Business Insurance Part 1

Transcription

1 Business Insurance Part 1 Working with Business Owners A PARTNER YOU CAN TRUST. Jorge Ramos, CFP,CLU Director of Advanced Marketing 1

2 Business Structures and Taxation A PARTNER YOU CAN TRUST. 1

3 Business Structures > Self Employed > Partnerships > Incorporated private business > CCPC > Publicly listed corporation > Professional Corporations

4 Business Taxation 101 > Self Employed > Commission income or sales > Can deduct expenses > Net profit taxed as personal income > Partnerships > Commission income or sales > Can deduct expenses > Net profit added taken as income proportionately by each partner

5 Business Taxation 101 > Incorporated Private business > General corporate tax rates > 26% (11% Provincial, 15% Federal) > 25% (manufacturing, farming, mining) > CCPC > 15.5% (4.5% Federal, 11% Provincial) > On first $500,000 >Publicly Traded companies >Do not qualify as CCPC

6 Canadian Controlled Private Corporation > CCPC > Corporation resident in Canada > 51% controlled by Canadians > Not listed on a stock exchange > Not owned by a publicly traded firm

7 CCPC - Advantages > Lower corporate tax rates > 15.5% vs. 26% > An additional month to pay taxes > Enhanced investment tax credits > Qualifies for Capital gains exemption - CGE > First $750,000 of capital gains on shares is tax-free

8 Capital Gains Exemption > First $750,000 of capital gains are tax-free > Qualified small business shares > Qualified Farm property > 50% of assets actively used in the business for the last 24 months > 90% of assets actively used in the business at time of sale > Shares owned by individual for last 24 months

9 Publicly Listed Corporation > Everyone is an employee, including Founder > Company can own Life insurance on employees > Requires resolution of the board > Insurance premiums not tax deductible

10 Professional Corporations A PARTNER YOU CAN TRUST. 1

11 Professional Corporations > Can only carry on business of profession > Majority must be owned by professionals (voting shares) > Non-professional spouse/children can also be shareholders (non-voting shares) > Cannot be a numbered company

12 When to set-up a Professional Corp > Income higher then needed for lifestyle > No personal non-deductible debts > In highest personal tax bracket > Spouse and children in lower tax brackets > Creditor protection needed > Deductions against income needed

13 Professional Corp. Advantages > Qualifies for small business tax rates > Expenses deduction > Tax deferral > Corporate tax vs. personal tax rates > Dividend vs. salary > Income splitting > Hiring family members > Dividend sprinkling > Creditor Protection

14 Professional Corp. - Disadvantages > CGE triggered on sale of shares > Cannot sell professional corp. shares easily > No protection against Professional negligence > Increased costs to administer > Increased regulation and complexity > Employee health tax charged on income > Business losses cannot be flowed to shareholders

15 The Mechanics of Corporate Policies A PARTNER YOU CAN TRUST. 1

16 CDA - Capital Dividend Account > The CDA is a notional account. > It is not an actual bank account but rather an accounting notation > The CDA tracks any amounts that a company receives tax free, such as: > Insurance death benefits, net of ACB > Tax-free portion of capital gains > Capital dividends received > The CDA amount allows the corporation to pay a tax-free capital dividend from their retained earnings. > Must be paid to a CDN resident > Must be a CCPC CDN controlled private Corp.

17 Calculating CDA > CDA = Life insurance death benefit ACB > Life insurance death benefit > net of policy loans > not net of collateral loans > Applies to permanent and Term policies > Applies whether there is cash value or not > Notes: > ACB usually goes to zero after 20+ years, cannot be negative > CDA has to be paid out equally to all shareholders of the same class

18 ACB > ACB Adjusted Cost Basis > Ensures that corporate money gets taxed properly in personal hands > The ACB of policy tracks the original premium paid by a company for life insurance minus the NCPI > Formula > Premiums Paid increase ACB > NCPI decreases ACB

19 NCPI > NCPI Net Cost of Pure Insurance > Net amount at risk (NAAR) for the year multiplied by the probability of death in that year, ie: similar to T1 rates > Based on 1975 Select and Ultimate mortality table > Costs for any benefits or riders removed > Removes any ratings on substandard risks

20 Calculating CDA > CDA = Life insurance death benefit ACB > Life insurance death benefit > net of policy loans > not net of collateral loans > Applies to permanent and Term policies > Applies whether there is cash value or not > Notes: > ACB usually goes to zero after 20+ years, cannot be negative > CDA has to be paid out equally to all shareholders of the same class

21 Impact of CDA > Client Male 50, Std. NS, Corp. > Policy Death benefit $5 million UL face only > Premium $200,000 per year for 10 year > Min Level COI Cost $66, > > ACB in year 5 $ 945,709 > ACB in year 20 $1,333,791 > ACB in year 30 $ 0 NCPI vs COI ($54,291 vs $331,096) ($666,209 vs $1,324,384)

22 Impact of CDA Year 5 > Death Benefit $5,000,000 > ACB $ 945,709 > CDA Credit $4,054,291 > How much did Corp. receive from InsCo.? > $5,000,000 > How much could Corp pay tax free to shareholders? > $4,054,291 > What happens to the rest?

