1. Achieving More Together Tips and Traps

2. Achieving More Together Some important considerations … This material is for information purposes only and should not be construed as legal or tax advice. Every effort has been made to ensure its accuracy, but errors and omissions are possible. All comments related to taxation are general in nature and are based on current Canadian tax legislation for Canadian residents, which is subject to change. Persons who are not residents in Canada or who are resident in Canada but are citizens of another country, may be subject to different tax rules in Canada and may also be subject to taxes levied by jurisdictions other than Canada. For individual circumstances, consult with legal or tax professionals. This information is current as of September 27, 2005.

3. Achieving More Together Have you ever wondered … Why clients ask their CA for advice on insurance and other financial products? –Gatekeeper –Financial “quarterback” –Comprehensive knowledge of affairs –Trustworthy –Unbiased –CA knows everything (including life insurance!?)

4. Achieving More Together Have you ever wondered … What does the CA do in a particular case? –Reviews proposal –Analyzes illustrations/projections for reasonableness –Identifies obvious errors / omissions –Considers alternative solutions –Gives their opinion (formal or informal) on whether the proposal is appropriate given the client’s specific circumstances

5. Achieving More Together Have you ever wondered … What happens if the CA catches an error? –By its nature, advice can turns out to be (or be perceived to be) misleading, inaccurate, or incomplete (especially tax advice!) –CA will report the error to the client –This may impact your credibility –This may impact the sale –Worst case, the client asks the CA for a referral!

6. Achieving More Together Have you ever wondered … How to best protect yourself (from yourself)? –Become a CA, too?? –Errors & omissions insurance?? –Continuing professional development –Keep up on your reading –Attend courses / seminars / conferences –Participate in a study group –Develop CAs as centres (and sources of information) –Listen to me for the next hour or so

7. Achieving More Together Tips and Traps Top 10 Errors In The Insurance Marketplace

8. Achieving More Together # 1 Premium Deductibility

9. Achieving More Together Insurance planning errors # 1 Life insurance premiums are tax deductible if the policy is corporate-owned! –Generally life insurance premiums are not deductible –Exception: collateral insurance – paragraph 20(1)(e.2) Assigned to a financial institution as collateral for loan Interest on the loan is deductible Assignment is a requirement of the institution Borrower is also the policyowner Deduction limited to lesser of premiums payable and NCPI (net cost of pure insurance)

10. Achieving More Together # 2 Premium Deductibility

11. Achieving More Together Insurance planning errors # 2 Premiums paid for “grouped” individual DI / CI coverage are tax deductible by the corporation! –When one or more shareholders are included in the plan, must consider in what capacity the shareholder receives the coverage … Employee or Shareholder –If coverage on shareholder consistent with coverage on other employees, premiums should be deductible –If premiums not deductible – result is BAD – no deduction for corporation but taxable benefit to shareholder

12. Achieving More Together # 3 Ownership Transfers

13. Achieving More Together Insurance planning errors # 3 There are no tax implications when a life insurance policy is transferred to a shareholder or executive from the corporation! –A transfer is a disposition for tax purposes –Transferor (corporation) deemed to receive proceeds equal to the “value” of the policy - value usually = CSV –If CSV > policy ACB, result is a policy gain –Policy gain fully included in income –And the transferee (shareholder or executive) is taxed on greater of CSV and FMV of policy, less payments

14. Achieving More Together Insurance planning errors # 3 Example: –A corporation owns an permanent policy on a business owner –The business owner plans to sell the business and wants to transfer the policy from the corporation to him/herself –At the time of the transfer … AV = $250,000 CSV = $150,000 ACB = $100,000 –What are the tax implications?

15. Achieving More Together Insurance planning errors # 3 Example: –Answer: To the transferor (corporation) –Deemed disposition under subsection 148(7) of ITA –Proceeds of disposition = $150,000 (CSV) –Policy ACB = $100,000 –Policy gain = CSV – ACB =$ 50,000 –Policy gain is T5 income –Policy gain is not a capital gain

16. Achieving More Together Insurance planning errors # 3 Example: –Answer: To the transferee (shareholder) –Deemed acquisition under subsection 148(7) of ITA –New policy ACB = CSV = $150,000 –Shareholder benefit = CSV =$150,000 –Shareholder benefit reduced by any amount paid by the shareholder –However, additional shareholder benefit if FMV > CSV –So, what is the FMV of an insurance policy??

