Choose the right investment. Segregated fund policies versus mutual funds

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1 Choose the right investment Segregated fund policies versus mutual funds

2 Choose the best option for your clients investment needs Segregated fund policies and mutual funds provide clients: Professional money management Diversified investment that can be tailored based on risk Segregated fund policies also have: Growth potential of investment funds along with: Death benefit Maturity guarantees 2

3 Target clients Segregated fund policies Investors who want to invest in the market for growth, but want to limit potential losses with maturity guarantees Investors who want to help protect the value of their legacy by bypassing the delays and expense of the estate and probate process Investors who want to keep details of their estate discrete by passing assets privately and immediately to their named beneficiaries Mutual funds Investors who value lower management fees (and are willing to forego guarantees or potential creditor protection) Investors with a simplified need for estate planning (for example, families with young children) Investors without a need for principal protection Sole proprietors, partners or professionals looking to protect their investments from creditors 3

4 Today, we ll: Understand the legal character of segregated fund policies and mutual funds Learn the similarities Understand the differences Learn how to position segregated fund policies Discuss why Canada Life segregated funds policies? 4

5 Legal character of segregated fund policies and mutual funds Segregated fund policies Life insurance contract Client owns an interest in the life insurance contract; units of the segregated funds are notional Contract ends on the death of the last annuitant (measuring life) Mutual funds Pooled investment in a trust or corporation Client owns units of a mutual fund trust or shares of a mutual fund corporation Units/shares pass to estate or to named beneficiary of a registered plan on death 5

6 Legal character of segregated fund policies and mutual funds cont d Segregated fund policies Can name beneficiaries for both registered and non-registered policies Regulated by provincial insurance legislation Information folder must be given before or at time of sale and a policy at the time of sale Potential creditor protection for registered and non-registered policies Mutual funds Cannot name beneficiaries for nonregistered plans or registered plans in Quebec Regulated by provincial securities legislation Prospectus must be given within 48 hours of sale Potential creditor protection for registered accounts only 6

7 Differences Income allocations versus distributions Tax treatments Protection features Annuitants and beneficiaries Death of owner and/or annuitant Potential creditor protection 7

8 Income allocations versus distributions Tax treatment Segregated fund policies We allocate income on a time-weighted basis, except capital gains or losses are allocated first to policyowners who disposed of units throughout the year. Mutual fund trust Income distributed to accountholders of record on distribution date. Mutual fund corporation Income distributed to shareholders of record on distribution date. Mutual fund trust: Mutual fund trusts are unit trusts. The beneficial interest in the trust is divided into units. Mutual fund corporation: Mutual fund corporations are share corporations. Investors in the corporation own shares. 8

9 Income allocations versus distributions Tax treatment of dividends Segregated fund policies Taxable Canadian dividends, capital gains, losses and foreign income all flow through and retain their character when allocated to policyowners. Mutual fund trust Taxable Canadian dividends, capital gains and foreign income all flow through and retain their character when distributed to account holders of mutual fund trusts. Mutual fund corporation Only Canadian dividends and capital gains flow through to investors and are paid in form of dividends and capital gains dividends. 9

10 Income allocations versus distributions Tax treatment of switches Segregated fund policies Switches between different segregated funds are taxable dispositions. Mutual fund trust Switches between different mutual fund trusts are taxable dispositions. Mutual fund corporation Switches between different funds within the same mutual fund corporation are not considered taxable dispositions. 10

11 Income allocations versus distributions Capital losses Segregated fund policies Net capital losses flow through to investors and are available to investors to offset capital gains from other sources. Mutual fund trust Net capital losses and non-capital losses must be carried forward at the fund level. Mutual fund corporation Net capital losses and non-capital losses must be carried forward at the corporate level. 11

12 Income allocations versus distributions Income reporting Segregated fund policies Income is reported on T3 (Relevé 16 in Quebec). Capital gains and losses reported on the T3 (Relevé 16 in Quebec) include both allocated gains/losses and gains/ losses from disposal of units. Mutual fund trust Income reported on T3 (Relevé 16 in Quebec). Accountholders must track own ACB and report the gain/loss on dispositions on their tax return. Mutual fund corporation Income is reported on T5 (Relevé 3 in Quebec). Clients must track own ACB and report the gain/loss on dispositions on their tax return. 12

13 Income allocations versus distributions Effect of allocations on unit value Segregated fund policy example Unit value $12 Units owned 100 Allocation $1/unit Post allocation unit value $12 Units purchased Adjusted cost basis Increased by $100 Total units owned

