Are Insurance Premiums Deductible?

Transcription

1 Are Insurance Premiums Deductible? December 2011 Can I deduct the premiums? That s a questin yu prbably hear when yu re presenting an insurance cncept. Unfrtunately, the answer is generally n insurance premiums are usually nt deductible fr individuals r businesses. But there are exceptins. In this bulletin we will discuss when life, health and disability insurance premiums are and are nt deductible. Insurance used in the business setting When life, health r disability insurance is used in the fllwing business settings, there may be sme cnfusin ver whether the premiums are deductible. Sme f the cnfusin arises frm the fact that ther types f insurance premiums (prperty and liability cverage, fr example) can be deductible business expenses. Cnfusin als arises frm the fact that insurance premiums may be deducted in sme cases, nt because insurance premiums are by themselves deductible, but because the insurance premiums are treated as emplyment incme in thse cases. Life r health insurance wned by a sharehlder, premiums paid by the crpratin Premiums are treated as a sharehlder benefit t the sharehlder Ordinary incme t the sharehlder Nt deductible t the crpratin Life insurance death benefit paid tax-free t plicywner s beneficiary Health and disability insurance benefits paid tax-free t plicywner Life r health insurance wned by an emplyee, premiums paid by the emplyer Premiums are treated as taxable incme t the emplyee Emplyer may deduct premiums against business incme as lng as the premiums are a reasnable business expense The premiums are deductible because they are treated as incme t the emplyee, nt because insurance premiums are, in and f themselves, deductible Life insurance death benefit paid tax-free t plicywner s beneficiary Health and disability insurance benefits paid tax-free t plicywner Key persn insurance emplyer wns insurance n key persn r sharehlder Premiums are nt deductible N tax cnsequences t insured emplyee r sharehlder Sun Life Assurance Cmpany f Canada,

2 Life, health and disability benefits paid tax-free t emplyer Fr life insurance wned by a crpratin n a key persn r sharehlder that part f the life insurance plicy death benefit exceeding the adjusted cst basis may be psted t a crpratin s capital dividend accunt. Capital dividends are paid t sharehlders tax-free. Shared wnership arrangements Tw parties share wnership f an insurance plicy, with the wnership split depending n the type f insurance plicy wned: If the parties share wnership f a life insurance plicy, ne party will wn the plicy s cash value while the ther will wn that part f the death benefit exceeding the cash value If the parties share wnership f a critical illness insurance plicy with the return f premium benefit, ne party will wn the health benefit while the ther will wn the return f premium benefit N premium deductibility Shared benefit arrangements One party wns the plicy, but the benefits are split amng different parties (including the party wning the plicy) N premium deductibility Life Insurance Generally, individuals and businesses may nt deduct life insurance premiums. Hwever, there are exceptins: Grup term life insurance (emplyer prvides term life insurance cverage fr emplyees each cvered emplyee has a certificate f cverage) Emplyer may deduct the premiums against business incme as a reasnable business expense Emplyee must include the premium payments in incme Emplyee s beneficiary receives the death benefit tax-free Charitable giving (individual r crpratin dnates a life insurance plicy t a charity, and may cntinue t pay the premiums t keep the plicy in frce) Individual Dnates life insurance plicy t charity, cntinues t pay premiums Includes plicy gain, if any, in incme Claims tax credit fr fair market value f plicy 15% federal tax credit fr value f gifts up t $200 in ne year 29% federal tax credit fr gifts ver $200 in ne year Prvincial tax credits may be available Claims tax credit fr life insurance plicy premiums paid after dnatin Owns life insurance plicy, names charity as beneficiary N deductin r tax credit fr premiums paid (even if charity named as irrevcable beneficiary) Death benefit treated as a dnatin made immediately befre death tax credit available n deceased s final return fr year f death r prir year Crpratin Dnates life insurance plicy t a charity, cntinues t pay premiums Includes plicy gain, if any, in incme Deducts fair market value f plicy Deducts life insurance plicy premiums paid after dnatin Registered life insurance plicy (plicy cash value is registered asset, mrtality cmpnent is nt) Rarely sld nw (if at all), but plicies may still be in frce Plicywner may nt deduct that part f the premium attributable t the mrtality risk (the amunt f the death benefit exceeding the plicy s cash value), but may deduct the rest f the premium (subject t RRSP cntributin rm availability) Insurance cmpany tells plicywner which part f the premium payment is deductible and which is nt Beneficiary includes in incme that part f the death benefit equal t the plicy cash value; the rest f the death benefit is tax-free 2