17. Achieving More Together # 4 Beneficiary Designations

18. Achieving More Together Insurance planning errors # 4 Of course you can name your spouse as beneficiary on this corporate-owned policy! –Life insurance premiums are not tax deductible –Usually advantageous having corporation pay insurance premiums with its low-tax dollars –However, if a family member is named beneficiary under a corporate-owned policy – result is BAD – no deduction to corporation but is taxable benefit to shareholder –Avoid by naming corporation as the beneficiary

19. Achieving More Together # 5 Principal Residence Exemption

20. Achieving More Together Insurance planning errors # 5 You can always claim the principal residence exemption on your cottage! –Taxpayers can only designate one property as their principal residence for a particular tax year –For taxation years after 1981, only one property per family unit can be designated as a principal residence –If husband and wife own a house and a cottage, one of the properties may have a taxable capital gain on disposition

21. Achieving More Together # 6 Beneficiary Designations

22. Achieving More Together Insurance planning errors # 6 You should always name a beneficiary on your RRSP to avoid probate fees! –Usually true, but consider this example: Taxpayer is widowed and has the following assets: RRIF: $300,000 GICs: $300,000 Taxpayer designates Son as beneficiary of the RRIF and leaves the GIC to Daughter through the Will The result: Son gets the $300,000 from RRIF, Daughter gets $300,000 from GIC LESS tax on the RRIF Oops!

23. Achieving More Together # 7 Tax-Free Rollovers

24. Achieving More Together Insurance planning errors # 7 You can transfer this policy to your son tax-free! –Tax-free rollover is available for transfers between spouses and between a policyowner and a child of the policyowner, but only if a child of the policyowner or the transferee is the life insured –Otherwise, the transfer is treated as a disposition to a non-arm’s length party (not a tax-free rollover!)

25. Achieving More Together # 8 Taxation of Policy Gains

26. Achieving More Together Insurance planning errors # 8 A capital gain is only 50% taxable, and a policy gain on a disposition of your life insurance policy is treated the same way! –A policy gain is reported on a T5 and is fully included in income in the year it is reported –A policy gain may occur in the event of: Policy loan (loan exceeds policy ACB) Partial or full surrenders (if accrued policy gain) Transfers of ownership (other than tax-free rollovers)

27. Achieving More Together # 9 Capital Dividend Account

28. Achieving More Together Insurance planning errors # 9 Proceeds from a corporate-owned life insurance policy pass through the corporation to your heirs tax-free! –Insurance proceeds received by a private corporation on the death of the life insured are credited to the capital dividend account (CDA) only to the extent the proceeds exceed the policy ACB immediately before death –The corporation can distribute tax-free capital dividends to its shareholders to the extent of the balance in the CDA

29. Achieving More Together # 10 Projections

30. Achieving More Together Insurance planning errors # 10 Your capital gains tax liability will grow at 10% per year to be at least $12,000,000 at life expectancy!

31. Achieving More Together Tips and Traps Top 10 Opportunities Using Exempt Insurance

32. Achieving More Together # 10 Risk Management

33. Achieving More Together Insurance planning opportunity # 10 Financial planning Planning Pyramid Investment management  Education  Retirement  Estate Risk management  Contingency fund  Insurance (life, health, DI, CI, home, auto)  Wills, POAs WEALTH PROTECTION

34. Achieving More Together Insurance planning opportunity # 10 Financial planning –Insurance to fund basic estate liquidity needs For example … –Final expenses –Estate administration –Debt repayment –Professional fees –Income continuation –Matrimonial obligations –Charitable bequests –Education trusts

35. Achieving More Together Insurance planning opportunity # 10 Financial planning –Insurance to fund basic estate liquidity needs What to look for … –Married couple or single parent with dependent children –Have not yet achieved financial independence

36. Achieving More Together # 9 Funding Business Needs

37. Achieving More Together Insurance planning opportunity # 9 Business planning –Business owners often have a significant amount of their net worth tied up in their business –The death of a business owner or key executive can impair the value of the business and create financial hardship for the deceased’s family and the surviving shareholders

38. Achieving More Together Insurance planning opportunity # 9 Business planning –Protect the business against the loss of an owner or key executive with insurance For example … –Funding shareholder agreements –Keyperson insurance protection –Collateral insurance

39. Achieving More Together Insurance planning opportunity # 9 Business planning –Protect the business against the loss of an owner or key executive with insurance What to look for … –Businesses with more than one shareholder –Businesses with loans –Owners or other key executives whose death would have a significant financial impact on the business –Needs may differ at different stages in business life cycle

40. Achieving More Together # 8 Funding Family Business Succession

41. Achieving More Together Insurance planning opportunity # 8 Business planning –Over 75% of current family businesses will have to deal with a change in leadership over next 15 years –Only one-third of family businesses survive the transition to the 2nd generation primarily because of a lack of planning, no qualified successors, and a lack of liquidity

