Death and taxes are certain – but this tax is avoidable
Section 115 of the Ontario Insurance Act is a hidden tax on seniors
We begrudgingly accept that there are “hidden taxes” in the price we pay for things like gasoline and liquor, but at least we know it’s there. And we get some benefit – we get to drive and drink (as opposed to drink and drive). But the tax I am referring to is one that few people know about and it’s not even considered a tax. But it is. On seniors. And seniors get absolutely no benefit from it.
Tax (noun): a compulsory financial contribution imposed by a government or other institution to raise revenue, levied on the income or property of persons or organizations, or on the production costs or sales prices of goods and services.
What you own is yours
Millions of us have assets: perhaps a house, a savings account, a GIC, RRSP, life insurance policy. In most cases the value of our assets appreciate over time and, of course, we have the right to sell or divest of that asset in a free market system, any time we want. And depending on the tax laws, sometimes we are taxed on the proceeds and sometimes we are not. Whether we agree with the taxes or not that’s the way it works and we are aware that we live in an insatiable tax system.
At least we get some benefits from the taxes we pay, even the hidden version, but very few are aware of the detrimental impact of the Ontario Insurance Act, Section 115 nor that the only financial benefit it provides is to insurance companies.
Ontario Insurance Act/Section 115: A compulsory financial contribution imposed by government and life insurance companies
It’s simple. Section 115 prevents owners of life insurance policies from receiving the fair market value for their asset, if they choose to divest their interests in it prior to death. And receiving less than fair market value due to a government restriction is, by definition, “a tax on income and property.” More egregious is the fact that the compulsory reduced value in the asset becomes revenue, not in taxes to the government to fund social programs but to the insurance companies bottom line. It amounts to billions of dollars every year being in insurance companies’ bank accounts rather than seniors’ bank accounts.
The owner of a life insurance policy is restricted by law and must take the “cash surrender value” rather than accessing the fair market value for their policy. On average, the amount they receive in cash surrender value is less than 25% of what they could get in the open market. That is a punitive tax – “a compulsory financial contribution … levied on property,” which is used “to raise the revenue” of insurance companies.
It’s a simple question and any good insurance broker or financial planner can answer it with any number of good reasons. But if the client needs money now, before they die, advisors have only one answer: Take the cash surrender value in your policy, if there is any – even though it’s significantly less than you could get through a life settlement in a well-regulated secondary market. Sorry, you’ll have to wait until you die.
This misappropriation of policy owner rights and their access to the fair market value has been buried in bureaucracy and the fine print of the Ontario Insurance Act for decades. Unfortunately, the same type of regulations are currently being written into Saskatchewan’s new Bill 177 (see previous blog below: Deja vu all over again), which will set seniors’ financial situation back decades.
Jim Hall, senior crown counsel for Saskatchewan Financial and Consumer Affairs Authority (FCAA), under the guise of “consumer protection” – which is the red herring insurers role out to obfuscate the real financial problem for seniors – has said, “Unless there is some National initiative that brings together all the jurisdictions…….” What? That’s nothing but spin in support of delay and confusion, which, of course, favours insurance companies. Insurance acts are regulated by the provinces and any suggestion of a “national initiative” is blatant support for years of delay – to the detriment of seniors. Besides, everyone is for regulations, it’s a matter of creating and implementing them, not just using their absence as fear-mongering.
Until such regulations are removed or replaced by a new bill, seniors must live with the inevitability of this counterproductive tax. Unless, of course, they demand that their MPP or MLA insist on changing the offending regulation, thereby, eliminating what amounts to an tax on seniors and the system, while topping up the insurance companies’ coffers by a few extra billion.
With one stroke of a government pen and this tax can be eliminated.