1. Corporate estate transfer with cash withdrawal Patrick Cziolek, B
Corporate estate transfer with cash withdrawal Patrick Cziolek, B.COM, CFP, CLU, TEP, CHS Regional Marketing Consultant, BC
A long-term, tax-advantaged strategy for withdrawing cash from a corporation
Information for advisors. This material is not intended for use with clients.

2. Client profile John is 45 years old, has a wife and 2 children
Operates a successful dental practice
Does not like paying taxes
Does not like a lot of risk. He remembers 2008!
Wants to maximize his estate
Has no pension plan, but wants one
Everyone is healthy, but has no life insurance
You have gathered all necessary info from the client, analyzed it, developed a plan and are now in front of your client.
What is your first move?

3. What happens during tax season for business owners?
CASE STUDY
What happens during tax season for business owners?

4. FOR CANADIAN CONTROLLED PRIVATE COMPANIES
BC CORPORATE TAX RATES
BC CORPORATE TAX RATES
FOR CANADIAN CONTROLLED PRIVATE COMPANIES
Type of Income
2017
2016
2015
2014
Active business income
RATE
Income up to $500,000
12.62
13%
13.5%
Income in excess of $500,000
26%
Investment income
49.67%
45.67%
44.67%

5. COMMON STRATEGY
Assets
Defer tax
OPCO
HOLDCO
INVESTMENT

6. How much tax do you pay on the growth of your passive investment?

7. FOR CANADIAN CONTROLLED PRIVATE COMPANIES
BC CORPORATE TAX RATES
BC CORPORATE TAX RATES
FOR CANADIAN CONTROLLED PRIVATE COMPANIES
Type of Income
2017
2016
2015
2014
Active business income
RATE
Income up to $500,000
12.62
13%
13.5%
Income in excess of $500,000
26%
Investment income
49.67%
45.67%
44.67%

8. PASSIVE INVESTMENT EXAMPLE
$500,000
INVESTED INITIALLY
NET VALUE:
NO TAX
NET AFTER TAX VALUE:
TAXED
CUMMULATIVE POTENTIAL GROWTH LOST TO TAX 5
$ 579,637
$ 918,957
$ 106,791 10
$ 671,958
$ 1,050,742
$ 258,401 15
$ 778,984
$ 1,201,426 $ 20
$ 903,056
$ 1,373,720
$ 758,735
Initial Balance: $500,000
Investment growth rate: 3%
Corporate tax rate: 49.67%
Source: tax grind

9. PASSIVE INVESTMENT – AFTER TAX
$500,000
INVESTED INITIALLY
NET VALUE:
NO TAX
NET AFTER TAX VALUE:
TAXED
CUMMULATIVE POTENTIAL GROWTH LOST TO TAX 5
$ 579,637
$ 345,054
$ 234,583 10
$ 671,958
$ 384,615
$ 287,434 15
$ 778,984
$ 427,253
$ 351,730 20
$ 903,056
$ 473,209
$ 429,846
Initial Balance: $500,000
Investment growth rate: 3%
Corporate tax rate: 49.67%
Source: tax grind

10. TAX WORKSHEET

11. CORPORATE INVESTMENT – TRADITIONAL
Policy year
Age
Cash invested/
premiums paid
After tax cash flow to corporation
After tax dividend to shareholder
Shareholder net estate value
IRR on death 5
$ 25,000 -
$ 81,650 % 10
$ 176,598
- 6.43% 15
$ 286,236
- 3.46% 20
$ 412,105
- 1.88% 21 66
$28,293
$ 16,803
$ 400,800
- 1.60% 30 75
$26,037
$ 15,463
$ 360,511
0.22% 50 95
$24,191
$ 14,367
$ 275,036
1.26%
will benefit from a closer look at the capital dividend account.
Non eligible dividend tax rate:40.61%
Interest: 100%,
Growth: 3%
RDTOH: 30.67%
Tax:49.67%

12. TAX ADVANTAGED LIFE INSURANCE
Policy year
Age
Cash invested/
premiums paid
After tax net of RDTOH partial surrender to Corporation
After tax dividend to shareholder
Net death benefit to shareholders estate
IRR on death 5
$ 25,000 -
$ 786,572
69.20% 10
$ 802,624
20.52% 15
$ 879,240
10.07% 20
$ 993,954
6.17% 21 66
$ 28,293
$ 16,803
$ 983,855
5.75% 30 75
$ 26,037
$ 15,463
$ 910,779
4.21% 50 95
$ 24,191
$ 14,367
$ 812,429
3.03%
Dividend scale: 5.5%, Estate Achiever 20 pay, male 45, $25,000 premium

13. The strategy Cash Cash Other Equities Other Equities Insurance
Instead of relying on investments alone, clients with excess money in their portfolio can reallocate a portion of their fixed-income investments into a participating life insurance policy.
By reallocating a portion of the money that a client would typically use in fixed-income investments into a participating life insurance policy, they don’t have to incur any additional out-of-pocket expenses. Rather, they are further diversifying their portfolio, which means they may be better equipped to manage risk and enjoy guaranteed growth.
Insurance
Fixed income
Fixed income