42. Achieving More Together Insurance planning opportunity # 8 Business planning –Facilitate family business succession plans with insurance For example … –Fund capital gains taxes on the parent’s shares –Fund a redemption of the parent’s shares –Equalize the estate amongst the heirs

43. Achieving More Together Insurance planning opportunity # 8 Business planning –Facilitate family business succession plans with insurance What to look for … –Successful family-owned businesses –Business owner within 1 - 5 years of planned retirement –Business owner has a desire for an orderly transition

44. Achieving More Together # 7 Creating Tax Advantages

45. Achieving More Together Insurance planning opportunity # 7 Tax planning –Life insurance is a unique financial instrument –It is possible to split the ownership of a universal life policy into the pure death benefit and the fund account –The growth in fund account values is tax-advantaged Account Value Death Benefit Owner A Owner B

46. Achieving More Together Insurance planning opportunity # 7 Tax planning –Create a tax-advantaged investment account for business owners and executives by using a split- ownership arrangement For example … –Opco owns death benefit (buy-sell, keyperson protection) and business owner (or executive) owns fund account –Opco owns death benefit and Holdco owns fund account –Opco owns death benefit and RCA trust owns fund account –Parent owns fund account and adult child owns death benefit

47. Achieving More Together Insurance planning opportunity # 7 Tax planning –Create a tax-advantaged fund account for business owners and executives by using a split-ownership arrangement What to look for … –Need for insurance by one party and excess cash/capital for investment by another party

48. Achieving More Together # 6 Funding Retirement

49. Achieving More Together Insurance planning opportunity # 6 Retirement planning –The demographics in Canada indicate that boomers will be retiring from active employment in ever increasing numbers over the next two decades –Retirement planning and retirement income are becoming an increasing priority in the minds of your clients

50. Achieving More Together Insurance planning opportunity # 6 Retirement planning –Provide supplemental retirement income to a business owner or executive For example … –Leveraged life insurance –Insured retirement compensation arrangement (RCA)

51. Achieving More Together Insurance planning opportunity # 6 Retirement planning –Provide supplemental retirement income to a business owner or executive What to look for … –Client over age 40 –Mortgage paid down –Maxed out on RRSPs/RPPs –Excess cash available for funding

52. Achieving More Together # 5 Creating A Guaranteed Lifetime Income

53. Achieving More Together Insurance planning opportunity # 5 Retirement planning –Fixed income investment returns have declined over the past two decades –Older clients looking for ways to increase returns while maintaining their estate for their heirs

54. Achieving More Together Insurance planning opportunity # 5 Retirement planning –Guarantee a lifetime retirement income while preserving the estate for the heirs For example … –Insured annuity –Corporate insured annuity –Leveraged corporate insured annuity

55. Achieving More Together Insurance planning opportunity # 5 Retirement planning –Guarantee a lifetime retirement income while preserving the estate for the heirs What to look for … –Clients age 65 – 75 –Personal investment assets being used as a source of retirement income –Want to preserve their estate for their heirs –Corporate investment holding company

56. Achieving More Together # 4 Creating A Charitable Gift

57. Achieving More Together Insurance planning opportunity # 4 Charitable gift planning –There are approximately 350,000 Canadian households with at least $1 million in household financial assets –Nine-in-ten (87%) of these millionaire households expect to make a financial contribution to a charity or local community organization in the next year

58. Achieving More Together Insurance planning opportunity # 4 Charitable gift planning –Fund a charitable gift with insurance For example … –Gift of life insurance to charity –Fund a charitable bequest with life insurance –Name a charity the beneficiary of a policy –Estate replacement insurance funded using the donation tax benefits –Insured share redemption of private company shares gifted to charity following death

59. Achieving More Together Insurance planning opportunity # 4 Charitable gift planning –Fund a charitable gift with insurance What to look for … –Client is over age 50 –Client has a desire to support a charitable organization –Client wants to magnify or multiply their bequest or minimize the impact of the donation on family wealth

60. Achieving More Together # 3 Transfer Wealth To The Next Generation

61. Achieving More Together Insurance planning opportunity # 3 Estate planning –Demographics in Canada suggest a significant transfer of wealth will occur over the next 25 years –Clients are looking for effective ways to initiate transfers of wealth

62. Achieving More Together Insurance planning opportunity # 3 Estate planning –Initiate a transfer of wealth to the next generation using life insurance For example … –Parent purchases insurance on life of child (or grandchild), transfers ownership (tax-free) following death of parents