14 Income allocations versus distributions Effect of distributions on unit value Mutual fund example Unit value $12 Units owned 100 Distribution Post distribution unit value $1/unit $11 Units purchased 9.09 Value $1,200 Total units owned

15 Income allocations versus distributions End difference Segregated fund policies Mutual funds 100 x $12 = $1, x $11 = $1,200 Cost: $12 x adjusted cost basis bump of $100 = $1,300 Cost: $12 x $11 x 9.09 = $1,300 Capital gain = $100 Capital gain = $100 15

16 Tax treatment differences Capital losses treatments Segregated fund policies Capital losses are passed to investors and are deductible by them Mutual funds Capital losses offset capital gains within the mutual fund during the year or are carried forward to apply against future capital gains of the fund 16

17 Tax treatment differences Tax on distributions and allocations Segregated fund policies Allocations of income are on a time-weighted basis Only income for the period of ownership is taxed. If units are purchased half way through year, half of the year s income is allocated to the investor. If fund units are redeemed half way through year, half of the year s income is allocated to the investor. 17

18 Tax treatment differences Tax reporting Segregated fund policies Income allocations, redemptions and gains or losses are reported on a T3 (RL-16 in Quebec) tax slip Insurance company tracks the adjusted cost basis Amounts on policyowner s year-end statement may not match with the tax slip as the unit value also reflects unrealized gains or losses on investments not yet disposed of. Mutual funds Income distributions of a mutual fund trust are reported on T3 tax slips Mutual fund corporations report income on T5 (RL-3 in Quebec) tax slips Disposition of mutual fund unit proceeds of sale are reported on a T5008 tax slip or statement of account Clients must track their own adjusted cost base Consider return of capital when tracking* *See Segregated funds or mutual funds: Do you know the differences advanced sales article (April 2012) 18

19 Protection differences Guarantees and options 19

20 Protection differences Market gains and income Additional options (availability of options varies by guarantee level, additional fees apply) Maturity guarantee reset option Death benefit guarantee reset option Canada Life lifetime income benefit option Annual automatic resets of the maturity guarantee Annual automatic resets of the death benefit guarantee Guaranteed income for life beginning as early as age 50 and offers features that may increase future income payments Available with 100/100 guarantee policies Available with 75/100 and 100/100 guarantee policies Available with 75/75 and 75/100 guarantee policies For more information see the Lifetime income benefit with the Canada Life segregated funds product guide (form ). 20

21 Protection differences Policy guarantees and taxation Top-up paid how is it taxed? Guarantee payment at maturity? Guarantee payment at death? The tax treatment of a top-up guarantee payment is not certain at this time. Top-up guarantee payments will be reported based on the understanding of the tax legislation and the CRA assessing practices at that time. The current understanding is to report these payments as a capital gain. Seek assistance from your tax advisor regarding the tax treatment of such payments in your particular situation. 21

22 Protection differences Guarantees and taxation, cont d Top-up paid how is it taxed? Original investment (ACB) $10,000 Fair market value $7,000 Top-up (Capital gain) $3,000 Income Capital gains Death benefit $10, per cent taxable 50 per cent taxable Not taxable ACB $10,000 Fair market value $ 7,000 Capital loss $ 3,000 (offset capital gain of top-up) Net effect Zero to client 22

23 Annuitants and beneficiaries Segregated fund policies: Must have both an annuitant and a beneficiary Beneficiary designation enables estate bypass under provincial insurance act legislation Mutual funds: No annuitants, but can have a beneficiary for registered mutual funds 23

24 Death of owner and/or annuitant Segregated fund policies If the annuitant dies The death benefit is paid to the named beneficiary, or estate if there is no beneficiary, and then the contract is terminated. If the owner (non-annuitant) dies Policy passes to contingent owner specified, or as outlined in deceased s will. If there are joint annuitants, and one of the annuitants dies, the surviving annuitant becomes the sole annuitant. Annuitant s death is a disposition for tax purposes. The policyowner must include any capital gain or loss arising from this disposition on their income tax return. If the policyowner dies, the Income Tax Act deems the deceased owner to dispose of the policy at fair-market value and as a result, any capital gain or losses must be reported on their final tax return. Note: Death of beneficiary isn t a taxable event. In this case, the policyowner should name another beneficiary. 24

25 Death of accountholder Mutual funds If the mutual fund accountholder dies Account remains in effect and ownership passes to new owner as designated in will. Ownership can be transferred tax-deferred to surviving spouse or common-law partner, provided both parties were residents of Canada on the date of death. The Income Tax Act deems a disposition to occur at fair market value on the date of death of the accountholder. Any capital gain or loss arising from the deemed disposition must be reported on the final tax return of the deceased. For registered mutual fund accounts, such as an RRSP or RRIF, the second row applies only unless the spouse or common-law partner is named the sole beneficiary. 25

