Insurance Business Policy

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					  Hot Business
Insurance Ideas

          Kevin Wark, LLB, CFP




         CIFPS National
         Annual Conference
Something Old, Something New,
   Something Borrowed…
#1 Shared Ownership/
    Split Beneficiary

   Both concepts involve splitting costs
    and benefits of a permanent insurance
    policy between two parties
   Can provide lower cost insurance to
    one party and enhanced investment
    returns to the other party
   Possible applications include buy-sell,
    key person and collateral insurance
#1 Shared Ownership/
    Split Beneficiary

Removes CSV of Policy from
 operating company

   Capital gains exemption
   Sale of Opco
   NCPI allocations and CDA
    maximization
   Creditor protection
1. Shared Ownership

   Operating company is owner and
    beneficiary of face amount of universal
    life policy
   Shareholder (individual or Holdco) is
    owner and beneficiary of cash surrender
    value
   Rights and obligations set out in split
    dollar agreement
   Issues with shareholder benefits and tax
    arising on future disposition of the policy
#1 Split Beneficiary

    Usually arranged between Holdco and
     Opco
    Holdco is owner - names itself and Opco
     as beneficiaries in agreed upon
     proportions
    Holdco receives tax free dividends from
     Opco to pay its portion of the premium
    Opco has no ACB so larger CDA credit
    Less complex than shared ownership as
     don’t have disposition if Opco is sold or
     beneficiary is changed in the future
#2 RCAs

   Non-registered supplementary pension
    plan
   Designed for executives and
    shareholders of private corps earning
    more than $100,000 pa
   Contributions subject to 50%
    refundable tax and deductible to
    employer
   Earnings subject to 50% refundable tax
   Tax refunded when payments
    made out of the plan and taxed to
    plan member
#2 RCAs

Benefits of RCAs:
 Creditor protection
 Ensures funding in place to pay
  future benefits
 No current tax to plan beneficiaries


But not tax efficient vehicles unless…
#2 RCAs

You use an exempt life insurance
  policy as a investment in the plan.

   Avoids payment of second level of tax on
    plan earnings.

   BUT the death benefit becomes taxable
    when distributed.
#2 RCAs

   Can avoid the death benefit being
    taxable by structuring as a “shared
    ownership” arrangement
   Employer or employee owns the
    death benefit and funds this cost
   RCA owns the cash surrender
    value and funds this through
    employer contributions
#3 Collateral Insurance

 Deduction for premiums equal to NCPI
 if following conditions are met:

    Policy is assigned to a “restricted
     financial institution”
    Assignment is required as
     collateral for a loan
    Interest payable on the loan must
     be deductible for tax purposes
#3 Collateral Insurance

    Deduction is available for any type of life
     insurance policy (not just term)
    Size of policy must reasonably relate to
     the amount owing by the taxpayer
    Taxpayer claiming the deduction must
     also own the policy
    Premium must actually be paid in the
     year
#3 Collateral Insurance

Planning Opportunity:
 Bob is shareholder in a successful
  private corporation (Bobco)
 In past 4 years Bob has received
  additional bonuses totalling $600,000
  (to reduce corporate income to
  $200,000)
 Bob has lent after-tax amount
  of $300,000 back to Bobco
#3 Collateral Insurance

    Bobco borrows $300,000 from bank and
     repays Bob
    Bobco purchases a life insurance policy for
     $300,000 and collaterally assigns to the
     bank
    Bob can invest in policy on “shared
     ownership” basis
    Bobco can deduct NCPI in respect to policy
    If Bob dies prematurely the
     bank loan is repaid and
     his estate can withdraw
     $300,000 tax-free from Bobco
#4 Charitable Gifting

    Shareholders in a private corporation
     have choice of making charitable
     donation personally or by using corporate
     funds
    There may be significant advantages to
     structuring the gift through the
     corporation
    Donation by individual is a credit,
     donation by a corporation is a
     deduction
#4 Charitable Gifting - Example

      Joe Dambro is the sole shareholder of
       Dambro Construction
      Joe went through crystallization -
       $500,000 in preference shares with full
       ACB
      Joe is owed $200,000 by company
      Joe in 50% tax bracket, company at 45%
       tax rate for earnings over $200,000
      Joe wants to make $100,000 charitable
       gift
#4 Charitable Gifting

 Gift of Insurance
    Dambro Construction could be the
     owner/beneficiary of a $100,000 policy on
     Joe’s life
    On Joe’s death the insurance proceeds
     would be gifted to charity by the company

 Note - it is not possible for Dambro Construction to
 designate charity as beneficiary and claim as a
 deduction
#4 Charitable Gifting

 Gift of Insurance
  Premiums not deductible - slight
   advantage to company paying premiums
  Dambro Construction can deduct gift of
   $100,000 - $45,000 in tax benefits
  Death benefit creates $100,000 capital
   dividend account - can be paid out tax
   free to Joe’s estate
#4 Charitable Gifting

 Preference Shares
  Joe could gift $100,000 in preference
   shares to charity other than a private
   foundation
  Dambro Construction would purchase
   $100,000 of insurance on Joe’s life
  On Joe’s death the insurance policy
   would redeem preference shares owned
   by charity
#4 Charitable Gifting

 Preference Shares
    Joe realizes full benefit of charitable
     credit ($50,000) as no gain resulting from
     gift of preference shares
    Charity receives dividends on shares
     while Joe is alive, and $100,000 on his
     death
    Insurance proceeds create capital
     dividend account - can pay tax-free
     dividends
#4 Charitable Gifting