23 Impact of CDA Year 5 > Death Benefit $5,000,000 > ACB $ 945,709 > CDA Credit $4,054,291 > Tax free Capital dividend paid $4,054,291 > Taxable dividend paid $ 945,709 > Tax paid on dividend $ 308,017 > What is the net death benefit received by shareholders? > $4,691,983

24 CDA Tax Trap > Problem: > Potential death benefit shortfall created by CDA/ACB > Net death benefit may fall short of required amount > Solution: > Buy-sell > Face plus fund plus ACB > Increases face amount so that CDA paid is equal to or greater than original death benefit > Removes risk of the ACB tax grind on CDA > Removes risk of underinsuring the need

25 Accounting for Corporate Owned Policies A PARTNER YOU CAN TRUST. 1

26 Deductibility of Insurance Premiums > Premiums paid by a corporation for a life insurance policy are generally not tax deductible > Considered a capital outlay and not an expense > Exceptions: 1.Group insurance premiums 2.Charitable gifting of a life insurance policy 3.Collateral insurance

27 1. Group Insurance Premiums > Group medical insurance > Group life insurance > IPP s > RCA s

28 2. Charitable gifting of a life insurance policy 1. Policy assigned to charity > Charity issues a tax receipt equal to actual premiums paid > Death benefit does not trigger a tax receipt 2. Policy not assigned to charity > Charity issues a tax receipt for value of death benefit upon receipt of death benefit proceeds > No tax receipt for annual premiums

29 3. Collateral Insurance 1. Client secures a loan from a restricted financial institution 2. Lender requires a policy as collateral to secure the loan 3. The policy is assigned to the lender 4. Loan proceeds are invested in a qualified income generating investment 5. Interest on loan must be tax deductible

30 Collateral Insurance Allowable deduction > Step 1 > Lower of: > NCPI for the year and > Premiums actually paid in the year > Step 2 > Pro-rated by amount applicable to loan > Example: Loan Amount = $250,000 Insurance DB = $1 million Deductible amount = 25% of step 1 amount

31 MTAR > Maximum Tax Actuarial Reserve > Magical Table of Allowable Room > The maximum premium a policy owner can deposit into a policy, tax sheltered. > The maximum amount that an insurance company can claim as a policy reserve.

32 MTAR - Two Major Tests > Exempt Test Policy (ETP) > designed to measure the funding level of a life insurance policy relative to its death benefit > 250% or Anti Dump-In Rule > applies if the accumulating fund on the tenth anniversary or any subsequent anniversary date, exceeds 250% of accumulating fund on the third preceding anniversary date

33 Issues with Exempt Test > Rules in Regulation 306 of Tax Act outlining exempt policies are open to interpretation > Based on CSV or Fund Value?? > Increase in Fund value considered new deposit?? > Test ends at age 85 > No insurance needed to tax shelter funds > Changes coming in 2014

34 250 percent rule (anti dump-in rule) > 10 th year test > Maximum deposit in year 10 is > Year 7 Fund value times 250% > Growth in fund value is considered new money > Prior to 7 th Year > Need to start contributing more than the minimum

35 Corporate Financial Statements A PARTNER YOU CAN TRUST. 1

36 Balance Sheet > Cash surrender value of policy = Asset

37 Income Statement > Premiums paid minus increase in CSV = Net Insurance Expense * > These amounts are added back in calculating the company s taxable income to nullify the expense. > Increase in CSV minus premiums paid = Income ** > These amounts are deducted in calculating the company s taxable income to nullify the income.

38 Corporate Minutes > Approve purchase of Life insurance > Key-Man > Buy-Sell > IPP/RCA > IRIS

39 Financial notes Notes to reflect that policy pledged as collateral

40 Advantages of Corporate Owned Life Insurance A PARTNER YOU CAN TRUST. 1

41 Corporate Insurance Advantages > Personal marginal tax rates vs. Corporate rates > 46.4% vs. 15.5% > Ease of administration > Buy-Sell premiums shared equally > Multiple policies centrally owned > Capital dividend account

42 Disadvantages of Corporate Owned Life Insurance A PARTNER YOU CAN TRUST. 1

43 Corporate Insurance Disadvantages > CDA Tax trap > Increased value to corporate shares > Increases capital gain > Opco vs. Holdco > Potential sale of Opco > CCPC/CGE offside risk

44 Thank You Jorge Ramos, CFP, CLU Director of Advanced Marketing