Save Taxes in Canada Using Life Insurance

A large part of tax savings strategies deal with restructuralizing your earnings through your inner family network and thus getting the benefits of lower tax brackets. In this group of tools you'll find some very interesting possibilities such as:

• Family Loans & Accounts Structuring


• Own & Spousal RRSP Contributions


• Claiming Home Office & Deducting Home Expenses


• RESP Contributions


• Medical Contributions


• Employing family members


• Donations to Charity

I've outlined the above methods in another article titled Guide to Tax Savings in Canada for a quick reference. From 2009, there's also a new tool in effect called Tax-Free Savings Account (TFSA). It is similar to an RRSP account, but with some significant differences. For example, withdrawals are non-taxable and they don't affect other government benefits. On the other side, deposits are non-deductible either. There's a maximum cap of $5000 for the savings every year, which translates to significant savings over the span of multiple years.

Life insurance products also offer significant advantages and can be useful tools for lowering your taxes and paving the way for maximizing wealth.

There are a number of benefits of using life insurance products over other forms of investments, for example traditional RRSP accounts and other assets such as stocks.

• No risks involved in life insurance: the minimum-guarantee percentage will keep the policy profitable under all circumstances. Life insurance therefore makes sense as one of your primary long-term investment tools.


• No probate fees: since life insurance is a liquid asset, it's one of the best ways to pass on wealth to the next generation in your family. In the event of your death, they don't have to pay any additional probate fees and there's no tax liability. In provinces like Ontario, these can total up to significant amounts - you'll be able to prevent these unnecessary expenses.


• You don't pay any taxes on the proceeds. Depending on your insurance package, your savings grow sheltered from taxes and you can also use accumulation funds to offset your future premiums with pre-tax dollars rather than after tax dollars.


• Cash values inside policies can be accessed at any time within certain limits through a policy loan or partial surrender. Often, these financial tools can create the equivalent of a tax-free income stream. However, be sure to understand that straight cash withdrawals are subject to taxation. Consult your advisors first in any case.


• Donations and charitable giving in the form of life insurance policies are tax-deductible. These are little known options which can involve transfer of ownership to the charity, naming the organization as the policy beneficiary or replacing the donated assets with a new insurance policy that will not affect the inheritance you wish to leave. These options all allow you to give future gifts of significant amounts at modest costs in the present.

These tools are well known by most people speculating on tax cuts and often get advised first. When using them, you'll need to know the projected amount of income taxes you'd pay before to see which options are the most effective in your individual case. For this, you can use our Canadian income tax calculator for the year 2009.

As closure, it is important to understand that taxes are a complicated matter and they deserve professional attention. Be sure to consult your options with independent advisors first and make only informed decisions.

Lorne S. Marr, President of Lorne S. Marr Insurance Services Ltd. has been a practicing financial planner since 1993 having graduated from the University of Windsor with an MBA. Check out his website www.lsminsurance.ca for many useful tips and tools including a income tax calculator for Canada