3 Plicy used as cllateral security fr a lan (plicywner assigns plicy t financial institutin as cllateral security fr a lan) Lan must cme frm a financial institutin (bank, trust, credit unin r insurance cmpany) nt frm a surce that is nt in the business f lending mney, like a relative r friend Financial institutin must require as a cnditin fr granting the lan the cllateral assignment t it f a life insurance plicy Plicywner must assign plicy t the lender as security fr the lan (the assignment will nt be treated as a dispsitin f the plicy, s n tax cnsequences will arise frm the assignment itself) After the assignment, plicywner may deduct the lesser f premiums he r she cntinues t pay and the net cst f pure insurance (NCPI) Restrictins n types f incme against which the plicywner may deduct the premiums r NCPI (generally restricted t business incme) Health insurance prvided by emplyers fr emplyees Generally, emplyers may deduct premiums fr critical illness insurance (CII), lng term care insurance (LTCI) and/r persnal health insurance (PHI) paid t prvide emplyee benefits. Emplyees need nt include the premiums r insurance benefits in incme, except in Quebec, where the emplyee reprts premiums as incme n his r her prvincial tax return (nt n his r her federal tax. In this sectin we discuss health insurance prvided by emplyers fr their emplyees; in the sectin immediately fllwing this ne, we discuss health insurance purchased by individuals and self-emplyed persns fr their wn use. Grup health insurance (emplyer prvides CII, LTCI and/r PHI cverage fr emplyees, their spuses and immediate family members thrugh a grup plicy each cvered emplyee has a certificate f cverage). Assuming that the plan qualifies as a grup sickness and accident plan (CII and LTCI) r as a private health services plan (PHI): Emplyer may deduct premiums against business incme as lng as the premiums are a reasnable business expense Emplyee des nt reprt premiums as incme, except in Quebec, where the emplyee reprts premiums as incme n his r her prvincial tax return (nt n his r her federal tax Benefits paid t emplyee, his r her spuse r cvered family members are tax-free Premiums paid and benefits prvided fr a sharehlder, his r her spuse and cvered family members are treated as sharehlder benefits (taxable t sharehlder, n deductin fr crpratin) unless the sharehlder receives his r her benefits as an emplyee. The sharehlder shuld cnsult with his r her tax advisr. Gruped health insurance (emplyer creates a written plan t prvide CII, LTCI and/r PHI cverage fr emplyees, their spuses and immediate family members by wning individual plicies insuring each cvered emplyee, spuse and family member). Assuming that the plan qualifies as a grup sickness and accident plan (CII and LTCI) r as a private health services plan (PHI): Emplyer may deduct premiums against business incme as lng as the premiums are a reasnable business expense Emplyee des nt reprt premiums as incme, except in Quebec, where the emplyee reprts premiums as incme n his r her prvincial tax return (nt n his r her federal tax Benefits generally paid tax-free directly t emplyee, spuse r family member Premiums paid and benefits prvided fr a sharehlder, his r her spuse and cvered family members are treated as sharehlder benefits (taxable t sharehlder, n deductin fr crpratin) unless the sharehlder receives his r her benefits as an emplyee. The sharehlder shuld cnsult with his r her tax advisr. Health and welfare trust and Emplyee life and health trust (emplyer creates and funds a trust t prvide health and welfare benefits fr cvered emplyees, their spuses and immediate family members. The trust buys CII, LTCI and/r PHI plicies fr each trust beneficiary emplyee, spuse and cvered family members). Assuming that the plan qualifies as a grup sickness and accident plan (CII and LTCI) r as a private health services plan (PHI): Emplyer may deduct against business incme the cntributins it makes t the trust t pay premiums plus the trustee s reasnable expenses, as lng as the cntributins are a reasnable business expense 3

