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The role of Life Insurance to minimize Capital Gains Tax

Curtis HaighBlog

Calculator and papers

A calculator next to a tax submission

Capital Gains Tax and the Value of Life Insurance in Canada

Capital gains tax is a tax imposed on the profit made from the sale of a capital asset, such as real estate or stocks. In Canada, the capital gains tax rate is currently at 50% of the gain, and it is calculated by subtracting the adjusted cost base (ACB) of the asset from the selling price.

One way to potentially minimize the impact of capital gains tax is by utilizing the lifetime capital gains exemption (LCGE). The LCGE allows individuals to exempt a certain amount of capital gains from tax, currently $971,190 for the 2023 tax year. This exemption can be utilized on the sale of a small business, qualified farm or fishing property, and certain shares of a qualified small business corporation.

A recent report from BMO notes that Life insurance can also play a role in minimizing the impact of capital gains tax. In Canada, life insurance proceeds are not subject to tax, making it a valuable tool for estate planning and passing on assets to beneficiaries tax-free. For example, if a capital asset, such as a business, is owned by a life insurance trust, the proceeds of the sale can be passed on to the beneficiaries tax-free.

It is important to note that the rules and regulations surrounding capital gains tax and life insurance can be complex, and it is always recommended to consult with a professional tax advisor or financial planner to ensure that you are taking full advantage of any available exemptions and planning for your estate in the most tax-efficient manner possible.