Registered Retirement Savings Plans
Contributions you make to your employee’s;RRSP and RRSP administration fees that you pay for your employee are considered to be a taxable benefit for the employee. However, this does not include an amount you withheld from the employee’s remuneration and contributed for the employee.
If the;GST/HST applies to the administration fees, include it in the value of the benefit.
Contributions you make to your employee’s RRSPs are generally paid in cash and are pensionable and insurable. Deduct CPP contributions and EI;premiums.
However, your contributions are considered non-cash benefits and are not insurable if your employees cannot withdraw the amounts from a group RRSP before the employees retire or cease to be employed.
Although the benefit is taxable and has to be reported on the T4;slip, you do not have to deduct income tax at source on the contributions you make to your employee’s RRSPs if you have reasonable grounds to believe that the employee can deduct the contribution for the year. For details, see Chapter;5 of Guide;T4001, Employers’ Guide; Payroll Deductions and Remittances.
Administration fees that you pay directly for an employee are considered taxable and pensionable. Deduct CPP contributions and income tax. These are considered a non-cash benefit, so they are not insurable. Do not deduct EI;premiums.
Naming People As Your Beneficiaries
Keep your death benefit tax-free by naming individuals as your beneficiaries. Your adult children, spouse, friends and/or siblings are just a few examples. You could name more than one beneficiary just make sure to clearly state how much each beneficiary gets in the form of a lump sum amount or percentage. You could name a company, charity or trust as a beneficiary, but the payout will be subject to taxes.
Life Insurance And The Estate Tax
In addition to income tax issues, there may be estate tax considerations for life insurance proceeds. If a beneficiary was not named, or on before the insured and no new beneficiaries were named, the life insurance proceeds will go to the insured’s estate.
A federal estate tax return is required if the gross estate is worth more than $11,180,000 if the policyholder died in 2018.
Not all states have their own estate tax. Of the ones that do, the minimum filing threshold could be significantly lower than the federal threshold. Life insurance proceeds may require state tax payments at the estate level.
Under most circumstances, the death benefit proceeds do not create federal taxable income. However, if you surrender a life insurance policy for reasons other than chronic or terminal illness , you may face tax consequences.
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Employee Benefits In Canada: Taxable Vs Non Taxable
As an employer, you know that you need to offer a great benefits packageto attract and retain great employees. But do you understand the difference between taxable and non-taxable benefits?
The rules around taxable benefits in Canada are constantly changing, and staying up-to-date is no easy task. If youre not aware of the most recent guidelines, it can cost your company dearly.
In this article, well take a look at what is and isnt taxable, so that you can rest easy knowing your money is well-spent.
Gifts Awards And Long
A gift or award that you give an employee is a taxable benefit from employment, whether it is cash, near-cash, or non-cash. However, we have an administrative policy that exempts non-cash gifts and awards in some cases.
Cash and near-cash gifts or awards are always a taxable benefit for the employee. A near-cash item is one that functions as cash, such;as a gift certificate or gift card, or an item that can be easily converted to cash, such as gold nuggets, securities, or stocks. For more information, see Rules for gifts and awards and Policy for non-cash gifts and awards.
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When Do You Pay Taxes On Life Insurance
There are only certain cases when you have to pay taxes on life insurance. Most notably, if the cash value of the policy exceeds a certain amount you may encounter the estate tax or the generation-skipping tax. The inheritance tax may come into play if you live in one the six states that enforce this measure. Each state has its own set of guidelines regarding taxes on life insurance policies.
Single Premium Insurance Policy Tax Benefits
The premium paid in case of a;life insurance;plans are eligible for a tax deduction, as per Section 80C of the Income Tax Act. This amount has a maximum limit of 1.5 lakh. Moreover ,the maturity benefits remain to be exempted from tax under Section 10 of the Act. Single premium term insurance qualify for the same benefits. However, not every policy offers the same benefit that the regular life insurance plan avails. Hence, one should be careful while choosing the plan.
The exemption from tax is valid only if the premium is less than 10% of the total sum assured. It is applicable to single premium plans. In case of death, the proceeds are to be tax free.
So Is Life Insurance Really Taxable
For the most part life insurance in Canada is considered non-taxable which can be appealing since your beneficiaries will be able to collect the full death benefit. By non-taxable we mean that your beneficiaries wont need to pay income tax on the amount they receive when you die.
This is the case regardless of the size of the policy, your partner, or anyone else youve named as a beneficiary. If youre choosing between term and permanent life insurance policies, dont worry both of these are considered non-taxable insurance plans.
