1 Corporate Insured Retirement Plan Because successful businesses need security and income
2 The Opportunity Business owners who need insurance to Fund a buy-sell agreement between partners of the company Cover the loss of a key employee such as an individual with a special skill Secure a loan that will only be granted if there is life insurance on the business owner Fund a capital gains liability that results from the distribution of a shareholder s interest in the company to his/her designated beneficiaries
3 The Opportunity Using universal life, once a sizeable Cash Value has accumulated, a third party line of credit may be established to Access a source of cash for income or emergencies Provide a source of supplemental retirement income for key employees Seek out new business opportunities Expand their businesses or pay for other operational expenses
4 Target Market Small business owners of CCPCs * who Require and are able to qualify for life insurance protection Are able to pay for the insurance coverage and who would like to transfer some of their corporate surplus into a UL policy to benefit from tax-deferred investment growth Are looking for a source of cash: To distribute to shareholders of the company in a tax effective manner OR Who need access to cash to use for other business reasons Will qualify for third party loans and are able to manage these loans as part of their business operations * Canadian Controlled Private Corporation
5 The Solution The Corporate Insured Retirement Plan
6 The Corporate Insured Retirement Plan: First Steps Assess insurance needs Determine deposit stream Select a UL policy from BMO Life Assurance Company including an investment portfolio best suited to the client s risk tolerance OVER 400 INVESTMENT OPTIONS Visit InvestmentPRO at for more information on the available Indexed Investment Accounts
7 The Corporate Insured Retirement Plan: Next Steps Once the policy has accumulated a significant Cash Value, it is assigned as collateral for a third party line of credit UL POLICY LENDER
8 Once the line of credit is granted Funds may be used within the business For new business opportunities To hire a new employee To buy new office equipment Or to pay out to shareholders of the company
9 How the Shareholder is Paid Corporation pays shareholder LENDER CORPORATION SHAREHOLDER Lender advances loan to the corporation
10 Payout Options When Corporation Does the Borrowing BONUS/ SALARY OR DIVIDEND
11 Tax Implications BONUS/SALARY PAYMENT DIVIDEND PAYMENT AT DEATH FOR THE CORPORATION Deductible expense Bonus-down strategy Interest paid on loan generally accepted as a deductible expense Not a deductible expense May receive a refund from the RDTOH account $1 for every $3 of taxable dividends paid Death Benefit proceeds, when paid to the company create a credit to the Capital Dividend Account (CDA) FOR THE SHAREHOLDER Taxed as regular income Taxed at dividend tax rates Once the loan has been paid off, the remaining amounts may be paid as tax-free capital dividends to the shareholder s estate, up to the balance in the CDA
12 At Death Corporation pays off the outstanding balance of the loan LENDER CORPORATION LENDER PAID Death Benefit paid to the corporation
13 At Death LENDER CORPORATION LENDER PAID Once loan has been paid off, any remaining amount may be paid to the shareholder s estate
14 The Results From the insurance policy Permanent insurance protection Tax-sheltered growth of deposits (net of charges) Death Benefit less the ACB is eligible for a credit to the Capital Dividend Account Once loan has been paid-off, remaining amount can be paid to the shareholder s estate
15 The Results From the third party line of credit/loan A valuable source of income or savings Depending on arrangement with lender, interest may be capitalized on the LOC/loan No payment due until death at which time it is paid using the tax-free proceeds of the Death Benefit.
16 A Case Study: Andy Andy is 45 years old and is a business owner of AndyCo Needs permanent insurance protection on his own life for key person purposes Would like to invest $25,000 a year for 10 years using corporate assets AndyCo is currently being taxed at 45% Andy s personal tax rate is 45% and he has a 31% dividend tax rate He is looking for a supplemental source of income.
17 Andy s Options Alternate Taxable Investment Corporate Insured Retirement Plan
18 The Universal Life Solution Life Dimensions (Low Fees) Single Life Owner of policy: AndyCo Beneficiary of policy: AndyCo Death Benefit Option: Sum Insured COI option: YRT 100 with Investor Maximizer Planned Deposits: $25,000 for 10 years Assume bank charges 6%/year in interest on accumulated loan balance Corporate Insured Retirement Plan
19 A Comparison for Andy Using the Bonus/Salary Method Corporate Insured Retirement Plan (projected at a 5% net annual rate of return) UL= Life Dimensions (Low Fees) Alternative Investment (Balanced Fund projected at an 5% net annual rate of return)^ Annual Deposits $25,000 for 10 years $25,000 for 10 years After-tax income (from age 65 to age 85) $23,467 (includes annual bank loans and corporate tax savings) $23,467 (assumes withdrawals from the fund) Estate Value at age 85 $1,042,800 $67,964 Accumulated bank loan at age 85 After-tax Estate Value (net of bank loan) $938,509 $0 $104,290 $73, % more to the shareholder s estate at age 85 with the Corporate Insured Retirement Plan ^ Assuming a Balanced Fund that has the following income: 50% interest, 30% dividends, 10% unrealized capital gains, 10% realized capital gains and probate fees of 1.5%. Probate fees are not applicable in Quebec.
