Estate Planning. Insured Inheritance. Income Shelter. Insured Annuity. Capital Gains Protector

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1 Estate Planning Insured Inheritance The Insured Inheritance concept demonstrates an opportunity to shelter a lump sum investment from income tax and to ensure that the maximum tax-free dollars become available to the estate, or to a beneficiary upon death. Income Shelter The Income Shelter concept demonstrates that a life insurance policy can be used successfully as a tax shelter for annual investments that are intended to provide a maximum fund to tax free dollars to the estate, or to a beneficiary, at death for a predetermined purpose. Insured Annuity An insured annuity provides a guaranteed regular income for life plus a permanent life insurance benefit. Capital Gains Protector The Capital Gains Protector demonstrates how life insurance can eliminate your future Capital Gains Tax liability at death. This is based on the Asset values and their projected growth tax rates.

2 Retirement Planning Income Generator This concept shows how substantial sums can be invested in a Life Insurance policy with a view to tax sheltering investment earnings until moneys are withdrawn during retirement years. Insured Retirement This concept demonstrates how the tax-free growth of funds within a life insurance policy can be used to generate tax-free income through use of the policy as collateral against annual loans from a bank/trust company. Secular Trust To provide an employee with additional retirement income a Secular Trust is set up to fund the income on an after-tax basis through the employee. Retirement Compensation Arrangement A retirement compensation arrangement (RCA) is a plan or arrangement under which an employer or former employer makes contributions to a trust or other custodian in connection with benefits to be enjoyed by any person on, after or in contemplation of an employee s retirement, loss of employment or any substantial change in services rendered (condensed from the Income Tax Act subsection 248 (1)). Tax Sheltered Income Stream This concept shows how substantial sums can be invested in a Life Insurance policy with a view to tax sheltering investment earnings until moneys are withdrawn during retirement years.

3 Corporate Insurance Capital Dividend Account A private corporation is entitled to maintain a national tax account, called the Capital Dividend Account (CDA) which keeps track of various tax-free surpluses accumulated by the firm. These surpluses may be distributed as capital dividends free of tax to the corporation s Canadian-resident shareholders. If the Corporation owns a life insurance policy and receives the proceeds upon the death of the insured, that portion of the death benefit which exceeds the Adjusted Cost Basis of the policy qualifies as a tax-free surplus for the CDA under The Income Tax Act (Canada). Corporate Split Dollar Split Dollar Deposit is a method of splitting the cost and benefits of a life insurance policy between an employer and an employee. NCPI Tax Savings Where a life insurance policy is required as security against a loan by a lender, a degree of tax deductibility may be claimed by the borrower in respect of the annual cost of acquiring that coverage according to a Revenue Canada approved table of mortality rates that are multiplied by the net amount at risk for the year (Estate Value minus Fund Value). The deductible Net Cost of Pure Insurance (NCPI) is either the result of this calculation, or the actual annual mortality charges paid on the policy whichever is the lesser. Corporate Buyout A popular way of planning for the continuation of a small corporation in case one of the shareholders dies is through a criss-cross buy-sell agreement between shareholders funded with life insurance policies owned by the company. Corporate Redemption of Shares This concept demonstrates the effectiveness of accumulating the cash to fund the buyout inside the company using traditional (non-tax-deferred) methods with a Universal Life policy. The redemption of shares from a shareholder by a corporation is usually carried out under the terms of a Buy-Sell Agreement which spells out the terms of the redemption

4 and funding through a corporate-owned life insurance policy. The redemption is triggered by the death of the shareholder. Employee/Shareholder Arrangement Small corporations sometimes offer shares and future benefits to attract and retain valuable employees. Retirement income and death benefits are among the more important offered. Share ownership and life insurance make for a good combination to provide those benefits in a tax effective way. Corporate Key Person Protection Many small corporations have at least one person upon who the business depends for its success. Life insurance can protect the business against the loss of this individual. It is referred to as key person insurance. Prudent business practice calls for the corporation to set up a contingency fund should the individual suddenly quit or die. Corporate Insured Annuity When funds within a Canadian-controlled private corporation are in excess of what is needed to carry on its active business in Canada the description of those funds changes from operating funds to investment funds. Earnings on investment funds, generally referred to as investment income, are not subject to the small business deduction. They are taxed at the high corporate rate. This reduces the amount available to the corporation for pay-out as dividends to its shareholders. The Income Tax Act requires that an extra refundable tax on investment income be collected. When the same amount is invested in a Long Term Guaranteed Investment, higher dividends are produced for shareholders if it is invested in a combination life annuity and term to 100 life insurance policy. The approach is referred to as Corporate Insured Annuity. Both the annuity and the term insurance policy are taken out on one of the principal shareholders.

5 Pension Estate Maximization Annuity Estate Maximizer The Annuity Estate Maximizer concept is designed for those who wish to invest a portion of their net after-tax Annuity, RRIF, or Pension income to ensure that a substantial tax-free capital sum becomes available to their estate, or to a beneficiary, upon death. RRIF Estate Maximizer The RRIF Estate Maximizer concept is designed for those who have surplus income in retirement and who wish to maximize the transfer of capital assets tax-free to beneficiaries upon death. Insured RRIF The Insured RRIF concept is designed for those who wish to ensure that the full balance of the RRIF account passes on to the estate upon death.

6 Charitable Giving Charitable Annuity The Charitable Annuity concept is designed for those who wish to have a guaranteed income for life, and yet make a regular donation to a charity during the donor s lifetime. This can be done with a Single Deposit Life-0 Annuity. Charitable Insurance Canadians may donate up to a maximum of 50% of taxable income in any one year to qualify for charitable donation tax credits. Deposit and payment duration of the policy should be selected so as to fall within this limitation. Over payments may be carried forward for up to 5 years. The 1996 federal budget increased the limit on charitable donations to 100% of an individual s net income in the year of death and in the immediately preceding taxation year. The 50% limit remains in effect for other years except where appreciated capital property is gifted. In this case, the donation limit equals 100% of the net income that arises as a consequence of the gift. Donations received by charities must be spent according to a set of rules known as Disbursement Quotas which dictate what proportion of the preceding year s donations must be spent by the charity for charitable purposes in the current year. The actual proportion depends on the category of the charity. Charitable Organisations and Public Foundations must disburse 80% of their income, and Private Foundations must disburse 100%. This places a limitation on the gifting of premiums for a life policy which are not available for disbursement until death of the donor. Care should be taken to review this aspect with all parties when considering a Charitable Insurance Plan. Charitable Insured Annuity The Charitable Insured Annuity concept is designed for those who wish to have a guaranteed income for life, and yet provide a maximal donation to one or more charities at death. This can be done by combining a prescribed Single Deposit Life-0 Annuity with one or more Term to 100 life insurance policies.

7 Miscellaneous Internal Rate of Return This concept is designed to show the Internal Rate of Return for an investment in a Life Insurance policy. Death Benefits are tax-free. Family Split Dollar A split dollar plan is neither a type of insurance nor a reason for purchasing an insurance policy. Split dollar plans are simply a method of splitting the costs and benefits of a life insurance policy between two parties. Any two parties can be involved in a split dollar plan but the most common application in a family is with a parent and adult child.