1. 1 Business Insurance Part 2 Insurance Concepts for Business Owners Jorge Ramos, CFP,CLU Director of Advanced Marketing A PARTNER YOU CAN TRUST.

2. > Buy Sell > Key Person > Shared Ownership > Executive Retirement Strategies > IRS > IPP > RCA Business Owner Insurance Concepts

3. 1 Business Insurance Part 1 Working with Business Owners Jorge Ramos, CFP,CLU Director of Advanced Marketing A PARTNER YOU CAN TRUST.

4. > Self Employed > Partnerships > Incorporated private business > CCPC > Publicly listed corporation > Professional Corporations Business Structures

5. > Incorporated Private business > General corporate tax rates > 26% (11% Provincial, 15% Federal) > 25% (manufacturing, farming, mining) > CCPC > 15.5% (4.5% Federal, 11% Provincial) > On first $500,000 > Publicly Traded companies > Do not qualify as CCPC Business Taxation 101

6. > First $750,000 of capital gains are tax-free > Qualified small business shares > Qualified Farm property > 50% of assets “actively” used in the business for the last 24 months > 90% of assets “actively” used in the business at time of sale > Shares owned by individual for last 24 months Capital Gains Exemption

7. > CDA = Life insurance death benefit – ACB > Life insurance death benefit > net of policy loans > not net of collateral loans > Applies to permanent and Term policies > Applies whether there is cash value or not > Notes: > ACB usually goes to zero after 20+ years, cannot be negative > CDA has to be paid out equally to all shareholders of the same class Calculating CDA

8. > ACB – Adjusted Cost Basis > Ensures that corporate money gets taxed properly in personal hands > The ACB of policy tracks the original premium paid by a company for life insurance minus the NCPI > Formula > Premiums Paid increase ACB > NCPI decreases ACB ACB

9. > NCPI – Net Cost of Pure Insurance > Net amount at risk (NAAR) for the year multiplied by the probability of death in that year, ie: similar to T1 rates > Based on 1975 Select and Ultimate mortality table > Costs for any benefits or riders removed > Removes any ratings on substandard risks NCPI

10. > Problem: > Potential death benefit shortfall created by CDA/ACB > Net death benefit may fall short of required amount > Buy-sell > Solution: > Face plus fund plus ACB > Increases face amount so that CDA paid is equal to or greater than original death benefit > Removes risk of the ACB tax grind on CDA > Removes risk of underinsuring the need CDA Tax Trap

11. 1 Advantages of Corporate Owned Life Insurance A PARTNER YOU CAN TRUST.

12. 1 Disadvantages of Corporate Owned Life Insurance A PARTNER YOU CAN TRUST.

13. Thank You Jorge Ramos, CFP, CLU Director of Advanced Marketing 416-206-7050 jorge.ramos@inalco.com

14. 1 Business Insurance Part 2 Insurance Concepts for Business Owners Jorge Ramos, CFP,CLU Director of Advanced Marketing A PARTNER YOU CAN TRUST.

15. > Buy Sell > Key Person > Shared Ownership > Executive Retirement Strategies > IRS > IPP > RCA Business Owner Insurance Concepts

16. Buy Sell

17. > Establish Value of business > Determine succession plan > Estimate succession tax issues > Recommend solutions > Resolve issues > Valuation Issues > Other Triggers Buy-Sell Advisor Role

18. > Fixed Price > Book Value > Multiple of Book Value > Capitalization of Earnings > Independent Appraisal Valuation Methods

19. > Accumulated Wealth > Borrowed Funds > Purchase over Time > Sinking Fund > Life Insurance Buy-Sell Funding Options

20. > Death > Disability > Retirement > Dissension > Bankruptcy > Marital Breakdown Buy-Sell Triggers

21. > Personally owned > Criss Cross > Corporately owned > Share Redemption > Promissory Note > Hybrid Method Common Buy Sell Arrangements

22. > Set-up > Personally owned policies > Partners own policies on each other > Premiums paid personally > Partners are each others beneficiaries > Premiums can be paid by company but treated as taxable benefit Personal Criss Cross Buy-Sell