20 A Comparison for Andy Using the Dividend Method Corporate Insured Retirement Plan (projected at a 5% net annual rate of return) UL= Life Dimensions (Low Fees) Alternative Investment (Balanced Fund projected at an 5% net annual rate of return)^ Annual Deposits $25,000 for 10 years $25,000 for 10 years After-tax income (from age 65 to age 85) $24,288 (includes annual bank loans and corporate tax savings) $24,288 (assumes withdrawals from the fund) Estate Value at age 85 $1,042,800 $0 Accumulated bank loan at age 85 After-tax Estate Value (net of bank loan) $938,509 $0 $104,290 $0 Estate Value continues past age 85 with the Corporate Insured Retirement Plan. ^ Assuming a Balanced Fund that has the following income: 50% interest, 30% dividends, 10% unrealized capital gains, 10% realized capital gains and probate fees of 1.5%. Probate fees are not applicable in Quebec.
21 Another Lending Option: Shareholder Does the Borrowing POLICY LENDER SHAREHOLDER Corporate-owned policy is assigned as collateral Shareholder obtains a personal loan. Lender advances loan to the shareholder
22 Tax Implications WHILE THE SHAREHOLDER IS ALIVE WHEN THE SHAREHOLDER DIES Shareholder may be deemed to incur a taxable benefit from loan advances Shareholder could pay guarantee fee to corporation If corporation pays off the loan, shareholder s estate may be deemed to incur a taxable benefit Shareholder s estate needs to pay off the loan The method to pay off the loan is therefore more complex Ensure that proper tax counseling is obtained.
23 At Death When Shareholder Does the Borrowing LENDER EXECUTOR OF THE ESTATE CORPORATION Requests that the lender release the UL policy as security and substitutes other assets as security Contacts the corporation and advises them that other assets have been assigned as security.
24 At Death When Shareholder Does the Borrowing LENDER EXECUTOR OF THE ESTATE CORPORATION Corporation then needs to enter into a new security agreement with lender.
25 At Death When Shareholder Does the Borrowing Outstanding loan balance is paid using proceeds paid by the corporation LENDER SHAREHOLDER S ESTATE CORPORATION PAID Payment is made to the shareholder s estate via tax-free capital dividend Claim is filed and Death Benefit proceeds are then paid to the corporation
26 A Comparison for Andy Using the Personal Loan Method Corporate Insured Retirement Plan (projected at a 5% net annual rate of return) UL= Life Dimensions (Low Fees) Alternative Investment (Balanced Fund projected at an 5% net annual rate of return)^ Annual Deposits $25,000 for 10 years $25,000 for 10 years After-tax income (from age 65 to age 85) $23,467 (includes annual bank loans and corporate tax savings) $23,467 (assumes withdrawals from the fund) Estate Value at age 85 $1,042,800 $0 Accumulated bank loan at age 85 After-tax Estate Value (net of bank loan) $938,509 $0 $99,880 $0 Estate Value continues past age 85 with the Corporate Insured Retirement Plan. ^ Assuming a Balanced Fund that has the following income: 50% interest, 30% dividends, 10% unrealized capital gains, 10% realized capital gains and probate fees of 1.5%. Probate fees are not applicable in Quebec.
27 Is the Corporate Insured Retirement Plan Right for Your Clients? Is your client a business owner that requires permanent insurance to protect his/her business? Will the proposed lives insured qualify for insurance? Would he/she like to transfer taxable corporate surplus into a tax-deferred investment vehicle? Does he/she want to lower the company s corporate tax bill? Does the corporation require a tax effective source of income? Is your client comfortable with carrying debt?
28 Factors to Consider Projections are affected by: Timing and amount of deposits Investment returns on the policy Interest rate charged by the bank loan If life insured outlives the projection, additional collateral will be required (in addition to the policy s Cash Value)
29 Tax Considerations Interest expense deduction The interest, if paid, may be a deductible expense for the corporation Retirement Compensation Arrangements (RCAs) If the plan includes a promise to pay retirement benefits, a refundable tax would need to be paid to CRA General Anti-Avoidance Rules (GAAR) In order to qualify for the CDA credit, the policy must be set up so that: Owner = CCPC Beneficiary = CCPC Ensure your client received advice from his/her tax professional!
30 Underwriting and Administration Insurance applied for must be reasonable and justified There must be an insurance need Refer to BMO Insurance Underwriting Guidelines on the Wave Run a personalized illustration on the Wave! For the Corporate Insured Retirement Plan: Owner: Corporation Life insured: Your client Beneficiary: Corporation Include a covering letter with the application.
31 Marketing Support Information contained in this document is for illustrative purposes and is subject to change without notice. Refer to an up-to-date policy illustration for this plan for a current statement of benefits. Insurer: BMO Life Assurance Company. Registered trade-mark of Bank of Montreal, used under licence.
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