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Click to edit Master subtitle style Use of Life Insurance in Tax Planning 7th Tax Planning for the Wealthy Family Workshop – June 15-16, 2010 Presented.

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Presentation on theme: "Click to edit Master subtitle style Use of Life Insurance in Tax Planning 7th Tax Planning for the Wealthy Family Workshop – June 15-16, 2010 Presented."— Presentation transcript:

1 Click to edit Master subtitle style Use of Life Insurance in Tax Planning 7th Tax Planning for the Wealthy Family Workshop – June 15-16, 2010 Presented by: Mimi C. Tang, CFP CLU CHFC 1 Mimi Tang Wealth Mgmt. & Consulting Ltd.

2 Mimi Tang Wealth Mgmt. & Consulting Ltd. Mimi C. Tang, CFP CLU CHFC President Mimi Tang offers financial planning and insurance services as an independent Representative, under Mimi Tang Wealth Mgmt. & Consulting Ltd. These services are offered independently of Peak Securities. Mimi Tang is an Investment Advisor for Peak Securities Inc. Peak Securities Inc. is registered with IIROC (formerly known as IDA) and a member of the Canadian Investor Protection Fund. It is a full service investment broker and its’ responsibilities is limited to investment products such as stocks, bonds, and mutual funds. 2 Mimi Tang Wealth Mgmt. & Consulting Ltd.

3 Dying Rich Old Man 3 Mimi Tang Wealth Mgmt. & Consulting Ltd.

4 Primary Purpose of Life Insurance  To provide cash on death:  Pay off personal debts  Funeral and last expenses  Payment of capital gains  Probate fees  Charitable bequests  Business owners:  Funding the purchase of shares under shareholders agreements  key person insurance  collateral insurance to cover bank loans 4 Mimi Tang Wealth Mgmt. & Consulting Ltd.

5 Types of Life Insurance Term: – Five, Ten, Twenty Year – Can usually be converted to permanent insurance without evidence of insurability – Cheapest form of insurance, premiums increase by term period – Not permanent, usually expires at age 65 or 70 Permanent: – Term to 100 – Whole Life – Participating or Non-Participating – Universal Life Living Benefits: – Critical Illness, Disability, Long Term Care 5 Mimi Tang Wealth Mgmt. & Consulting Ltd.

6 Other Types of Insurance: Annuities: – Prescribed – Non-Prescribed Segregated Funds: – A Segregated Fund (Seg Fund) is a type of investment fund administered by Canadian insurance companies in the form of individual, variable life insurance contracts offering certain guarantees to the policyholder such as reimbursement of capital upon death investment fundCanadianlife insurance 6 Mimi Tang Wealth Mgmt. & Consulting Ltd.

7 Estate and Tax Planning Strategies with Life Insurance Permanent Insurance: – Term to 100 Premiums are set and payable till age 100 No cash value until age 100 (cash value usually equals the face amount of insurance) Usually the cheapest type of permanent insurance Riders can be added to the main policy: – Waiver of premium on disability – Guaranteed insurability option – Term insurance (5, 10 or 20) 7 Mimi Tang Wealth Mgmt. & Consulting Ltd.

8 Participating Whole Life Policies: Premiums are higher than cost of insurance Excess deposits are invested and dividends (in effect return of premiums) are paid by the insurer to be used by policyholder: – in cash – Deposit in an interest-bearing account (tax- sheltered) – To apply against next policy premium – To purchase paid-up additions (additional insurance with no further premiums) – To purchase term insurance – Dividends not guaranteed and insurer are extremely conservative in their assumptions 8 Mimi Tang Wealth Mgmt. & Consulting Ltd.

9 Universal Life (UL) Introduced in the 1980’s when interest rates were higher Unlike participating whole life policies, UL policies allow policyholders wider range of investment options to choose from like fixed term deposits or investments tied to stock market indices Flexibility as premiums can be increased, decreased or stopped Greater death benefits like “face plus fund value” Death benefit option to increase by specified rate each year (convenient for estate and tax planning like for example exposure to capital gains increases) Potential risks and rewards greater with UL than Whole Life Investment growth is tax sheltered 9 Mimi Tang Wealth Mgmt. & Consulting Ltd.

