2016 tax rate changes to impact corporate life insurance sales concepts on Diamond View
What are the tax rate changes?
In early December 2015, the federal government announced two tax rate changes for individual taxpayers for 2016. The first change was a reduction in the federal tax rate from 22% to 20.50% for income earned between $45,283 and
$90,563. The second change increased the top federal tax rate for income earned over $200,000 from 29% to 33%.
The increase in the top personal tax rate to 33% also results in corresponding tax changes affecting Canadian Controlled Private Corporations (CCPCs). The following two changes will impact the corporate life insurance concepts on Diamond View.
The additional tax that a CCPC must pay on its investment income increases from 6.67% to 10.67%. Consequently the amount included in Refundable Dividend Tax On Hand (RDTOH) increases from 26.67% to 30.67%.
The dividend refund rate will increase from 33% to 38.33%.
Which corporate concepts are impacted?
The concepts impacted by these changes are:
Corporate Insured Retirement Program
Corporate Estate Bond
Corporate Insured Annuity
Corporate Buy Term Invest the Difference
How will the 2016 changes impact these concepts?
Net Estate Values (NEVs) will be impacted the most by these changes. On the insurance side NEVs will be lower in years where the ACB of the policy is greater than zero. When the ACB of the policy is zero the new rules will have no impact on the life insurance NEVs.
With respect to the alternative taxable investment the tax rate changes for 2016 will lower NEVs in all years when compared to solutions based on 2015 tax rate assumptions.
Until the Diamond View software is updated can I still use the corporate concepts?
Yes. We are currently working to have each of the concepts updated to reflect the announced changes. In the interim, each corporate concept will still provide a fair comparison as long as the following assumptions are used when creating the concept illustration:
For corporate tax rates use the 2015 rates.
For personal tax rates (personal tax rate or personal dividend rate) use the 2016 rates.
Note: If you use the existing corporate concept software and use the higher 2016 personal and corporate tax rates the illustrated benefits will unfairly skew the results to the insurance portion of the analysis.
Date: Updated-July 2016