you can leverage your investments inside the plan with a bank. The leverage is only repayable upon death and is guaranteed by the life insurance proceeds.

Most Canadian chartered accounting firms have published materials promoting the tax-advantaged benefits of insurance tax shelters. Ask your financial advisor or tax professional whether an insurance tax shelter can work for you and your family.

Common Mistakes in Wealth Transfers

Estate planning is just like planning a trip: Leave proper instructions, including keys, to people you trust. If you have been an executor, you know the kind of patience you need in dealing with an estate. Rarely is it easy; and when it is, something usually gets missed. Leaving an estate to family members can cause more problems than you might think. Family disputes can be avoided with careful, well-thought-out

planning.

The first step is communication. I usually recommend that parents discuss with their children their general intentions–not specific dollar amounts. Another great idea I picked up along the way is to create an estate binder, a file containing relevant documents for the executor. This would include copies of 

important documents such as the will, insurance policies, property titles, investments and banking info. Include important contact information for any tax, legal, financial, and insurance advisors.

Your executor will lose sleep if you have no will or if it cannot be easily located. Hey, make it simple to find if you have one. What if your family does not know it is in the safety deposit box?

Also, a problem is when there are no declarations in the will in regard to gifts. If you plan to leave gifts, make sure all are clearly spelled out in your will.

Make the most of your final tax return. Assets that are jointly owned with children do not form part of the estate. If there are assets being bequeathed, is that done in equal proportion for each of the children? Or did one child receive an additional part outside the will as a joint account holder?

Lack of records or disorganized records is a common problem for executors and family members. To simplify, you could make an up-to-date statement of  all investments with a note such as, “These records are up to date as of  June, 2019; you do not have to search every bank in Canada to find out where our money is.” Communication and a bit of record keeping may help you and/or your executors sleep better.