23. ABC Inc. B50%B50% A50% Personal Criss Cross Buy-Sell A owns policy on B A pays premium on B A is beneficiary on B B owns policy on A B pays premium on A B is beneficiary on A

24. > Death of a Shareholder 1. Shares of deceased transfer to estate/heirs 2. Death benefit paid to surviving partner 3. Funds used to buy shares from deceased shareholder estate/heirs 4. Surviving partners end up with more shares Personal Criss Cross Buy-Sell

25. > Premiums paid out of after-tax personal funds or paid corporately but as a taxable benefit > Can create inequities in premium payments > Complicated if more than 2 partners Personal Criss Cross Disadvantages

26. Personal Criss Cross with 5 partners 4 policies8 policies 20 policies

27. > Set-up > Company buys insurance on partners lives > Company pays for premiums > Company is beneficiary of all policies Corporate Share Redemption Buy-Sell

28. Death of a Shareholder 1. Shares of deceased transfer to estate/heirs 2. Death benefit paid to Corporation 3. Corporation redeems deceased shares with death benefit proceeds 4. Corporation cancels deceased partners shares 5. Surviving partners shares increase in value proportionate to cancelled shares Corporate Share Redemption Buy-Sell

29. > Set-up > Company buys insurance on partners lives > Company pays for premiums > Company is beneficiary of all policies Corporate Promissory Note Buy-Sell

30. Death of a Shareholder 1. Shares of deceased transfer to estate/heirs 2. Surviving Partner buys shares with Promissory note 3. Death benefit paid to Corporation 4. Corp. issues a tax-free dividend to surviving partner 5. Surviving partner uses funds to retire promissory note 6. Surviving partner receives shares from deceased partners estate Corporate Promissory Note Buy-Sell

31. > Generally cheaper to use corporate funds > Premium inequities removed > No T4A’s for partners > Creation of CDA > Watch out for the ACB Corporate Buy-Sell Advantages

32. > No tax deduction for premiums > Policy is asset of company > Subject to creditors > Affects balance sheet > May affect CGE of company > Fund value considered a passive asset > Stop-loss rules may apply > Changing policy from corporate to personal > Taxable disposition could apply Corporate Buy-Sell Disadvantages

33. > Allows parties involved to choose best methodology > Promissory Note > Share Redemption > Hybrid > or take advantage of new laws in place at time Optimization Clause

34. Key Person

35. > Establish the need for key person > Determine the value of key person > Recommend Solutions Key Person Insurance Advisor Role

36. > Replace the loss of a key person: > Owner/partner > Executives > Key sales people > Employees with highly specialized knowledge Key Person Insurance

37. For three 40 year- olds the chance of one of them being disabled before age 65 – about 90% Chance of losing a 40 year-old to a long-term disability of 3 months or more before the age of 65 – about 60% Key Person Risks

38. > Multiple of salary > Debt retirement > Replacement costs > Lost profits and increased expenses > creditors may reduce or withdraw credit > may lose customers > may lose other employees Value of a Key Person

39. > Same as Buy Sell > Insurance > Life Insurance > Disability > Critical Illness Funding Solutions

40. > Corporate owned and funded > Company is beneficiary > Premiums are not tax deductible > Creates liquidity for company > Can create benefits for key person’s family > Shared ownership Key Person Insurance

41. Shared Ownership

42. > Corporate Key-person/Buy-sell insurance required > Corporation has cash not required for growth of business > Shareholder wants to move corporate cash into personal hands > Shareholder seeking retirement funding arrangement > Shared cost strongly favours the shareholder Shared Ownership

43. Sole Shareholder, age 50 NS Corporation has a justification for $1Million corporate owned insurance. Corporation has excess cash not necessary for growth Shareholder wants to maximize retirement income tax-efficiently. Shared Ownership Case Study

44. Face Amount paid to the Corporation (CDA Credit) Corporation pays fair value for the assigned Face Amount Shareholder Purchases Policy Genesis UL Face Amount plus FUND Shareholder assigns ‘Face Amount’ to Corporation ‘Fund Value’ paid to shareholder’s beneficiary Shareholder Dies

45. Survey the T100 market for a rate to use (Shareholder plans to stay in business beyond normal retirement age) Calculate the present value of T100 premium from now to life expectancy (approx. age 85 for a M50NS) Spread the Net Present Value out over the 10 year premium payment period Corporations share