Since life insurance is non-taxable, you do not need to report the interest gained on your death benefit on your annual tax return.
However, there are certain unique situations where life insurance is taxed.
Are Life Insurance Payments Tax Deductible
If you have an individual policy, life insurance premiums are not tax deductible. Theyâre treated the same as any other expense.
Group term life insurance policies, typically provided by an employer or association, are different. The employer can deduct life insurance premium payments for up to $50,000 of coverage per employee, so long as the employer is not the beneficiary. As an employee or association member, the cost of group or supplemental life insurance can actually be added to your taxable income.
If you have less than $50,000 of group and supplemental term life insurance, you wonât be taxed on the value of it. However, any coverage over $50,000 will be assigned a fair market value by the IRS, which is determined by your age. The amount you pay in premiums is deducted from the fair market value, and the difference is considered to be taxable income. It may seem odd to pay taxes on coverage that youâve already paid for, but this rule is meant to account for cases in which you receive a discounted rate by purchasing group life insurance. With group coverage, risk is pooled across a large number of people so, if youâre quite unhealthy or older, you may receive a much lower rate than you would get with an individual policy.
Editorial Note: The content of this article is based on the authorâs opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.
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Board And Lodging Allowances Paid To Players On Sports Teams Or Members Of Recreation Programs
You can exclude up to $373 ;per month from income for a board and lodging allowance for a participant or member of a sports team or recreational program if all of the following conditions are met:
- you are a registered charity or a non-profit organization
- participation with, or membership on, the team or in the program is restricted to persons under 21 years of age
- the allowance is for board and lodging for;participants or members;that have to live away from their ordinary place of residence
- the allowance is not attributable to any services, such as coaching, refereeing, or other services to the team or program
Do not report the excluded income on a T4;slip.
The Tax Implications Of Employer
Does your employer provide you with group term life insurance? If so, and if the coverage is higher than $50,000, this employee benefit may create undesirable income tax consequences for you.
The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesnt add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you. Its included in the taxable wages reported on your Form W-2 even though you never actually receive it. In other words, its phantom income.
Whats worse, the cost of group term insurance must be determined under a table prepared by the IRS even if the employers actual cost is less than the cost figured under the table. Under these determinations, the amount of taxable phantom income attributed to an older employee is often higher than the premium the employee would pay for comparable coverage under an individual term policy. This tax trap gets worse as the employee gets older and as the amount of his or her compensation increases.
Check your W-2
But keep in mind that the amount in Box 12 is already included as part of your total Wages, tips and other compensation in Box 1 of the W-2, and its the Box 1 amount thats reported on your tax return
Consider some options
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Estate Taxes And Life Insurance Payouts
People with a large life insurance death benefit used to be worried about the estate tax, Mullaney says. Thats because the limit on assets including insurance that could be passed onto heirs tax-free was much lower than it is now.
For example, in 2004, an estate tax return had to be filed for estates exceeding $1.5 million, according to the IRS. For 2020, a federal estate tax exemption covers estates up to $11.58 million. If you have a term life policy and its included in your estate, you dont have to worry about the estate tax most likely, Mullaney says.
If you have a large estate, though, Allec suggests working with a tax planning professional to discuss tax minimization strategies.
To keep your insurance payout out of your estate, it may be advisable to transfer your policys ownership to someone else, perhaps the beneficiary, Allec says. Another strategy is to transfer the ownership of your life insurance policy to an irrevocable life insurance trust, where the proceeds of a life insurance policy may be insulated from estate taxes, subject to certain requirements. Again, work with a tax planning professional to see what may suit your specific situation.
Situations Where Life Insurance Is Taxable
As I mentioned above, for the most part, life insurance proceeds are delivered to beneficiaries tax free. BUT its important to take note that this is not always the case.
If you use your cash value creatively the taxman may still come knocking. So lets take a look at the most common ways cash value becomes taxable.
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Airline Passes For Employees And Retirees Of An Airline Company
If you provide standby airline passes to a current airline employee for their personal travel, there is no taxable benefit for the employee.
If you provide space-confirmed airline passes to;a current airline;employee;for personal travel, the passes are;a taxable benefit. The value of the benefit to be included in the employees income is the fair market value of the pass , less any amount paid by the employee.
If you;provide;standby or space-confirmed;airline passes to a;retired airline employee for their personal travel, there is no taxable benefit for the retired employee.
