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1 Life insurance solutions isn t static, neither is your business Protect life Corporate collateral loan strategy

2 Increase your business cash flow with corporately owned life insurance from Canada Life Business partners could significantly increase the after-tax value of their estate by moving the private corporation s passive assets into tax-advantaged permanent life insurance. See how business owners, David and Karen, use Canada Life s Corporate collateral loan strategy and permanent life insurance to access corporately owned life insurance policy cash surrender value.

3 Meet David and Karen David and Karen, both age 55. David inherited ABC Inc. from his parents 30 years ago. Continues to grow as a successful established business. Both are operating partners, with 24 employees working for them. Through comprehensive business planning, David and Karen not only expanded their services to be competitive in their market, but they also ensured they had cost-effective life insurance, providing flexibility in the future. Shortly after inheriting ABC Inc. David and Karen met with their advisor to review their financial needs, their advisor suggested that ABC Inc. purchase two Canada Life Simply Preferred term 20 life insurance policies with $1 million of coverage each on the lives of David and Karen. ABC Inc. s current state The company is now looking to grow the after-tax value of the corporate assets. ABC Inc. has grown into a successful second generation Canadian-controlled private corporation and is continuing to expand operations. David and Karen s hard work has paid off and ABC Inc. is generating a significant amount of excess cash flow each year. ABC Inc. retains a considerable portion of business profits within ABC Inc. These funds are currently in traditional investments and the corporation pays 45 per cent tax (the top corporate rate) on the income from these passive assets. With plans to expand ABC Inc., they may need to access these funds. 2

4 The need David and Karen have five primary needs: 1 Provide for their estate needs 2 Reduce annual taxes 3 Managing risk of market volatility of the investments 4 Protecting future access to their excess funds 5 Access to cash when needed on a tax-efficient basis The solution Corporate collateral loan strategy A Corporate collateral loan strategy is a financial planning strategy that utilizes the cash value of a tax exempt permanent life insurance policy as collateral for a corporate line of credit or loan. Corporately owned life insurance policy cash value Policy assigned to lending institution Lending institution provides tax-free loan advances to corporation This strategy will: Keep excess funds inside ABC Inc., but switch capital to a tax-advantaged environment by converting existing term policies into permanent participating life insurance policies. Provide the opportunity to reduce erosion of corporate assets due to taxes and accumulate tax-advantaged growth inside policies. Allow the corporation to access policy cash surrender values by a collateral loan from a lending institution. Provide tax-free funds to the corporation upon death of the insured. The death benefit proceeds may be paid out tax-free to the remaining shareholder or the estate. David and Karen s advisor suggests they convert their existing term policies. David and Karen each choose a Wealth Achiever max 20 policy with maximum additional deposit option (ADO). This plan has: Guaranteed cash value starting in year one Guaranteed basic premium payable for 20 years Flexibility to include an additional deposit option 3