14. The strategy Cash Cash Other Equities Other Equities Insurance
Instead of relying on investments alone, clients with excess money in their portfolio can reallocate a portion of their fixed-income investments into a participating life insurance policy.
By reallocating a portion of the money that a client would typically use in fixed-income investments into a participating life insurance policy, they don’t have to incur any additional out-of-pocket expenses. Rather, they are further diversifying their portfolio, which means they may be better equipped to manage risk and enjoy guaranteed growth.
Insurance
Fixed income
Fixed income

15. SUMMARY OF RESULTS – COMPARISON AGE 95
TRADITIONAL
INSURANCE
INSURANCE ADVANTAGE
Cumulative cash invested or premiums
$ 500,000
Result if cash is accessed
Cumulative net cash flow to shareholder
$ 453,360 $
Net benefit at death to corporation
$ 185,137
$ 812,429
$ 627,292
Credit to capital dividend account
Net benefit to shareholder’s estate
$ 109,953
$ 702,476
Internal rate of return
0.43%
2.77%
2.34%
Result if cash not accessed
Estate Benefit
699,186
1,836,885
$1,137,699

16. CAPITAL DIVIDEND ACCOUNT (CDA)
When a corporation owns a life insurance policy and names itself as the beneficiary, this opens up new opportunities to use the corporation’s capital dividend account (CDA). In this life insurance strategy, the corporation (as beneficiary) receives the death benefit tax-free.The corporation can distribute the net death benefit received and any other funds to the extent of the credit to the CDA, to heirs or the estate as shareholders tax-free.
Notional account
Tracks tax-free amounts received by private corporation, resident in Canada
Ensure integration of taxes payable by a corporation and its shareholders
Passes tax-free amounts to shareholders, such as life insurance death benefit (less its adjusted cost basis)
The capital dividend account (CDA) has several benefits you should consider when you buy life insurance and name your private corporation as the beneficiary. These include:
Life insurance proceeds from the death benefit
Tax-free capital dividends, up to the balance in the CDA, may be paid to surviving shareholders or the estate, to provide money for succession or taxation issues.
CDA is only available to private corporations.
Corporations don’t have to pay a capital dividend immediately after the corporation receives the death benefit proceeds.
The CDA balance remains until capital dividends are elected. This allows corporations to pay a capital dividend when it’s most advantageous for shareholders. However, it is possible future capital losses that ocurr in the corporation can reduce the CDA balance.
Because payment of a capital dividend is elective, it requires attention to detail and knowledge of tax legislation. Your accountant should be involved in the election process.
For more information on the CDA, refer to the Income Tax Act, subsection 83(2).

18. Capital dividend account
Winding Up Dividend
No Insurance
With Insurance
Winding Up Dividend
900,000
Tax Payable
300,000
Net to Estate
600,000

19. PREMIUM BENEFIT OF CORPORATE OWNED POLICY
Annual insurance premium
$ 25,000
Corporate tax rate
13%
Personal tax rate
47.7%
Premiums paid in corporation on corporate owned policy
Gross revenue required in corporation
$ 28,736
Corporate income tax
($ 3,736)
Net after tax – pay premium
Premiums paid personally via salary increase from corporation
Gross revenue required in corporation, paid out in salary
$ 47,801
Tax on salary
($ 22,801)
Net after tax to individual - pay premium

20. ADVANTAGES AND DISADVANTAGES OF CORPORATE OWNED LIFE INSURANCE

21. ARTICLE FROM CA MAGAZINE

22. TARGET MARKET Business owner Age 45-50
Has excess cash in retained earnings
Is looking to enhance estate
Is looking to supplement retirement income

23. The Corporate Estate Transfer Strategy
What are the benefits?
Tax-advantaged asset accumulation during lifetime
Access to assets accumulated during lifetime
Conversion of taxable retained earnings into tax-free capital dividends following death
Significantly enhanced after-tax estate values for heirs
Permanent life insurance coverage
In addition to having permanent insurance coverage, this strategy is primarily intended to:
Permit tax-advantaged asset accumulation – acts as a form of tax-shelter from the perspective of the policyowner - the growth in policy cash values is not subject to policyowner taxation.
Create a capital dividend account in the corporation from the life insurance proceeds which can be used to fund tax-free capital dividends to the shareholders.
Net effect is greater asset values (depending on returns, of course) and a significantly greater net estate value for spouse or other heirs.

24. The Corporate Estate Transfer Strategy
How does it work?
Corporation acquires an exempt life insurance policy
Corporation is owner, premium-payer and beneficiary of the policy
TODAY
These slides walk through the steps.
Step 1 – the corporation acquires an exempt life insurance policy (whole life or universal life).