10 Exempt Life Insurance Policies Policy accumulating cash reserves are not subject to taxation as long as they do not exceed the “exemption test policy” It is usually the contractual responsibility of the insurer to ensure that a policy is and remains exempt The tax free mortality gain is the most attractive feature of life insurance Under Section 148 of the Income Tax Act, properly arranged and planned, a large pool of tax- free dollars will be available to fund obligations arising from death. The death of the life insured under an exempt policy is not a disposition for income tax purpose and the proceeds payable are not subject to tax. 10 Mimi Tang Wealth Mgmt. & Consulting Ltd.

11 Calculation of Adjusted Cost Base (ACB) of Life Insurance Policies Factors that increase the ACB: – Premiums paid to the policy – Policy gains included in income (example: from withdrawals or policy loans) – Repayment of policy loans which were subject to tax Factors that decrease the ACB: – Proceeds of disposition – The net cost of pure insurance (NCPI) – Participating whole life policies, policy dividends received 11 Mimi Tang Wealth Mgmt. & Consulting Ltd.

12 Tax Tip For Corporation with Holding Company – Have beneficiary be the Holdco Full proceeds (ACB and the cash value) tax free 12 Mimi Tang Wealth Mgmt. & Consulting Ltd.

13 Tax and Estate Planning with Life Insurance Taxation of Property Held at Death: – Canada does not have estate taxes – Canadian resident is generally deemed to have disposed of his/her property for fair market value (FMV) immediately before death. – Deceased is taxed on his/her terminal return any gains/losses at year of death 13 Mimi Tang Wealth Mgmt. & Consulting Ltd.

14 Exception: Transfers of Property to Spouses or Spouse Trust at death “rollover” occurs for income tax purposes to the surviving spouse or spousal trust. is deemed to be disposed of for its’ ACB, resulting in no capital gain or loss. A spousal trust will be disqualified if, for example, the spouse’s entitlement will end if he/she remarries or other conditions to spouse’s right to capital or income. 14 Mimi Tang Wealth Mgmt. & Consulting Ltd.

15 Types of Property that can be “rollover” Real Estate as an investment or cottage that is not the deceased’s principal residence RRSP’s and RRIF’s if surviving spouse is named as beneficiary Shares of public traded and private companies Mutual and segregated funds 15 Mimi Tang Wealth Mgmt. & Consulting Ltd.

16 Joint Last to Die (JLTD) Policy Tax burden realized on the surviving spouse could be satisfied through a JTLD policy (payable on second death). A great advantage of being paid when needed: – The premiums are generally very inexpensive compared to a single life policy – Least expensive way to fund estate liabilities – More cost effective than: Taking a loan Liquidating assets Self-insuring 16 Mimi Tang Wealth Mgmt. & Consulting Ltd.

17 Premium Matchmaker Face Amount $250,000, Non-Smoker Age 10-year Term Term to 100 Life Provider (UL) Male 50 $ 475 $ 3, $ 2,811.22* Female 360 2, ,153.06* Male 60 1,345 5, ,622.45* Female 950 4, ,433.67* Male 70 10,265 10, ,043.37* Female 2,735 8, ,977.04* JLTD Male 50 1,242.48* Female 50 (combined age Male 39 N/S) (First year maximum annual deposit $11,392.50) Male 60 2,701.53* Female 60 (First year maximum annual deposit $16,787.50) Male 70 Female 70 (combined age Male 59 N/S) 5,055.00* (First year maximum annual deposit $28,652.50) *Pls. Refer to page 11 for disclosure 17

18 Disclosure * For Universal Life (UL) insurance, the premium amount is the annual minimum Level cost of insurance premium for the selected province of issue. The Death Benefit of all UL plans is based on Sum Insured Plus Fund Value option. Premium rates may or may not change at time of purchase NOTE: This is an illustration and not a contract. Every effort has been made to ensure accuracy, but accuracy is not guaranteed. In the event of discrepancy, your insurance policy governs. 18 Mimi Tang Wealth Mgmt. & Consulting Ltd.

19 Cost of Insurance for age 60 N/S Single Life Premium Joint Last to Die 19 M $5, F$4,587.50* $2,701.53* *Rates provided by BMO Insurance Total cost for M/F $10, Mimi Tang Wealth Mgmt. & Consulting Ltd.

20 Life Annuity Insured gives the Insurance Company a lump sum of money Insurance Company provides an income stream for the rest of your life – Each payment is part repayment of capital and part interest Once contract is issued, it cannot be changed or cancelled The older you are, the higher your payment (opposite to life insurance) 20 Mimi Tang Wealth Mgmt. & Consulting Ltd.