 Shareholder Loan
  Dambro Construction would borrow
   $100,000 to repay part of shareholder
   loan
  Joe would gift $100,000 to charity (can be
   a private foundation)
  Dambro would purchase $100,000
   insurance on Joe’s life - could be
   assigned to repay new loan
#4 Charitable Gifting

 Shareholder Loan
  Portion of premiums could be deductible
   as collateral insurance
  Joe can claim charitable credit of
   $100,000 ($50,000 tax savings)
  Loan is repaid on death with insurance
  Insurance proceeds would create credit
   to capital dividend account
#5 Corporate Back to Back

Objectives
 Increase investment yield and cash
  flow
 Increase estate by reducing taxes
 Facilitate distribution of corporate
  assets on tax-effective basis
#5 Corporate Back to Back

   Typical client is 65+ and shareholder in
    private company with large accrued
    capital gain and taxable investments
   Company purchases T100 or min pay
    UL100 (no CSV) on shareholder’s life -
    company is owner and beneficiary
   Company liquidates investments and
    borrows funds to replace investments
#5 Corporate Back to Back

   Corporation purchases a non-
    prescribed annuity on
    shareholder’s life with a zero
    guarantee period
   Annuity payments sufficient to fund
    insurance premiums and after-tax
    cost of interest payments
   Death benefit repays loan to bank
#5 Corporate Back to Back

Tax consequences during lifetime
 Annuity is non-prescribed and
  taxed more highly in early years
 Interest expense deductible
  (subject to October 2003 REOP
  proposals)
 NCPI deductible
#5 Corporate Back to Back

Tax Consequences on Death
 Company shares deemed to be disposed
  of at fair market value - insurance and
  annuity have no value for these purposes
 Company value also reduced by bank
  liability
 CDA credit generally equal to death
  benefit that can be flowed out tax-free to
  estate
#5 Corporate Back to Back

Risks
 liquidation of corporate assets may have
  tax consequences and/or penalties for
  early termination of contracts
 interest rate fluctuations
 Lack of flexibility - no commuted value
 different insurers recommended
#5 Corporate Back to Back

Risks - “GAAR”
 could the CCRA treat this as one
  non-exempt life insurance policy?
 has fair market value of corporation
  really been reduced?
 is interest deductibility really
  appropriate? (Singleton case supports
  deductibility but must now consider
  October 2003 REOP proposals)
#5 Corporate Back to Back

Risks
 May 2002 - CCRA provided verbal
  interpretation regarding taxation of
  annuity contract under Regulation 301
 adversely affects calculation of income
  earned by annuity contract
 issue appears to arise through drafting
  error - correction being sought by
  insurance industry
#6 Leveraging

   Corporation owns policy on key
    shareholder and max funds the
    policy
   On retirement shareholder borrows
    for personal purposes
   Corporation guarantees loan and
    uses insurance policy as security
#6 Leveraging

   1% guarantee fee recommended
   Loan interest is capitalized
   Insurance proceeds paid through
    capital dividend account and used
    to retire loan including capitalized
    interest
   Excess insurance proceeds for
    estate purposes
#6 Leveraging

Tax Consequences
 Policy accumulations tax-free in
  corporation
 Assignment of policy as collateral not a
  taxable disposition
 Loan payments to shareholder tax-free
 Taxable benefit minimized by guarantee
  fee
#6 Leveraging

Tax Consequences
 Interest deductible if loan is for
  business or investment purposes
  (subject to October 2003 REOP
  proposals)
 Insurance proceeds through CDA
  tax-free
#6 Leveraging

   Risks
    Arrangement being treated as an
     RCA
    Taxable benefit from corporation
     guaranteeing shareholder loan
    Creditors of corporation
    Sale of business
    Impact on capital gains exemption
#7 “10/8” Programs

   Target market – business owners
    and high net worth individuals aged
    40-60
   Designed to reduce costs of
    permanent insurance protection
   Provides access to cash values for
    investment purposes
#7 “10/8” Programs

Overview of Program
 UL policy with special policy loan
  provision at 10%
 Collateral loan account earning 8%
 Guaranteed “spread” and/or
  rates in the policy
#7 “10/8” Programs

   Interest on policy loan deductible
    (subject to October 2003 REOP
    proposals)
   Investment return in UL policy is tax
    deferred and on death converted to
    tax-free death benefit
   Net return is positive due to interest
    spreads and deductibility
#7 “10/8” Programs

Example
 Client in 46% tax bracket borrows
  $10,000 from UL policy at 10%
 After-tax cost of interest is $540
  (5.4%)
 Compares with after-tax interest
  earned of 8% (positive spread of
  2.6%)
#7 “10/8” Programs

The Problem
 Policy loan is a disposition for tax
  purposes
 Amount of loan – ACB = taxable
  income
 ACB is reduced by NCPI
 Cannot withdraw full amount of
  premiums on tax-free basis
#7 “10/8” Programs

The Solution:
 Shared ownership with private
  corporation owning the death benefit
 NCPI allocated to corporation as death
  benefit owner (larger CDA credit)
 Allows shareholder to loan out full
  premiums without taxable income
#7 “10/8 Programs

Interest deductibility essential to
  program
   Money borrowed to earn income from a
    business or property
   Must complete Form 2210 and have
    approved by insurance company to claim
    deduction
   REOP test – requires sufficient “profit” to
    utilize interest deduction over a long period
    of time
   “profit” does not include capital gains
There are Great Opportunities for
  Selling Life Insurance in the
       Corporate Market!

				
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