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Hot Business Insurance Ideas Kevin Wark, LLB, CFP CIFPS National Annual Conference.

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Presentation on theme: "Hot Business Insurance Ideas Kevin Wark, LLB, CFP CIFPS National Annual Conference."— Presentation transcript:

1 Hot Business Insurance Ideas Kevin Wark, LLB, CFP CIFPS National Annual Conference

2 Something Old, Something New, Something Borrowed…

3 #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

4 #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

5 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

6 #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

7 #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

8 #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…

9 #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.

10 #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

11 #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

12 #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

13 #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

14 #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

15 #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

16 #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

17 #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

18 #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

19 #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

20 #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

21 #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

22 #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

23 #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

24 #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

25 #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

26 #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

27 #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

28 #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

29 #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)

30 #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

31 #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

32 #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

33 #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

34 #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

35 #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

36 #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

37 #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

38 #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

39 #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%)

40 #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

41 #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

42 #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

43 There are Great Opportunities for Selling Life Insurance in the Corporate Market!


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