4 Emplyee des nt reprt emplyer s trust cntributins as incme, except in Quebec, where the emplyee reprts trust cntributins as incme n his r her prvincial tax return (nt n his r her federal tax Benefits generally paid tax-free directly t emplyee, spuse r family member Cntributins paid and benefits prvided fr a sharehlder, his r her spuse and family members are treated as sharehlder benefits (taxable t sharehlder, n deductin fr crpratin) unless the sharehlder receives his r her benefits as an emplyee. The sharehlder shuld cnsult with his r her tax advisr. Health insurance wned by individuals and self-emplyed persns (sle prprietrs and partners, but nt sharehlders) Critical Illness Insurance (CII) and Lng Term Care Insurance (LTCI) Generally, individuals and self-emplyed persns may nt deduct premiums they pay fr critical illness insurance (CII) r lng term care insurance (LTCI) plicies that they wn n themselves, r fr premiums they pay fr plicies wned by their spuses r family members. Nr may they treat thse premiums as medical expenses fr purpses f the medical expenses tax credit. Hwever, plicy benefits generally are paid tax-free. Persnal Health Insurance (PHI) Individuals Generally, an individual may nt deduct premiums paid fr a persnal health insurance (PHI) plicy, whether wned by the individual, his r her spuse, r family members. Hwever, if the PHI plicy qualifies as a private health services plan an individual may be able t treat the premiums as medical expenses fr purpses f the medical expense tax credit. The right t claim a medical expense tax credit applies als t premiums paid fr plicies wned by the individual s spuse and family members wh are part f the individual s husehld. Plicy benefits are generally paid tax-free. Persnal Health Insurance (PHI) Self-emplyed persns If the PHI plicy qualifies as a private health services plan a self-emplyed persn may be able t deduct sme r all f the premiums paid fr plicies n the self-emplyed persn, his r her spuse, and family members living in his r her husehld. Hwever, the rules are cmplex the self-emplyed persn shuld cnsult with his r her tax advisr. This is a general verview f the rules: Self-emplyed persn pays premiums fr his r her wn plicy, and/r fr a plicy n his r her spuse and/r family members (r a partnership pays premiums fr a plicy wned by a partner, his r her spuse and/r family members) If the business has n emplyees Premiums deductible, but nly up t $1,500 per year each fr the self-emplyed persn, his r her spuse, and fr each adult member f the self-emplyed persn s husehld, and up t $750 per year fr each member f the self-emplyed persn s husehld under age 18 Premiums ver this limit may cunt as medical expenses fr purpses f the medical expense tax credit If the business has emplyees, mre than half f whm are arm s length 1 Premiums deductible, but deductibility limited by the prprtin f emplyees wh receive benefits, the level f benefits the emplyees receive, and by the prprtin (if any) f the premiums that the emplyees pay Premiums that are nt deductible may cunt as medical expenses fr purpses f the medical expense tax credit. If the business has emplyees, fewer than half f whm are arm s length Same deductibility rules as where mre than half f the emplyees are arm s length, but subject additinally t the $1,500 and $750 caps referred t abve Premiums that are nt deductible may cunt as medical expenses fr purpses f the medical expense tax credit. 1 Arm s length emplyees are nt family members f the business wner. Further, if a nn-family member emplyee wns part f the business, but nt enugh t cntrl the business, he r she is an arm s length emplyee. 4