5 A comparison 30 years later Life insurance and corporate traditional investment comparison at age 85 To compare the Corporate collateral loan strategy versus their current strategy (traditional investments), the advisor illustrates an equalized income scenario with cash flow distributed as taxable dividends from the corporation to the shareholders. Cumulative premium**/deposit Cumulative net after-tax shareholder (10-year period) Death benefit to estate, net of loan repayment Capital dividend account credit Life insurance solution Karen Corporate traditional investments Life insurance solution David Corporate traditional investments $511,850 $511,850 $519,750 $519,750 $593,317 $593,317 $593,317 $593,317 $628,676 $204,482 $528,183 $224,523 $1,779,390 N/A $1,775,011 N/A While living, have access to tax-advantaged Life insurance and traditional investment comparison at cash age value 85 accumulation within a life insurance policy. On death, receive credit to capital dividend account (CDA). Capital dividend and the capital dividend account an integral part of tax planning The credit to the capital dividend account at age 85 will be $1,775,011 for David and $1,779,390 for Karen, which could be paid out tax-free by way of a capital dividend C **Accumulated without interest. Policy assumptions: male non-smoker, standard risk class, age 55, $1 million Wealth Achiever max 20 policy with $4,995 additional deposit option for 10 years. Female non-smoker, standard risk class, age 55, $1 million Wealth Achiever max 20 policy with $4,995 additional deposit option for 10 years. The current dividend scale, which is assumed to remain unchanged. Dividends are not guaranteed. Any insurance policy used as an example in this document is assumed to be validly in force and its cash values within prescribed limits so as not to attract accrual tax. The example provided isn t 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. Strategy assumptions: Province of residence is Ontario, corporate tax rate per cent, refundable dividend tax rate per cent, non-eligible dividend tax rate per cent, fixed-income investment 100 per cent interest, growth rate of return five per cent, equalize using requested scenario from year 21 for 10 years, borrowing type dividend to shareholder, collateral loan assumptions 6.25 per cent interest, maximum loan/cash value ratio 90 per cent, reach maximum loan at age 90. Taxable to David and Karen on distribution as dividend income. A lending institution may require early loan repayment, so funds should be available from sources other than by policy surrender to ensure repayment. Any insurance policy used as an example in this document is assumed to be validly in force and its cash values within prescribed limits so as not to attract accrual tax. 4

6 How it works Using corporately owned life insurance policies as collateral, ABC Inc. approaches a third-party lending institution to borrow funds. ABC Inc. then declares a taxable dividend on the basis of the loaned amount and pays the borrowed funds to the shareholders. The reason a tax advisor may recommend taxable dividends be paid is to recover some of the refundable tax if there is a balance in the corporation s refundable dividend tax-on-hand account. For example, the payment of a taxable dividend could result in a dividend refund to the corporation at a rate of $1 for every $3 of taxable dividends paid. If there is more than one shareholder for a class of shares (e.g., common shares class A), then each shareholder would receive a proportionate amount of the dividends based on their ownership in that class. Taxable dividends received by the shareholder are subject to tax at his or her marginal tax rate. The dividend tax credit will apply. The marginal tax rates on dividends are generally lower than the marginal tax rate on salary or bonus. Another advantage Another advantage of a corporately-owned life insurance policy is that the life insurance death benefit creates a credit to the corporation s capital dividend account (CDA). The credit is equal to the death benefit less any remaining adjusted cost basis (ACB) of the life insurance policy. The CDA can be used to pay tax-free capital dividends to shareholders. For ABC Inc., this means part of the life insurance death benefit proceeds are used to repay the loan, while the entire amount (less any remaining ACB) is credited to the CDA. A tax-free capital dividend, up to the balance in the CDA, can then be paid to the remaining shareholder or deceased s estate. Many of the key challenges faced by an established business may be solved with permanent life insurance. A permanent life insurance policy provides the protection of a death benefit, as well as access to cash value through a collateral loan. In this example, cash from a collateral loan can be used for Karen and David s expanding business and/or retirement needs. This is one example of how a participating life insurance policy from Canada Life can provide flexibility to help business owners like David and Karen elevate their financial plan. 5

7 Many of the key challenges faced by an established business may be solved with permanent life insurance. Traditional investments assumes fixed-income investments. In Quebec, advisor refers to a financial security advisor for individual insurance and segregated fund policies; and to an advisor in group insurance/annuity plans for group products.

8 Founded in 1847, Canada Life was Canada s first domestic life insurance company. In Canada, Canada Life offers a broad range of insurance and wealth management products and services for individuals, families and business owners from coast to coast. Canada Life is a subsidiary of The Great-West Life Assurance Company and a member of the Power Financial Corporation group of companies. Visit our website at This material is current as of August 2011 and is for information purposes only and should not be construed as providing 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 and interpretations for Canadian residents, which is subject to change. For individual circumstances, consult with your accountant, lawyer and tax advisor. Helping people achieve more Canada Life and design and Helping people achieve more are trademarks of The Canada Life Assurance Company /11

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