Dividends From The Insurance Company
Whole life insurance is a robust, permanent type of insurance that doesnt simply vanish once a time frame is over unlike the basic term life insurance that many people buy and your cash value can help create a significant asset. Interest and dividend payments from the insurance company can build up your cash value . Another factor is taxes. In general, the “interest build-up” portion of the annual increase in the policy’s cash value is not taxed annually by the IRS.6
Dividends those payments the insurance company may make to your account depending on their profits that year are also generally not taxable. This depends on which stage the cash value has reached, an aspect of the policy that should be talked about with your financial representative and a tax advisor as it can get complicated.
Another feature of life insurance is that the money your beneficiaries receive after youre gone isnt subject to income taxes, although they may be subject to federal estate taxation.7 State inheritance taxes and federal gift taxes may also apply to life insurance policies and proceeds under specific circumstances. Consult your tax advisor with questions about income, estate, and gift tax consequences.
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Using Life Insurance In Your Estate Plan
Life insurance can play a vital role in estate planning. It is important to coordinate all aspects of life insurance with your overall estate plan. Carefully analyze all factors before purchasing life insurance. Depending on family and farm circumstance term life insurance might be more appropriate than whole life insurance and vice versa. Continue to evaluate your life insurance as family, estate and business needs change throughout your lifetime.
Caution: This publication is offered as educational information. It does not offer legal advice. If you have questions on this information, contact an attorney.
Gary Hachfeld, former Extension educator; David Bau, Extension educator and C. Robert Holcomb, Extension educator
Reviewed in 2018
Who Benefits From A Life Insurance Policy In The Uk
Someone who receives a life insurance payout is known as a beneficiary. Beneficiaries are named on an insurance policy as the people who will benefit from any payout if a claim is made on a life insurance policy in the UK, and the claim is accepted and paid out.
People take out life insurance protection to ensure that their family or dependants have a cash payout should they no longer be around.
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Do You Give Your Employee A Benefit An Allowance Or An Expense Reimbursement
Your employee;has received a benefit if you pay for or give something that is personal in nature:
- directly to your employee
- to a person who does not deal at arms length with the employee
A benefit is a good or service you give, or arrange for a third party to give, to your employee such as free use of property that you own. A benefit includes an allowance or a reimbursement of an employees personal expense.
An allowance or an advance is any periodic or lump sum;amount that you pay to your employee on top of salary or wages, to help the employee pay for certain anticipated expenses without having them support the expenses. An allowance or advance is:
- usually an arbitrary amount that is predetermined without using the actual cost
- usually for a specific purpose
- used as the employee chooses, since the employee does not provide receipts
An allowance;can be calculated based on distance, time or something else, such as a;motor vehicle allowance using the distance driven or a meal allowance using the type and number of meals per day.
A reimbursement is an amount you pay to your employee to repay expenses they incurred while carrying out the duties of employment. The employee has to keep proper records ;to support the expenses and give them to;you.
If You Need Term Life Insurance
Now that you know more about the tax implications of life insurance proceeds, you might have interest taking the next step and purchasing a policy for yourself or your loved ones.; In recent years, shopping for life insurance has migrated online for many low-cost policies, often negating the need for speaking to an agent/salesperson to get a quote.;
Because many companies operate in this online space, we have curated a list of top online companies that sell life insurance to save you time and effort in your search for the best quotes.; To make this list, the companies included must make shopping for life insurance easy by keeping the process online and quick.
And remember, getting a quote doesnt cost you anything! Check out our list below!
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Accelerated Death Benefits And Terminal Or Chronic Illness
You may be able to arrange with your insurance provider if you are chronically or terminally ill and need to access your benefits now. The acceleration of life insurance policies do not create taxable income.
If you terminate your policy for any other reason, such as financial hardship or you need startup funds for a business, then the income in excess of premiums paid is taxed.
Are Life Insurance Payouts Subject To Estate Tax
Like the name says, estate tax can apply to an individuals estate, which the IRS considers to be everything a person owns or has an interest in when they die.
Based on that definition, life insurance proceeds paid out to a beneficiary dont count as part of their estate because that money doesnt belong to the insured. It belongs to their beneficiaries after the insured person passes away.
But if the policy pays the death benefit to the covered persons estate, rather than a beneficiary, its possible that the amount could be subject to estate tax.
Large estates worth $11.58 million or more can be subject to federal estate taxes. But few estates are that large. In 2018, just 0.19% of estates were subject to federal estate tax, according to a Tax Policy Center analysis of federal data.
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