Guide to Universal Shareholder Agreement by ypo14389


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									                        Advisor Guide

The BMO Insurance Corporate

Insured Retirement Plan
  Because successful
  businesses need
  security and income
Table of Contents

Introduction to The BMO Insurance
Corporate Insured Retirement Plan                2

The Opportunity                                  3

The Solution                                     4

Tax Considerations                               6

Case Study                                       8

Underwriting and Administration Considerations    9

A Quiz on The BMO Insurance
Corporate Insured Retirement Plan                10
Introduction to The BMO Insurance
Corporate Insured Retirement Plan

Universal life insurance (UL) is a flexible planning tool that contains both insurance and investment elements. Due
to this flexibility, UL can be structured to fit many different financial planning objectives. In particular, there are
several opportunities using The BMO Insurance Corporate Insured Retirement Plan that you may want to consider for
your business owner clients who require permanent insurance as well as a tax effective way to access cash.

With this plan, business owners can get the insurance they require, in addition to benefiting from the following:
        • Tax-deferred growth of deposits (net of charges) into the plan
        • A conversion of corporate taxable surplus into non-taxable surplus*
        • A reduction in future taxable income since assets are transferred into a life insurance policy with
            tax-deferred accumulation
        • Access to a source of tax-free income via a third party line of credit (or other loan)
        • An effective way of paying-off the loan through the tax-free proceeds of the UL policy

This combination, when structured properly, can create a powerful financial planning tool.

To help support your understanding of the mechanics of the Corporate Insured Retirement Plan, we encourage you to
read this Guide and use the latest version of our Wave illustration software to help you prepare personalized proposals
for your clients.

Once you have had a chance to familiarize yourself with the concepts presented, test yourself on the mechanics by
taking the short quiz at the end of this guide!

Note: The ideas presented in this guide should be reviewed for suitability to individual circumstances. The information contained in this guide is general in
nature and should not be construed as legal or tax advice. You and your clients are encouraged to seek the advice of other professionals such as legal and
tax experts to ensure that the ideas presented are appropriate for the circumstances of the individual(s) for whom this plan is being considered.
* Certain limits apply to the tax-exempt growth within the policy. Refer to an illustration for a projection of these amounts.                                  2
The Opportunity

While most business owners realize the benefits of corporate-owned insurance, many don’t realize that flexible life
insurance products such as UL can provide them with the protection they need as well as a source of cash for business

Your clients may be business owners who require insurance to:
      • Fund a buy-sell agreement between partners of the company.
      • Cover the loss of a key employee such as an individual with a special skill.
      • Secure a loan that will only be granted if there is life insurance on the business owner.
      • Fund a capital gains liability that results from the distribution of a shareholder’s interest in the company to
        his/her designated beneficiaries.

Once the policy is funded and accumulates a significant Cash Value, your clients may then decide to pledge the
Cash Value as collateral for a line of credit (or other loan) from a third party lender which will allow them to do
one or several of the following:
      • Seek out new business opportunities.
      • Expand their businesses or pay for other operational expenses.
      • Provide a source of supplemental retirement income for key employees.
      • Access a source of cash for emergencies.

Implementing insurance solutions such as the Corporate Insured Retirement Plan can be complex. So, it is always
wise to consult with a team of experts to ensure that your proposal meets the financial objectives of your client
and that all of the benefits and risks of the plan are considered. Oftentimes, this team will include you (the insurance
expert) as well as other legal, tax, banking and accounting professionals. Therefore, building strong working
relationships with experts in each of these fields of practice is important when implementing such ideas.

Target Market
Ideally, the Corporate Insured Retirement Plan is suited to clients with the following profile:
      • Small business owners of privately controlled Canadian corporations who require and are able to qualify for
        life insurance protection.
      • Business owners who are able to pay for the insurance coverage and who would like to transfer some of their
        corporate surplus into a UL policy to benefit from tax-deferred investment growth.
      • Business owners who are looking for a source of cash to distribute to shareholders of the company in a tax
        effective manner OR who need access to cash for other business reasons.
      • Business owners who will qualify for third party loans and are able to manage these loans as part of their
        business operations.