5 Disability insurance (DI) Generally, disability insurance (DI) premiums are paid with after-tax dllars, but the benefits are received taxfree. Hwever, there are exceptins: Grup disability insurance (emplyer prvides DI cverage fr emplyees thrugh a grup plicy each cvered emplyee has a certificate f cverage). Assuming that the plan is characterized as a wage lss replacement plan and qualifies as a grup sickness and accident plan : Emplyer may deduct premiums against business incme as lng as the premiums are a reasnable business expense Emplyee des nt reprt premiums as incme, except in Quebec, where the emplyee reprts premiums as incme n his r her prvincial tax return (nt n his r her federal tax Emplyee may pay sme premiums, but may nt deduct them (unless he r she receives disability incme benefits) Benefits included in the emplyee s incme, but the emplyee may deduct frm incme all premiums he r she paid in the year and in previus years (if nt already deducted) Premiums paid and benefits prvided fr a sharehlder are treated as sharehlder benefits (taxable t sharehlder, n deductin fr crpratin) unless sharehlder receives his r her benefits as an emplyee. The sharehlder shuld cnsult with his r her tax advisr. Gruped disability insurance (emplyer creates a written plan t prvide DI cverage fr emplyees by wning individual plicies insuring each cvered emplyee). Assuming that the plan is characterized as a wage lss replacement plan and qualifies as a grup sickness and accident plan : Emplyer may deduct premiums against business incme as lng as the premiums are a reasnable business expense Emplyee des nt reprt premiums as incme, except in Quebec, where the emplyee reprts premiums as incme n his r her prvincial tax return (nt n his r her federal tax Emplyee may pay sme premiums, but may nt deduct them (unless he r she receives disability incme benefits) Benefits included in the emplyee s incme, but the emplyee may deduct frm incme all premiums he r she paid in the year and in previus years (if nt already deducted) Premiums paid and benefits prvided fr a sharehlder are treated as sharehlder benefits (taxable t sharehlder, n deductin fr crpratin) unless the sharehlder receives his r her benefits as an emplyee. The sharehlder shuld cnsult with his r her tax advisr. Health and welfare trust and Emplyee life and health trust (emplyer creates and funds a trust t prvide health and welfare benefits fr cvered emplyees). Assuming that the trust is characterized as a wage lss replacement plan and qualifies as a grup sickness and accident plan : Trust wns and pays premiums fr a plicy n each emplyee/trust beneficiary Emplyer may deduct against business incme the cntributins it makes t the trust t pay premiums plus the trustee s reasnable expenses, as lng as the cntributins are a reasnable business expense Emplyee des nt reprt emplyer s trust cntributins as incme, except in Quebec, where the emplyee reprts trust cntributins as incme n his r her prvincial tax return (nt n his r her federal tax Benefits are taxable incme t the trust, but deductible t the trust when paid ut t the trust beneficiary. As a result, benefits are taxable incme t the emplyee. Cntributins paid and benefits prvided fr a sharehlder are treated as sharehlder benefits (taxable t sharehlder, n deductin fr crpratin) unless sharehlder receives his r her benefits as an emplyee. The sharehlder shuld cnsult with his r her tax advisr. Individually-wned plicies including plans wned by self-emplyed persns (individual wns plan and pays premiums) Generally, individuals may nt deduct disability insurance premiums they pay n plicies that they wn. Hwever, plicy benefits generally are paid tax-free. Plicy wned by self-emplyed persn (sle prprietr r partner wns plan and pays premiums) Plicy wned t prtect against a lss f incme-earning ability Self-emplyed persn may nt deduct premiums against self-emplyment incme Benefits nt included in incme Plicy wned t pay verhead expenses during a disability Self-emplyed persn may deduct premiums against self-emplyment incme as lng as the premiums are a reasnable business expense Benefits included in incme 5

6 Crprate wned plicies Advising clients Actual verhead expenses paid fr frm benefits received are deductible as lng as the verhead expenses are reasnable business expenses Key persn prtectin (crpratin wns a plicy n a key persn and pays the premiums. Insurance prtects the crpratin frm the ptential lsses that a key persn s disability wuld cause) Premiums are nt deductible Benefits are nt subject t tax Sharehlder dividend prtectin (crpratin wns a plicy n a sharehlder and pays the premiums. Insurance prceeds paid by crpratin t the sharehlder if the sharehlder suffers a disability) Premiums are nt deductible by crpratin Benefits are nt subject t tax in crpratin s hands Benefits paid t sharehlder as a sharehlder benefit (incme t sharehlder, nt deductible t crpratin) Overhead insurance prtectin (if a key persn is disabled, a business revenues may suffer but its verhead cntinues as befre disability insurance prtects business frm the revenue gap) Premiums are deductible by crpratin Benefits are subject t tax in crpratin s hands But actual verhead expenses paid fr frm benefits received are deductible as lng as the verhead expenses are reasnable business expenses Buy-sell insurance (if an wner is disabled, he r she may need t sell his r her share f the business) Each wner wns disability insurance n his r her c-wners Premiums nt deductible Benefits are tax free The business culd wn disability insurance n each wner Premiums nt deductible Benefits tax free Disabled sharehlder sells shares t c-wners, realizes capital gain Crpratin redeems disabled sharehlder s shares, sharehlder treats redemptin prceeds as dividends There are nly a few places in the Incme Tax Act where life, health r disability insurance premiums are deductible. The best rule is t assume that the premiums are nt deductible until yu find ut therwise. This article is intended t prvide general infrmatin nly. Sun Life Assurance Cmpany f Canada des nt prvide legal, accunting r taxatin advice t advisrs r clients. Befre yur client acts n any f the infrmatin cntained in this article, r befre yu recmmend any curse f actin, make sure that yur client seeks advice frm a qualified prfessinal, including a thrugh examinatin f his r her specific legal, accunting and tax situatin. Any examples r illustratins used in this article have been included nly t help clarify the infrmatin presented in this article, and shuld nt be relied n by yu r yur client in any transactin. 6