26 Protection differences Provincial estate taxes (probate) fees Probate, which is called different things across the country, is a process through which the will is proved valid and authentic and also deals with the administration of the deceased s estate. When probate may be necessary Intestacy Litigation Minors Continuing testamentary trust Real property Bank accounts Corporate shares Canada Savings Bonds Life insurance 26

27 Protection differences Estate taxes (probate) costs $500,000 estate $250,000 estate Probate fee Basis points Probate fee Basis points Alberta 1 $400 8 $ British Columbia $6, $3, Manitoba $3, $1, Newfoundland & Labrador $2, $1, Northwest Territories 1 $400 8 $ New Brunswick $2, $1, Nova Scotia $7, $3, Nunavut 1 $400 8 $ Ontario $7, $3, Prince Edward Island $2, $1, Quebec 2 $0 0 $0 0 Saskatchewan $3, $1, Yukon Territory 3 $140 3 $140 6 As of January Probate fees capped at $400 2 $102 for non-notorial wills filed by individual, $114 if filed by corporation. Notorial wills not probated 3 Probate fees capped at $140 27

28 Protection differences Fees to settle estates Annual trustee/executor fees 2.5 per cent 2.5 per cent 0.4 per cent Income receipts/disbursements Capital receipts/disbursements Gross asset value legal fees Eligible fees Three to five per cent of assets depending on size of estate Accounting fees Privacy no courts Timing Above figures are examples only, actual costs will vary. Source: Canadian Estate Administration Guide 28

29 Potential creditor protection Segregated fund policies Potential for creditor protection is provided under insurance legislation. For personally owned segregated fund policies creditor protection can mean that the policy can t be accessed by creditors during the life of the annuitant. Potential for creditor protection may be available where the beneficiary is of a certain relationship to the annuitant, for example: spouse or common-law partner, child or parent. As well, there may be other protections available for registered policies, under either bankruptcy or writ execution legislation. 29

30 Potential creditor protection Segregated fund policies After the death of the annuitant, the benefit of insurance continues the protection from creditors, where policyowner has named a beneficiary; death benefit is paid to a named beneficiary outside estate and any creditors of the estate do not have an interest. A beneficiary of a segregated fund policy that is registered may have joint and several liability under the Income Tax Act (Canada) if the estate is unable to pay the income taxes relating to the amount included for the RRSP or RRIF on the final return of a deceased taxpayer. Creditor protection depends on court decisions and applicable legislation, which can be subject to change and can vary by province; it can never be guaranteed. Clients should talk with their lawyers to find out more about the potential for creditor protection for their specific situations. 30

31 A little more cost for a whole lot of difference Segregated fund policies Investment in mutual fund Professional management Diversification Simplicity Liquidity Flexibility Additional benefits Potential creditor protection Tax treatment differences Protection features Reduced estate costs Increased privacy Additional costs for segregated fund policies

32 Canada Life makes business easier for you Automatic rebalancing Fund-to-fund dollar-cost averaging (systematic fund-tofund switches) Deferred sales charge (DSC) reimbursement program Potential for no cost, 12 switches allowed per year 32

33 Canada Life segregated funds offer great funds and unique offerings For 2011, 58 per cent of all Canada Life segregated funds were ranked first or second quartile, including fundof-fund solutions with 75 per cent ranked the same. Canada Life segregated funds has unique offerings, such as: Canada Life Real Estate Fund (GWLRA) Enhanced Dividend (Laketon) 33

34 You have corporate strength and stability with Canada Life Canada Life has received very strong ratings on our claims paying ability and financial strength from the major rating agencies.* For current information on Canada Life s rating and financial strength, see our website *as rated by A.M. Best Company, Dominion Bond Rating Service, Fitch Ratings, Moody s Investor Service and Standard & Poor s Ratings Services at time of publication. 34

35 Disclaimers The information provided is based on current tax legislation and interpretations for Canadian residents and is accurate to the best of our knowledge as of the date of publication. Future changes to tax legislation and interpretations may affect the information. The information is general in nature, and is not intended to be legal or tax advice. For specific situations, you should consult the appropriate legal, accounting or tax advisor. A description of the key features of the segregated fund policy is contained in the information folder. Any amount that is allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value. 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. Canada Life and design, and Helping people achieve more are registered trademarks of The Canada Life Assurance Company. 35

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