The Solution

The Universal Life Solution
You may wish to use the following as a guideline to implementing the Corporate Insured Retirement Plan. Depending on
your client’s profile, additional steps may be required and could involve the expertise of other professionals such as those
described in this guide.

   Step 1      Determine the amount of permanent business insurance your clients need, based on their corporate

   Step 2      Work with your clients to determine what portion and how quickly their taxable corporate surplus
               should be transferred into the policy.

   Step 3      Your client then applies for a UL policy from BMO Insurance and selects an investment portfolio within
               the policy that suits their long-term objectives and risk tolerance.

   Step 4      Once the policy has accumulated a significant Cash Value, the corporation or shareholder may apply for
               a line of credit from a third party lender using the policy as collateral. Please note that the structure and
               tax consequences will vary depending on which option is selected (see Tax Considerations below).

   Step 5      Once the policy is in force, check on a regular basis to determine whether the accumulation in the
               plan continues to meet your client’s original objectives. Adjust the plan, if necessary.

   Step 6      Depending on the arrangement with the lender, the interest and principal balance of the loan may be
               capitalized. Alternately, your client may wish to pay the interest on the loan.

   Step 7      At death, the loan is repaid by the company from the tax-free Death Benefit proceeds of the policy
               or by the shareholder’s estate through amounts received from the corporation via tax-free dividends
               (see Tax Considerations below).

Please note that the process to pay-off the loan differs, depending on whether the corporation or shareholder/business
owner does the borrowing. There could be serious tax consequences if this process is not implemented correctly
(see Tax Considerations below). To ensure that the proper steps are followed you and your clients should consult with
legal, tax, banking and accounting professionals.

The Solution

The Results
By using the ideas of The BMO Insurance Corporate Insured Retirement Plan, your clients will benefit from the following*:

                     From the insurance policy                                       From the third party line of credit/loan

    The corporation is protected with the valuable                              The Cash Value of the policy is used as collateral for a
    insurance protection that it needs.                                         loan, usually in the form of a line of credit that can
                                                                                provide a source of supplemental tax-free income for
                                                                                the corporation.

    Deposits into the policy grow on a tax-deferred                             Depending on the agreement with the lender, the
    basis (up to the maximum allowed under the Income                           principal and interest payments may be capitalized.
    Tax Act), reducing your client’s corporate tax bill.                        Therefore, no payment of the loan is due until death,
                                                                                at which time it is paid using the tax-free proceeds
                                                                                of the Death Benefit.

    The Death Benefit is paid to the corporation                                The interest expense, if paid, may be a deductible
    tax-free and creates a credit to the Capital Dividend                       expense for the corporation if the proceeds of the loan
    Account for the amount in excess of the Adjusted                            are invested to earn income. However, you should
    Cost Basis of the policy.                                                   consult with your team of professionals to ensure that
                                                                                this is feasible for your client’s specific situation as well
                                                                                as what amount can be deducted.

Is the Corporate Insured Retirement Plan Right for Your Clients?
When considering whether to suggest The BMO Insurance Corporate Insured Retirement Plan to any of your clients, you
may want to run through the following checklist to determine if the plan is appropriate for their individual needs:
        • Is your client a business owner that requires permanent insurance to protect his/her business?
        • Will the proposed lives insured qualify for insurance?
        • Would he/she like to transfer taxable corporate surplus into a tax-deferred investment vehicle?
        • Does he/she want to lower the company’s corporate tax bill?
        • Does the corporation require a tax effective source of income?
        • Is your client comfortable with carrying debt?

If your client answers "yes" to these questions, then The BMO Insurance Corporate Insured Retirement Plan may be an
ideal solution for them.