50. Executive Retirement

51. Adequate Pension “a normal level of benefits would be the same benefits provided under a registered pension plan without regard to the Revenue Canada maximum. This would be 2% x years of service x final average earnings or about 70% of pre-retirement income for an employee with 35 years of service.” CCRA roundtable discussion (1998)

52. RRSP Limits Max. ContributionMax. Income > 2012$22,970 $127,611 > 2013$23,820 $132,333 > 2014$24,270 $134,833

53. Executive Retirement Strategies > IRS/IRP > IPP > RCA

54. Insured Retirement

55. I mplementation AccumulationDisbursement Death and repayment The concept in 4 steps: Corporate IRS

56. I mplementation Step 1: Implementation 1.The company is owner and beneficiary of the contract 2.Premiums are paid by the company from the excess retained earnings 3.Insurance premiums are not tax deductible Corporate IRS

57. Accumulation Minimum of 10 to 15 years Contract options deposit level number of accumulation years date retirement income begins Step 2: Accumulation period

58. Step 3: Payout at retirement Disbursement Corporate IRS Two possibilities Loan by the company Re-lend to individual Dividend Loan by the shareholder Guarantee Fee

59. Death and repayment Death benefit Step 4: Death and repayment CDA Heirs Repay loans and Balance retained by heirs Non-taxable CDA dividends CDA = Death benefit Less ACB ACB credits Retained earnings Regular taxable dividend Corporate IRS

60. Individual Pension Plan

61. > Registered pension plan > Increases contribution room beyond RRSP limit > Defined benefit > Employer funded > Tax deductible contributions > Creditor Protected > Reduces RRSP Room through pension adjustment

62. RRSP vs. IPP

63. IA IPP Support > Prep and quote plan > Initial actuarial valuation and on-going monitoring > Past service calculation > Register plan with CRA > Annual statements > Pension adjustment calculation > For Quotes: Paul.Vanderkolff@inalco.com

64. RCA’s

65. > Defined benefit pension plan > Tax deductible contributions > More room than IPP > Creditor protected > Does not affect personal RRSP room > Alternative to “Bonus down” strategy > Removes capital from balance sheet > Often used as Golden handcuffs Retirement Compensation Arrangements

66. RCA Mechanics – Non Insurance OPCO RCATRUST RefundableTaxAccount RCAINVESTMENTACCOUNT tax deductible contributions 50% 50% 50% of realized growth

67. RCA Mechanics – using Universal Life OPCO RCATRUST RefundableTaxAccount RCAINVESTMENTACCOUNT tax deductible contributions 50% 50% 50% of realized growth

68. RCA Mechanics upon Retirement RCATRUST $2 $1 TaxableIncome RCAINVESTMENTACCOUNT RefundableTaxAccount Pensioner $3

69. RCA Example Male Non-Smoker 45 years of age earns $200,000 RRSP of $200,000 Max. RRSP contrib. 35 yrs of service at retirement retires at 65 RRSP Retirement Income (assuming 5.5% ROR from age 65 to age 82) = $95,632 annual income Expected Pension (indexing 5% to age 65, 70% of final 5 year average) = $321,647 annual income RRSP RCA

70. RCA Disadvantages > 50% of contributions go to CRA RTA account > No growth on these funds > 50% of growth goes to CRA RTA > Can require large top-up deposits by Corp. if interest rates decline as it is a defined benefit plan

71. RCA Advantages

72. 1 Business Insurance Part 2 Insurance Concepts for Business Owners Jorge Ramos, CFP,CLU Director of Advanced Marketing A PARTNER YOU CAN TRUST.

73. > Buy Sell > Criss Cross vs. Share Repurchase > Key Person > Shared ownership policies > Executive Retirement strategies > IRS > IPP > RCA Business Owner Insurance Concepts

74. 1 Business Insurance Part 3 Servicing Corporate Owned Insurance Policies Jorge Ramos, CFP,CLU Director of Advanced Marketing A PARTNER YOU CAN TRUST.

75. Thank You Jorge Ramos, CFP, CLU Director of Advanced Marketing 416-206-7050 jorge.ramos@inalco.com