hot business insurance ideas kevin wark, llb, cfp cifps national annual conference

Hot Business Insurance Ideas

Kevin Wark, LLB, CFP

CIFPS National Annual Conference

Something Old, Something New, Something Borrowed…

#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

#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

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

#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

#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

#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…

#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.

#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

#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


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


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


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

#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

#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


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 todesignate charity as beneficiary and claim as adeduction


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


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


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


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


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

#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


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


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


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


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


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


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)


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

#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

#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

#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

#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

#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

#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


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


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


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%)


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


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

#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

There are Great Opportunities for Selling Life Insurance in the

Corporate Market!

hot business insurance ideas kevin wark, llb, cfp cifps national annual conference

Documents

policy slide

collateral insurance

future slide

tax purposes slide

bobco slide

borrowed slide

member slide

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