* Based on Rules and Regulations in effect at the time of writing this Guide.                                                                   5
Tax Considerations

Structuring Third Party Lending Arrangements for the Business Owner
Structuring the bank loan appropriately is crucial to the successful implementation of the Corporate Insured Retirement
Plan. Either the corporation or the shareholder/business owner may borrow funds using the policy as collateral.
However, you should note the following:

 If the corporation does the borrowing               If the shareholder/business owner does the borrowing

  The policy is assigned as collateral to the   The shareholder uses the corporate policy as collateral and receives the
  third party lender and as a result, the       proceeds of the loans personally. Upon his/her death, the Death Benefit
  loans are advanced to the corporation.        would first have to be paid to the corporation then be distributed to the
  Payments may then be made to the              shareholder’s estate via tax-free dividends created by the company’s
  shareholder either through dividends          Capital Dividend Account credit. Once received, the shareholder’s estate
  or a bonus/salary.                            would pay off the outstanding loan using the dividend payment and any
  Upon death of the insured, since the          residual amount would be added to the value of the shareholder’s estate.
  corporation is the beneficiary of the         While the shareholder is alive, he/she may be deemed to incur a taxable
  policy, the life insurance benefit is         benefit if the borrowing is done personally. To minimize this concern,
  used to retire the principal and interest     the shareholder may consider paying a guarantee fee to the corporation.
  outstanding on the loan. Any residual         This fee could be calculated using several methods such as determining
  amount is paid to the corporation             the difference in interest rates that would be charged using the policy
  tax-free.                                     as collateral versus using personal assets OR determining what the
  The amount of the Death Benefit in            corporation or lender would charge the shareholder to secure the loan
  excess of the policy’s Adjusted Cost          (using assets other than the policy).
  Basis creates a Capital Dividend Account      When the shareholder dies, his/her estate may be deemed to incur a
  credit. As a result, the company can          taxable benefit if the corporation pays off the loan instead of having it
  elect to pay up to this amount as a           paid off by the shareholder’s estate. As a result, the process to pay off
  tax-free dividend to the shareholder’s        the loan using this option is more complex. You should therefore consult
  estate.                                       with your team of professionals to determine if a taxable benefit would
                                                be assessed and to ensure that when the loan is paid off, it is done so
                                                correctly so as to minimize any unforeseen tax consequences.
                                                The two options should be analyzed for the specific circumstances of your
                                                client; each option will have its advantages and disadvantages. The option
                                                selected should be made based on the facts of the case in question.

Interest Expense Deduction
If the interest on the loan is paid while the shareholder is alive and the proceeds of the loan are invested to earn income,
the expense may be deducted from the borrower’s taxable income. The ability to deduct interest expense on a loan has
been recently scrutinized by Canada Revenue Agency. Your client’s legal, tax and accounting advisors should determine
whether this is feasible for his/her individual circumstance.

Tax Considerations

Retirement Compensation Arrangements
If the proceeds of the loan are used to supplement a shareholder’s retirement income, the amounts advanced could
be considered to fall under a Retirement Compensation Arrangement (RCA). Under the rules of an RCA, if there is a
legal obligation for an employer to provide post-retirement benefits to an employee, a refundable tax must be paid
to Canada Revenue Agency (CRA). If the Corporate Insured Retirement Plan is set-up to provide such benefits, this tax
would need to be paid on the amounts deposited into the UL policy which would therefore affect the amounts that
could be borrowed.

Taxation of Bank Loans
General Anti-Avoidance Rules (GAAR) prohibit financial transactions that are generated solely for the purpose of
creating tax benefits. Using the Corporate Insured Retirement Plan and the current interpretation of the Canadian
Income Tax Act, the income from a bank loan is considered tax-free to the recipient. However, CRA could apply GAAR
rules to the third party loan and consider the amount to be a policy loan. This result would mean that a portion (or all)
of the loan amount would be taxed as income. Your clients should be aware that this risk exists, but also that the
Agency accepts the fact that taxpayers should be allowed to structure their affairs in an efficient manner.

In addition, it is important when proposing The BMO Insurance Corporate Insured Retirement Plan to your clients that
the life insurance established be a key requirement for your clients.

