Budget 2012 - Impact on the Critical Illness Protection Plan

The Critical Illness Protection Plan (CIPP) is a business insurance planning strategy designed to provide your owner-manager clients and their key employees with cost-effective critical illness protection. If the CIPP qualifies as a group sickness or accident insurance plan, the premiums paid by the corporation would be deductible and any critical illness benefit paid would be paid directly to the employee, tax free.

The 2012 Federal Budget announced changes that eliminate one of the benefits associated with a “grouped” solution. Under the new rules, premiums paid on behalf of an employee by an employer will be included in the employee’s income. Due to these changes, the CIPP concept is no longer available to support critical illness sales.

Where do we go from here?

Despite the 2012 Budget limiting this planning opportunity, critical illness insurance remains an important benefit for employees and owner-managers. Employers can still provide this valuable protection with no cost or reduced cost to the employee or owner-manager, while ensuring any benefit payable to the employee or owner-manager is received tax free.

Critical illness protection for employees

In situations where an employer is looking to provide critical illness protection for an employee or group of employees, the insurance can be structured with the employee or employer owning the insurance coverage.

The employer would fund the insurance premiums in one of two ways:

Paying the premium directly and issuing the employee a T4 for an amount equal to the premium paid

Increasing the employee’s salary by an amount that covers the cost of the critical illness policy, plus the tax payable on the additional salary. The additional salary paid by the employer is tax deductible by the employer.

Critical illness protection for owner-managers

In situations where the individual seeking critical illness protection is an owner-manager (shareholder-employee) of a corporation, the insurance can be structured with the owner- manager or corporation owning the insurance coverage.

The corporation can fund the insurance premium by increasing the owner-manager’s salary by an amount that covers the cost of the critical illness policy, plus the tax payable on the additional salary. This additional salary will generally be deductible by the corporation.

Alternatively, the corporation can pay the premium directly and issue the owner-manager a T4 for an amount equal to the premium paid. Note that if the owner-manager receives this benefit in his/her capacity as a shareholder, the premium paid by the corporation will not be deductible. If the coverage is as an employee benefit, the premiums should be deductible by the corporation.

In these situations described above, any critical illness benefits payable are received tax free by the owner-manager.

As more and more Canadians see critical illness as an important part of their financial plan, employers should be cognizant of the positive impact to employees and owner-managers when offering critical illness as part of the benefit package.