63. Achieving More Together Insurance planning opportunity # 3 Estate planning –Initiate a transfer of wealth to the next generation using life insurance What to look for … –Clients over 50 who are financially independent with adult children

64. Achieving More Together # 2 Funding Estate Taxes

65. Achieving More Together Insurance planning opportunity # 2 Estate planning –A deceased taxpayer is deemed to dispose of all property immediately before death for proceeds equal to fair market value –Accrued gains taxed on final tax return –Transfer to surviving spouse or spouse trust can defer (but not eliminate) tax liability –The tax liability can have a material impact on the value of the estate available for distribution to the heirs

66. Achieving More Together Insurance planning opportunity # 2 Estate planning –Fund the estate tax liability with insurance to preserve/conserve the estate for the heirs For example … –Investments –Private company shares –Commercial real estate –Vacation property –RRSPs

67. Achieving More Together Insurance planning opportunity # 2 Estate planning –Fund the estate tax liability with insurance to preserve/conserve the estate for the heirs What to look for … –Client(s) over age 50 –Investment assets with significant accrued gains –Private company shares –Registered funds

68. Achieving More Together # 1 Maximize Family Wealth

69. Achieving More Together Insurance planning opportunity # 1 Estate planning –Wealthy families may have no obvious need for life insurance protection but are interested in ways to maximize family wealth without adding significant risk

70. Achieving More Together Insurance planning opportunity # 1 Estate planning –Maximize the estate for distribution to the heirs For example … –Insured inheritance –Corporate estate transfer –Insurance as an alternative investment

71. Achieving More Together Insurance planning opportunity # 1 Estate planning –Maximize the estate for distribution to the heirs What to look for … –Client over age 50 –Significant investment holdings (personal or corporate) –Investments include fixed income component generating interest income taxed at top rates

72. Achieving More Together Insurance as an alternative investment

73. Achieving More Together Daily interest 1, 3, 5, 10 year simple interest GIC Maximum First Year Excess Deposit1, 3, 5, 10 year compound interest GIC $269,119 Bond funds Millennium Profile accounts Index-linked options Mutual funds and managed accounts Cost of Insurance$47,400 Minimum Premium Commitment $48,490 Premium tax (2%)$970 + 2% excess funding Policy Fees$120 INSURANCE BENEFIT The "Mechanics" of Millennium Universal Life Male, Non-Smoker, 60, Standard Health and Female, Non-Smoker, 60, Standard Health $5,000,000 Canada Life Millennium Universal Life Insurance Policy (Joint-Last) $5,000,000 ACCOUNT VALUE

74. Achieving More Together Insurance as an alternative investment Bob and Carol, both age 60, good health $5.0-million of investment assets –50% fixed income –50% equities Assume –3% after-tax return on fixed income –6% after-tax return on equities –Maintain current asset allocation –Need $100,000 after-tax annual cash flow –Joint life expectancy is 30 years

75. Achieving More Together TODAY Fixed Income$2,500,000 Equities2,500,000 Total$5,000,000 Insurance as an alternative investment

76. Achieving More Together TODAY ESTATE Fixed Income$2,500,000 Equities2,500,000 Total$5,000,000 Fixed Income$6,000,000 Equities6,000,000 Total$12,000,000 Insurance as an alternative investment

77. Achieving More Together TODAY Cash$50,000 / yr Insurance as an alternative investment

78. Achieving More Together TODAY Cash$50,000 / yr ESTATE Investment$2,500,000 Insurance as an alternative investment

79. Achieving More Together TODAY Cash$50,000 / yr Life Policy Or… Insurance as an alternative investment

80. Achieving More Together TODAY Cash$50,000 / yr ESTATE Cash$5,000,000 Or… Insurance as an alternative investment Life Policy

81. Achieving More Together TODAY Cash$50,000 / yr ESTATE Investment$2,500,000 Cash$5,000,000 Difference in the strategies $2,500,000 Or… Insurance as an alternative investment Life Policy +

82. Achieving More Together Tax-free IRR 20 25 30 35 20 25 30 35 14.8% 10.1% 7.3% 5.5% 14.8% 10.1% 7.3% 5.5% 27.4% 18.7% 13.5% 10.2% 27.4% 18.7% 13.5% 10.2% Years To Life Expectancy Pre-tax IRR * * Assumes a 46% tax rate on interest income Insurance as an alternative investment

83. Achieving More Together Conclusions: –Insurance is an innovative financial instrument –Insurance can be used to facilitate or enhance a client’s overall wealth management plans –Insurance can be a viable solution even when the need for liquidity is not evident –Insurance strategies such as Insured Inheritance and Corporate Estate Transfer are very appealing in the HNW marketplace Insurance as an alternative investment