The Value of a Universal Life Policy
in a Corporation                                                Other Considerations
The Cash Value of a life insurance policy is considered to be   When proposing the Corporate Insured Retirement Plan,
a passive asset within the corporation. Your clients should     you and your clients should consider the following:
therefore be aware of the following:                            Be conservative with the projected values on the illustration
  • If more than 50% of the corporation’s assets are            you present to your clients. If your client outlives your
    passive assets, the corporation may not qualify for         projection, additional collateral security may be required to
    the small business deduction limit.                         continue to capitalize the loan or the policy may have to
  • Also, if more than 10% of a corporation’s total assets      be surrendered for its Cash Value. This latter option would
    are passive (instead of active), the corporation may        mean a taxable disposition and tax would need to be paid.
    not qualify for the $500,000 capital gains exemption        The growth of the Cash Value is independent of the
    at the time of disposition of the UL policy (such as at     accumulated balance of the loan and the interest rate
    the time of death).                                         charged on the loan is negotiated between your client

For a more complete understanding of these issues, it is        and his/her lender. The lending institution advancing the

wise for you and your clients to seek out the advice of a       loans will monitor the policy’s Cash Value to ensure that

tax professional.                                               it is sufficient to pay-off the outstanding loan balance,
                                                                but you should also check to make sure that your client’s
                                                                objectives are still on track. In force illustrations may be
                                                                a good tool to monitor this progress.

Case Study

Client Details:
        • Andy is 45 years old and is a business owner of AndyCo
        • Working with you, he realizes that his corporation needs permanent insurance protection on his life
        • Andy has $250,000 of surplus cash flow in his company that is currently being taxed at 45% and needs
          a more tax effective method of investing this money
        • He also needs a source of funds to access to supplement his retirement income

Solution: The BMO Insurance Corporate Insured Retirement Plan
        • Insured life: Andy
                                                                              • Planned deposits: $25,000 for 10 years
        • Owner of policy: AndyCo
                                                                              • Projected values illustrated at:
        • Beneficiary: AndyCo
                                                                                  – 6% net return in Indexed Accounts in the UL policy
        • Death Benefit option: Sum Insured
                                                                                  – 8% net return before-tax on an Alternative Investment
          with maximizer
        • Cost of insurance option: YRT 100                                       – 8% annual interest expense on a third party line of credit
                                                                                    with policy assigned as collateral by AndyCo
                                                                                  – Andy's personal tax rate: 40% on income, 35% on dividends

                                        Comparison of Values
           Alternative Investment vs. The BMO Insurance Corporate Insured Retirement Plan
                                                                        Corporate Insured Retirement Plan                                Alternative Investment
                                                                             (projected at a 6% net                                  (Balanced Fund projected at an
                                                                              annual rate of return)                                 8% net annual rate of return)^
   Annual Deposits                                                                 $25,000 for 10 years                                       $25,000 for 10 years
   After-tax income                                                                    $33,793                                                     $33,793
   (from age 65 to age 85)                                                (includes annual bank loans and                                   (assumes withdrawals
                                                                                corporate tax savings)                                          from the fund)
   Estate Value at age 85                                                                  $2,322,617                                                 $618,675
   Accumulated bank loan at age 85                                                         $1,703,942                                                       $0
   After-tax Estate Value (net of bank loan)                                                $618,675                                                  $215,420

The Result:
        • If the income from the loans is paid as a dividend, Andy would have $33,793 (after-tax) to supplement his
          retirement income from age 65 to 85.
        • At age 85, there would still be $618,675 left to his estate even after the outstanding balance of the loan is paid-off.
        • With the alternative investment, if the same deposits are made and the same after-tax income withdrawn, there
          would be only $215,420 left to his estate.

NB: These examples are based on Life Dimensions (wave 19.0) policy and are merely a projection of future results, using a set of assumptions that will change over time. Actual
results are not guaranteed and will vary. This projection is not complete unless it is accompanied by all of the pages of a Life Dimensions projection from the Wave illustration software.
^Assuming a Balanced Fund that has the following income: 50% interest, 30% dividends, 10% unrealized capital gains and 10% realized capital gains.                                            8
Underwriting and
Administration Considerations

When proposing the Corporate Insured Retirement Plan, you should consider the following:

    • Check to ensure that the amount of insurance you are proposing on any life is reasonable and justifiable;
      this amount will need to be approved by a BMO Insurance underwriter.