21 Types of Annuities Life versus Term Certain – Life annuity pays until the annuitant dies. Payments can be guaranteed for a number of years or as long as the insured lives If death occurs before the guaranteed period, payments would continue to the beneficiary If death occurs after the guaranteed period, there is no residual value – Term Certain Annuity pays for a fixed period like 5, 10, 15 years. Stops at the end of the fixed period Prescribed versus Non-prescribed – Prescribed could be registered (payments are fully taxable) or non-registered (only the interest portion is taxable) – Non-prescribed: taxable amounts are different, usually higher during the early years like a mortgage 21 Mimi Tang Wealth Mgmt. & Consulting Ltd.

22 Life Annuities Can be issued as single life or joint life Smaller income payments on a joint life versus single life Income payments can change upon first death if issued jointly Immediate Annuities: – Income payments starts Deferred Annuities: – Income payments are deferred for certain situations where income must start at a certain date in the future 22 Mimi Tang Wealth Mgmt. & Consulting Ltd.

23 Insured Annuity Current GIC Investments Despite the low interest rate environment in Canada over the last 15 years, currently over $800 Million of wealth in Canada is still placed in GICs earning low after-tax returns. The problem with this investment strategy is: – Low rates of return for many years – Interest income is 100% taxable – Increasing your income decreases your capital 23 Source: BMO Insurance Mimi Tang Wealth Mgmt. & Consulting Ltd.

24 The Insured Annuity Solution This solution combines two financial instruments: – Prescribed Life Annuity – Life Insurance policy This combination creates an extraordinary opportunity to increase income, lower taxation and guarantee the investment capital is returned at death to the beneficiaries Source: BMO Insurance Mimi Tang Wealth Mgmt. & Consulting Ltd.

25 Click to edit Master subtitle style 9/22/10www.mimitang.ca Mimi Tang Wealth Mgmt. & Consulting Ltd.

26 26 That’s a difference of $3,517 per year! A GIC pre-tax equivalent would have to be 7.3% per year...every year! Insured Annuity vs. GIC: Gross annual income generated from Annuity = $ 12,268 less taxes paid on income (assuming 45% tax rate) = $ 1,191 less premiums for Term to 100 insurance plan= $ 5,085 Total net annual income from Annuity= $ 5,992 Gross annual income generated from the GIC = $ 4,500 less taxes paid on income (assuming 45% tax rate)= $ 2,025 Total net annual income from GIC= $ 2,475 Insured Annuity Case Study Source: BMO Insurance Mimi Tang Wealth Mgmt. & Consulting Ltd.

27 27 That’s a difference of $3,517 per year, an increase of 142%! Insured Annuity vs. GIC Insured Annuity Case Study Source: BMO Insurance Mimi Tang Wealth Mgmt. & Consulting Ltd.

28 Taxation 28 Source: BMO Insurance Mimi Tang Wealth Mgmt. & Consulting Ltd.

29 Case Study on Segregated Fund and Life Annuity 29 Client, 65 yrs. Old, diagnosed with cancer Disabled nephew Client wants to leave a monthly income to nephew for the rest of his life should she die Solution: – $100,000 in a Segregated Fund – Beneficiary, her nephew with condition Proceeds to buy a 10 year life annuity for her nephew Mimi Tang Wealth Mgmt. & Consulting Ltd.

30 Corporate- Owned Life Insurance Capital Dividend Account (CDA) – Is the vehicle through which insurance proceeds received by a private corporate and may in turn be distributed tax-free to its’ shareholders. – Purpose of the CDA: Originates from the “integration theory” – is the fundamental basis on which the Canadian corporate tax system orginates. Integration theory holds that income tax should be the same (no more no less) as income earned by the corporation or earned directly 30 Mimi Tang Wealth Mgmt. & Consulting Ltd.

31 Capital Dividend Account (CDA) CDA is a notional tax account which includes certain tax-free amounts received by a corporation Outstanding credit in the CDA can be distributed tax-free to the shareholders Amounts credited to the CDA: – Tax-free portion of capital gains (currently 50%) – Capital dividends received by the corporation – Certain tax-free amounts which the corporation receives from the sale of “eligible capital property” like goodwill of a business – Amount of any life insurance proceeds received by the corporation from a policy under which it was beneficiary, less ACB of the policy to the corporation 31 Mimi Tang Wealth Mgmt. & Consulting Ltd.

32 Purposes of Corporate-Owned Life Insurance Availability of the CDA Buy/Sell Funding Key Person Insurance Collateral Insurance Charitable Giving Pay Estate Liabilities 32 Mimi Tang Wealth Mgmt. & Consulting Ltd.

