Small business is up in arms about the Canadian government’s July 18, 2017 proposals on tax planning using private corporations – and rightly so.
These proposals represent the biggest change to tax policy since 1972. They are complex and highly technical, and if adopted will have widespread detrimental effects on small business and corporations.
Some proposals would affect existing plans, causing costly reviews and changes. They would also create uncertainty in the business sector, significantly hindering growth and limiting small business investments.
An industry group called the Coalition for Small Business Tax Fairness wrote Finance Minister Bill Morneau in August to complain about the proposals. The coalition’s 35 members include Advocis, the Canadian Institute of Financial Planners, the Conference for Advanced Life Underwriting, Independent Financial Brokers of Canada and the National Exempt Market Association.
Their letter noted, “Independent business owners, including professionals, are telling us that these changes have the potential to discourage entrepreneurs from going into business and could hurt employment and growth as business owners look for other ways to offset the additional costs to themselves and their business.”
I agree with the coalition’s concerns. When complicated proposals like these are rushed through, other plans are often unintentionally affected.
Why insurance advisors should care
The proposals do not seem to impact corporate-owned life insurance plans or insurance strategies. But that does not mean insurance advisors and their clients are immune.
Over the past two years, life insurance products and life insurance strategies have gone through dramatic changes. However, the positive tax attributes of life insurance, such as tax-efficient cash accumulation and the capital dividend account credit features, have been maintained. These features benefit both individuals and incorporated entrepreneurs.
It’s unlikely the rules governing the exempt test and disposition of insurance proceeds will change. However, if the July proposals go through, they could open the door to changing the tax treatment of insurance proceeds, eliminating integration on a taxable disposition, or constraining post-mortem planning.
That said, it’s dangerous to speculate how these rules could affect the use of life insurance strategies. It is equally dangerous, however, to believe we are immune.
We must not be complacent. I would encourage you to educate yourselves on the proposals and their implication on your clients. If they are so moved, ask them to write to their MPs to voice their concern and displeasure. Tax policy must be initiated with fairness and logic. These proposals have neither.
Agree? Disagree? Comment below.
David Wm. Brown , CFP, CLU, Ch.F.C., RHU, TEP, is a member of the MDRT, and a partner at Al G. Brown and Associates in Toronto.