    • Refer to BMO Life Assurance Company’s Universal Life Underwriting Guidelines found under the Underwriting
      Guidelines menu of our Wave software for details on age, amount and financial underwriting requirements.

    • Run a personalized illustration for your client, using the latest version of the Wave illustration software and
      include a signed copy with the application.

    • To ensure that the underwriter reviewing the application for insurance understands the purpose of the
      insurance, include a covering letter with a summary of what is being proposed.

A Quiz on
The Corporate Insured Retirement Plan

             When proposing the Corporate Insured                         Which of the following are true about loans
Q1           Retirement Plan, which of the following
             could be considered as part of the plan?
                                                                  Q4      obtained using the Corporate Insured
                                                                          Retirement Plan?

     i. Key person insurance on the life of a key employee        i. There are two methods of obtaining a third party
     ii. Life insurance to help fund a buy-sell arrangement          loan: either the shareholder or the corporation
         between two partners                                        borrows

     iii. Insurance to protect the shareholder’s family against   ii. The structure of the borrowing arrangement
          the death of minor children                                 depends on both the shareholder’s as well as
                                                                      the corporation’s financial objectives
         a) i and ii only          d) None of the above
                                                                  iii. When retiring the loan in the case that the
         b) ii and iii only        e) All of the above                 shareholder borrows, it is more tax effective to have
         c) i and iii only                                             the corporation pay the loan first and then distribute
                                                                       the net proceeds to the shareholder’s estate
             When presenting the Corporate Insured                   a) i and ii only         d) None of the above
Q2           Retirement Plan what are some of the risks
             that should be discussed with your client?
                                                                     b) ii and iii only       e) All of the above
                                                                     c) i and iii only
     i. The spread between the interest earned on the
        policy versus the interest rate charged on the bank               When structured properly, what are some of
        loan could affect how much can be borrowed
     ii. The possibility (and consequences) of the insured
                                                                  Q5      the benefits of the Corporate Insured
                                                                          Retirement Plan?
         outliving the projected values (i.e. the illustration)
                                                                  i. Tax-deferred growth of deposits (net of charges)
         could mean that additional security would need to
                                                                     into the plan
         be pledged for the loan
                                                                  ii. Access to a source of tax-free income via a third
     iii. The interest expense may not qualify as a deductible
                                                                      party line of credit (or other loan)
          expense for the purposes of “borrowing to invest”
                                                                  iii. An effective way of paying-off the loan directly (or
         a) i and ii only          d) None of the above                indirectly) from the tax-free proceeds of the UL policy
         b) ii and iii only        e) All of the above               a) i only                d) None of the above
         c) i and iii only                                           b) ii only               e) All of the above
                                                                     c) iii only
             The Corporate Insured Retirement Plan
Q3           should include a promise to pay
                                                                          Regardless of where the proceeds of the
             post-retirement benefits to an employee
             to ensure that it is not considered a                Q6      loan are invested, the interest expense on
                                                                          the loan can be deducted from the company’s
             Retirement Compensation Arrangement.
                                                                          taxable income as long as the interest is paid
                                                                          every year.
         a) True                   b) False

                                                                     a) True                  b) False

Answers 1 a, 2 e, 3 b, 4 a, 5 e, 6 b
           To find out more about BMO Insurance products, please call your MGA, contact the BMO Insurance
           regional sales office in your area, call 1-877-742-5244 or visit
                Ontario Region                                 Quebec – Atlantic Region                        Western Region
                1-800-608-7303                                 1-866-217-0514                                  1-877-877-1272

BMO Life Assurance Company
60 Yonge Street, Toronto, ON, Canada M5E 1H5

For Advisor Use Only.
Information contained in this document is for illustrative purposes and is subject to change without notice.
Refer to an up-to-date policy illustration for this plan for a current statement of benefits.
Insurer: BMO Life Assurance Company.
  Registered trade-mark of Bank of Montreal, used under licence.                                                                333E (2009/06/01)

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