33 The Corporate Asset Transfer Plan… it’s simple! 33 Source: BMO Insurance Mimi Tang Wealth Mgmt. & Consulting Ltd.

34 The Jim Pattison Group began on May 8, 1961 when Mr. Pattison purchased a General Motors automobile dealership by borrowing $40,000 from the Royal Bank of Canada, and placing his home and life insurance policy with the bank as collateral. Acquisitions in subsequent years included the following:General MotorsRoyal Bank of Canadacollateral Awarded license to operate Vancouver AM radio station CJORVancouver Acquired Neon Products (Vancouver) & Seaboard Outdoor Advertising Acquired Overwaitea Foods (Vancouver)Overwaitea Foods Acquired Provincial News (Edmonton) – Employees: 2,500 Sales: $100 million Started Jim Pattison Real Estate Group – Employees: 6,000 Sales: $500 million Purchased Beautiful British Columbia MagazineBritish Columbia Magazine Acquired Canadian Fishing Company Jim Pattison Story 34 Source: WikipediaSource: Wikipedia, the free encyclopediafreeencyclopedia Jim Pattison, June, 2007

35 Jim Pattison Story Acquired Ripley's Believe It or Not!Ripley's Believe It or Not! – Employees: 6,000 Sales: $1 billion Acquired the Foodservice Packaging GroupFoodservice Packaging Group – Acquired the Flexible Packaging GroupFlexible Packaging Group – Acquired Coroplast and Montebello Packaging – Employees: 10,000 Sales: $2 billion Started Jim Pattison Trade Group – Started Financial Services division Acquired Westshore Terminals, a BC-based coal-export terminal facilityWestshore Terminals – Employees: 15,000 Sales: $3 billion Acquired Buy-Low FoodsBuy-Low Foods Started Select Media Services – Opened Ripley's Aquarium, Myrtle Beach, SC Acquired Cooper's Foods – Employees: 20,000 Sales: $4.4 billion Opened Ripley's Aquarium of The Smokies, Gatlinburg, TNRipley's Aquarium of The Smokies – Employees: 22,000 Sales: $4.6 billion Acquired Monarch BroadcastingMonarch Broadcasting – Acquired Van-Whole ProduceVan-Whole Produce – Employees: 24,000 Sales: $5 billion 35 Source: WikipediaSource: Wikipedia, the free encyclopediafreeencyclopedia

36 Jim Pattison Story Started ProLogix Distribution Services and AccuLogix Distribution ServicesProLogix Distribution ServicesAccuLogix Distribution Services – Acquired Ever Corp.Ever Corp – Employees: 25,000 Sales: $5.2 billion Acquired LIN PAC Inc.LIN PAC Inc – Employees: 26,000 Sales: $5.5 billion Acquired Classic Attractions (Texas)Classic Attractions – Acquired St. Augustine Sightseeing Trains (Florida)St. Augustine Sightseeing Trains – Acquired Maltese Signs (Norcross, GA)Maltese Signs – Acquired auto lease business of Cross-Canada Car Leasing Limited (Toronto, ON)Cross-Canada Car Leasing Limited – Acquired periodical distribution companies in San Jose and Chico, CA – Employees: 27,000 Sales: $5.7 billion Acquired control of Icicle Seafoods (B.C.) Inc.Icicle Seafoods – Acquired Freeway Dodge ChryslerFreeway Dodge Chrysler – Acquired Spartech Corporation’s corrugated plastic sheet businessSpartech Corporation – Started the Vancouver edition of 24 Hours (in partnership with Quebecor Media)24 HoursQuebecor Media – Formed or purchased interests in several US and Canadian joint ventures in the periodical industry – Employees: 28,000 Sales: $6.1 billion Acquired Carthage Cup, Carthage, TXCarthage, TX – Acquired Creative Outdoor Ads, Halifax, Nova ScotiaHalifax, Nova Scotia – Acquired Island Radio Ltd.'s six FM stations on Vancouver IslandVancouver Island – Acquired OK Radio Group Ltd.'s two FM stations in Victoria, BCVictoria – Acquired A&W Fixtures, Cocoa, FloridaCocoa, Florida – Started Great Pacific Bank Limited, Warrens, BarbadosBarbados Disposed of interest in the Vancouver 24 Hours Acquired Guinness World Records from HIT EntertainmentGuinness World RecordsHIT Entertainment 36 Source: WikipediaSource: Wikipedia, the free encyclopediafreeencyclopedia

37 Life Insurance Asset not a liability Creditor Protection Under the Insurance Act – Each province has an Insurance Act which provides creditor protection to life insurance policies in the legislation. The legislation is identical in every province except Quebec. Sub-section 147(2) of the Insurance Act (BC) is an example: While a designation in favour of a spouse, child, grandchild or parent of a person whose life is insured or any of them, is in effect, the insurance money and the rights and interests of the insured therein and in the contract are exempt from execution or seizure. 37 Mimi Tang Wealth Mgmt. & Consulting Ltd.