7 Tabular Summary please see text abve fr mre cmplete descriptin Life r health insurance wned by a sharehlder, premiums paid by the crpratin Life r health insurance wned by an emplyee, premiums paid by the Insurance used in the business setting Premiums deductible t emplyer, crpratin r individual? Premiums incme t sharehlder r emplyee? N Yes N Yes Yes N emplyer Key persn insurance N N N Shared wnership arrangements N N N Shared benefit arrangements N N N Life insurance Grup term life insurance Yes Yes N Charitable giving individuals N tax credit N/A N Charitable giving crpratins Yes N/A N Registered life insurance plicy Partly N/A Partly Plicy used as cllateral security fr Yes, if certain cnditins N/A N a lan met Health insurance (CII, LTCI r PHI) prvided by emplyers fr emplyees Grup health insurance Gruped health insurance Health and welfare trust Yes if paid fr emplyee N if paid fr sharehlder Yes if paid fr emplyee N if paid fr sharehlder Yes if paid fr emplyee N if paid fr sharehlder N fr emplyee (except n Quebec prvincial Yes fr sharehlder N fr emplyee (except n Quebec prvincial Yes fr sharehlder N fr emplyee (except n Quebec prvincial Yes fr sharehlder Benefit taxable? N fr emplyee Yes fr sharehlder N fr emplyee Yes fr sharehlder N fr emplyee Yes fr sharehlder Health insurance (CII, LTCI r PHI) wned by individuals and self-emplyed persns (sle prprietrs and partners, but nt sharehlders) CII and LTCI N N/A N PHI individuals N but may qualify fr medical expenses tax credit N/A N PHI self-emplyed persns Yes, subject t limits 2 N/A N 2 Deductibility rules are cmplicated and nt all the premiums may be deductible. Premiums that are nt deductible may qualify twards the medical expenses tax credit. 7

8 Tabular Summary please see text abve fr mre cmplete descriptin Grup DI Gruped DI Health and welfare trust Disability Insurance (DI) Premiums deductible t emplyer r crpratin? Yes if paid fr emplyee N if paid fr sharehlder Yes if paid fr emplyee N if paid fr sharehlder Yes if paid fr emplyee N if paid fr sharehlder Premiums incme t sharehlder r emplyee? N fr emplyee (except n Quebec prvincial Yes fr sharehlder N fr emplyee (except n Quebec prvincial Yes fr sharehlder N fr emplyee (except n Quebec prvincial Yes fr sharehlder Individually wned plicies N N/A N DI plicy wned by self-emplyed N N/A N persn t replace incme DI plicy wned by self-emplyed Yes N/A Yes 3 persn t pay verhead expenses Crprate wned key persn DI N N/A N Crprate wned sharehlder N N/A N 4 dividend prtectin Crprate wned verhead Yes N/A Yes 3 insurance Crprate wned buy-sell insurance N N/A N Yes Yes Yes Benefit taxable? 3 Hwever, the expenses that the insurance is meant t pay shuld be deductible. 4 Crpratin may nt deduct premiums, but receives benefit tax-free. Pays benefit t sharehlder as taxable dividend. Crpratin may nt deduct dividend payment t sharehlder. 8