Hot Business Insurance Ideas

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Hot Business Insurance Ideas
Kevin Wark, LLB, CFP
CIFPS National Annual Conference
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Something Old, Something New, Something Borrowed
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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

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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

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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

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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 dont have
  disposition if Opco is sold or beneficiary is
  changed in the future

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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

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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

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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.

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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

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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

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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

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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

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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 withdraw300,000 tax-free
  from Bobco

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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

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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

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4 Charitable Gifting

• Gift of Insurance
• Dambro Construction could be the
  owner/beneficiary of a 100,000 policy on Joes
  life
• On Joes 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

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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 Joes
  estate

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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 Joes life
• On Joes death the insurance policy would redeem
  preference shares owned by charity

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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

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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 Joes
  life - could be assigned to repay new loan

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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

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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

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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 shareholders life - company is owner and
  beneficiary
• Company liquidates investments and borrows funds
  to replace investments

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5 Corporate Back to Back

• Corporation purchases a non-prescribed annuity on
  shareholders 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

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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

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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

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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

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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)

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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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

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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

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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

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