38 Case Law 1. Ramgotra: – 1996 Supreme Court of Canada decision in the case of Royal Bank vs North American Life and Balvir Singh Ramgotra. June of 1990, Dr. Ramgotra transferred his non-insurance RSP to a RIF through North American Life naming his wife as beneficiary. In Feb., 1992, he declared bankruptcy and was discharged in Jan., 1993 at which time his only assets were his clothing, household contents and the RIF. Royal Bank argued that by moving his RSP to an insurance company’s RIF, the bank’s view was that the RIF remained part of his estate and was therefore subject to seizure by the trustee in bankruptcy. The court ruled and made it abundantly clear that, all other legal considerations aside, the exempt status of the RIF under provincial insurance legislation was the critical factor in its’ decision. The transfer of non-exempt funs to insurance policies and to insurance RSPs and RIFs within one to five years prior to bankruptcy, will in most cases provide effective creditor protection Sykes, Robson and Stock 3. Harrison V. State Farm Mutual Automobile Insurance Co. 4. Minister of National Revenue V. Moss – The Court ruled that the taxpayer’s insurance policies were not exempt from seizure by Revenue Canada. Case of statutory exception: The court held that, while the Bankruptcy and Insolvency Act (Canada) contains specific language which prevents trustee in bankruptcy from seizing assets which are protected from creditors under provincial legislation, no such provisions are contained in the Income Tax Act (Canada) 38 Mimi Tang Wealth Mgmt. & Consulting Ltd.

39 Use of Life Insurance in Tax Planning Asset 39 Minimize the expense: cost of life insuranceMaximize the tax-sheltered investment Mimi Tang Wealth Mgmt. & Consulting Ltd.

40 Private Health Service Plan (PHSP) 3 Ways to Pay for Health Care Expenses : 1. Traditional Insurance 2. Paying out of Pocket 3. PHSP 40 Mimi Tang Wealth Mgmt. & Consulting Ltd.

41 What is a PHSP? In 1988, the Canada Revenue Agency under IT- 339R2 under Subsection 248(1) (also paragraphs 6(1)(a), 18(1)(a), 118.2(2)(q) and 118.2(3)(b)), passed into law the Private Health Services Plan that allows you to expense your medical costs through your company as long as they are administered through a third party arms length administrator: 100% tax deductible to your company 100%tax-free to the employee 41 Mimi Tang Wealth Mgmt. & Consulting Ltd.

42 Who is Eligible? Incorporated business Limited company Sole proprietorship: – 50% of your net income for the year must be your net income – Your net income from sources other than business should not exceed $10, Mimi Tang Wealth Mgmt. & Consulting Ltd.

43 What is Covered? Any product, procedure or service you receive from a medical practitioner. For example: – Physician, dentists, chiropractor, massage therapist, ophthalmologist, optical service, psychiatrist, therapist etc. Hospital Services Medication Prescribed Medical Treatment 43 Mimi Tang Wealth Mgmt. & Consulting Ltd.

44 Cost? One-time set up fee of $295 10% administration fee for expenses as they are submitted (fees are 100% tax deductible to the company) 100% tax-deductible for the employer 100% tax-free for the employee Easy to set-up 44 Mimi Tang Wealth Mgmt. & Consulting Ltd.

45 Three Insurance salesman were sitting in a restaurant boasting about each companies service. The first one said, "When one of our insureds died suddenly on Monday, we got the news that evening and were able to process the claim for the wife and had mailed a check on Wednesday evening." The second one said, "When one of our insured died without warning on Monday, we learned of it in 2 hours and were able to hand-deliver a check the same evening." The last salesman said, "That´s nothing. Our office is on the 20th floor of a tall building. One of our insureds who was washing a window on the 85th floor, slipped and fell. We handed him his check as passed our floor." 45 Mimi Tang Wealth Mgmt. & Consulting Ltd.

46 Mimi Tang Wealth Mgmt. & Consulting Ltd (Fax) 46

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