25. The Corporate Estate Transfer Strategy
How does it work?
Premiums are funded from excess corporate cash flow or by transferring existing capital into the policy
Increases in cash values are not subject to policyowner taxation
ACCUMULATION
Step 2. The corporation funds the premium deposits. The growth in policy values is tax-sheltered.

26. The Corporate Estate Transfer Strategy
How does it work?
Policy cash values can be accessed to supplement retirement income, if desired
Withdraw from policy
Policy loans
collateral assignment to third party lender for loans
Tax implications vary between alternatives
ACCESS
The policyowner may decide to access the policy values, for example, for retirement, business expansion, etc.
3 methods of accessing cash values:
Cash surrender – prorata taxation of accrued policy gain
Policy loan – proceeds in excess of policy ACB taxed as policy gain
Leverage – collateral assignment of policy by corporation (or possibly by shareholder) for a bank loan or line of credit – advances are not taxable so this is a more efficient method of accessing policy values in many cases – however, there are financing charges
The key point is that the funds inside the insurance policy are accessible if needed.

27. Accessing cash value
Can be a one-time or series of cash withdrawals to:
Supplement retirement income
Create another tax-advantaged account
Use for unexpected life events
Alternative to accessing income from corporate assets
Accessing cash value can be a one-time withdrawal, or a series of cash withdrawals. Withdrawing cash value may reduce the total death benefit while maintaining the initial base life insurance coverage amount.
Let’s compare partial surrenders/cash withdrawals and policy loans, as each one works differently.
If a client borrows against or withdraws money from the policy, it may reduce the policy’s cash value and death benefit and may be subject to tax.

28. The Corporate Estate Transfer Strategy
How does it work?
Insurance death benefit is paid tax-free to corporation
Excess of death benefit over policy ACB credited to capital dividend account of corporation (CDA)
Corporation can distribute tax-free dividends to shareholders to extent of balance in CDA
ESTATE
Insurance proceeds are received by a corporation on a tax free basis. The portion of the policy proceeds that constitutes adjusted cost basis is received tax-free as part of the death benefit, however the ACB portion does not form part of the CDA. The CDA portion of the proceeds can be paid out to the shareholders on a tax-free basis. The ACB portion of the proceeds would be paid out on a taxable basis. The cash value portion of life insurance is included in the share value of a corporation for purposes of valuation of those shares immediately before death. Therefore the CSV is included in the share price for calculating any capital gain on the death of the shareholder.

29. CONCOURSE

30. CONCOURSE

31. Excel Spreadsheet

32. TAX GRIND CALCULATOR

33. Dividend scale interest rate
Low volatility
Current DSIR
5.5% rate for 2017
Historical performance for periods ending 2016
7.0% 10-year average, since
7.8% 20-year average, since
8.9% 30-year average, since
8.9% 60-year average, since
1.9% 30-year standard deviation, since 1987
The investment component of policyowner dividends is based on the dividend scale interest rate.
The dividend scale interest rate reflects the return on the assets backing the participating account liabilities. It does not include assets backing the participating account surplus.
As this slide shows, the dividend scale interest rate for is 6.50 per cent.
Note the historically low volatility level, as measured by the 30-year standard deviation. From – , it’s only 1.8 per cent.
(Note to presenter:) This historical information matches the last printed version of this information.
What this means . . .
For clients, this means they are purchasing something with a solid investment component and low volatility
It’s important to understand the dividend scale interest rate is only one factor that contributes to the performance of your client’s policy. The policy’s cash value also reflects other factors, such as type of product, product features, premium-paying period, issue age, rating, dividend option, and others.

34. Where policy owner dividends come from
Facts
Where policy owner dividends come from
Key messages:
It’s important to distinguish between two different types of performance within participating accounts.
Investments (circled in red) -- Investments held in the participating account achieve returns.
The returns from the assets backing the participating account’s liabilities are reflected in the dividend scale interest rate. They are brought into the dividend scale interest rate over a period of time. This “smoothing” helps reduce volatility.
Other factors (circled in blue) -- the dividend scale interest rate is used to calculate the investment component of the dividend scale.
Other factors also affect the dividend scale. These include mortality, expenses and taxation and others.
The main takeaway here is that the participating account performance, reflected in the dividend scale interest rate, is just one of many factors that contribute to the overall performance and stability of policyowner dividends.

35. Bond laddering strategy

36. REVIEW STRATEGY REPORT

37. Important notes
An exempt life insurance policy is defined in regulations 306 and 307 of the Income Tax Act (ITA). Generally, the ITA provides that the cash value accumulation is exempt from annual accrual taxation, provided certain conditions, as set out in the regulation, are met. Illustration examples: Examples provided are not complete without the Canada Life illustration, including the cover page, reduced example and product features pages, all having the same date. Read each page carefully, as they contain important information about the policy. Dividends are not guaranteed and vary up or down from those illustrated, depending on future dividend scales.

38. THANK YOU