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Make the Connection with a best practice approach
Make it easy for advisors like you to start conversations with your clients about wealth protection solutions.
ONE SIMPLE OBJECTIVE:
Disclaimer
• The following information is being presented with the understanding that it is intended for information purposes only.
• Neither Sun Life Assurance Company of Canada nor the presenter has been engaged for the purpose of providing legal, accounting, taxation, or other professional advice.
• No one should act upon the examples/information without a thorough examination of the legal/tax situation with their own professional advisors, after the facts of the specific case are considered.
Corporate investment shelter (CIS) overview What it is and how it works
Case Study
Illustrating the CIS strategy
Sales and marketing support available
What you’ll learn today
Compares the benefits of a corporately owned participating whole life insurance solution to a traditional non-registered investment
• Maximize corporate asset value by minimizing the erosion of investment assets through taxes and other costs
• Use of capital dividend account (CDA) and refundable dividend tax on hand credits (RDTOH)
Corporate investment shelter 101
The corporate tax challenge Challenges with traditional investments
Challenges while living •Taxes payable on investment income
– Interest – Dividends – Realized capital gains
Passive investment income •Attracts tax at top corporate rate •No small business deduction
Erosion through income taxes =
Reduced growth of corporate assets
The corporate tax challenge Challenges with traditional investments
• Challenges at death – Taxes payable on deferred capital gains – Taxes payable on transfers to shareholder’s
estate
Erosion through taxes at death =
Less assets available for estate
The corporate investment shelter Addressing the tax challenges
• Addressing tax challenges while living – CIS uses a participating whole life insurance
policy • Policy earnings grow tax exempt
• Addressing tax challenges at death
– Policy proceeds can be paid tax free to the corporation (no deferred gains)
– Amount of death benefit in excess of the policy’s adjusted cost basis can be paid as a tax-free capital dividend to the shareholder’s estate
• Owner / significant shareholder of a Canadian controlled private corporation (CCPC)
• Age 50+ and healthy • A corporate life insurance need exists • Corporation has:
– excess cash flow and/or, – investment assets not needed for business purposes
• Wants to maximize estate and transfer assets in a tax-efficient manner
• Looking for stable and consistent asset growth
Target client profile
CIS suitability questionnaire
Does the shareholder / corporation CIS have a business succession plan in place? √ want to reduce tax on corporate investment income? √ have a desire to pass corporate assets to a beneficiary? √
have a corporate life insurance need? √ own taxable passive investment assets? √ own corporate investment assets with a deferred capital gain?
√
want a minimum amount of estate value to be guaranteed?
√
CIS is not just tax efficient Some additional benefits
• Insurance immediately increases estate value • Reduction of investment risk gives greater certainty to estate value • CDA credit improves estate value • Life insurance policy dividends provide stable long-term growth
For the shareholder
For you
• Convincing, professional demonstration • Proof of insurance as a cost-effective
solution for asset transfer at death • Increased client loyalty
Capital dividend account The finer points…
Corporate income type Is this eligible for CDA credit?
Interest earned
Dividends earned
Deferred capital gains
Realized capital gains
Life insurance death benefit
No
Yes, amounts in excess of the policy ACB
Yes, only the non-taxable portions
No, only when these gains are realized
No
• Access to the steady and consistent performance of the Sun Life Par Account through the crediting of policyholder dividends – managed with a long-term perspective – Investment experience is a key factor influencing
dividends • Potential to reduce investment volatility • No need to make ongoing investment decisions • Opportunity for asset diversification
The benefits of a CIS with par whole life insurance from Sun Life Financial
The Sun Life Participating Account historical returns
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Dividend Interest Rate CPI S&P/TSX Total Return 5-Year GIC 10-Year GOC Bond
Case study – Bruce’s story
Age 54
Time to retirement 11 years
Retained earnings
$1.25 million (equity + fixed
income)
•Investment assets must deliver stable and consistent returns •At death, corporate assets will be passed to his children
• Access to corporate assets for retirement • $60,000/yr of dividend income for 20 years starting at age 65
• Bruce’s corporate investment income is being taxed at the highest rate.
• Capital gains taxes are due at his death. • Assets paid from the corporation to his estate are
taxed as a dividend. • A significant market correction will decrease the
estate value of his corporate assets.
Bruce’s concerns
• BL Holdco purchases a participating whole life insurance policy
• Transfers funds from taxable investments to policy
The solution Corporate investment shelter
Policy type Sun Par Protector – 20 pay Face amount $750,000 Dividend option Paid-up additional insurance Annual premium $44,990 – including Plus premium
benefit payment of $10,290 Number of payments 10 Premium offset* Beginning in year 11 – under current / -
1% Withdrawals from BL Holdco
$60,000/yr (indexed) beginning at age 65 for 20 years
* Not guaranteed
• Strategy compares CIS against traditional corporate- owned investments
Is life insurance really necessary? Comparing to corporate owned investments
Asset value $1,250,000 ACB $1,000,000 Bond component of portfolio earns 4%
40% to age 65 60% after age 65
Equity component of portfolio earns 6%
60% to age 65 40% after age 65
The results What happens at death?
Net to beneficiaries (at death)
Without CIS strategy
CIS strategy (current)
CIS advantage
CIS strategy (current -1%)
CIS Advantage
Age 55 $908,218 $1,641,374 $733,156 $1,640,877 $732,659
Age 64 $1,383,808 $2,019,798 $635,990 $1,973,799 $589,991
Age 75 $1,246,894 $1,654,109 $407,215 $1,445,060 $198,166
Age 85 $1,067,198 $1,767,438 $700,240 $1,359,327 $292,129
Age 90 $1,303,322 $2,073,810 $770,488 $1,580,980 $277,658
Illustrated net death benefit is after the income stream of $60K + 1% annual inflation to shareholders; illustration includes premium offset
A closer look CIS net estate value – life insurance
CIS – Life insurance – age 75 Sun Par Protector death benefit
$1,116,333
Minus dividend tax payable $81,124
Equals net to estate $1,035,209
A closer look CIS net estate value – corporate investments
CIS – corporate investments – age 75 Investment balance at death $812,913 Minus capital gains taxes $8,484 Plus RDTOH refund $105,720 Equals amount available for distribution
$910,148
Minus dividend tax payable $291,249 Equals net to estate $618,899
A closer look CIS net estate value – corporate investments
Net to estate – life insurance $1,035,209
Net to estate – corporate investments
$618,899
Total net to estate $1,654,108
Refundable dividend tax on hand RDTOH: How it works
• A notional account • A credit to the RDTOH is created when taxable
income is earned • When taxable dividends are paid
– Amounts equal to RDTOH balance can be received by corporation
– Corporation receives $1 for every $3 of taxable dividend paid to shareholders
– Balance of RDTOH is paid at death
Refundable dividend tax on hand The finer points…
Corporate income type RDTOH eligibility?
Interest earned
Dividends earned
Realized capital gains
Deferred capital gains
Life insurance death benefit
Yes, 26.67% of the taxable portion No
Yes, 26.67%
Yes, 33.33%
No
• Tax on corporate investment income has been reduced
• Capital gains on corporate assets at death have been reduced
• A significant portion of corporate assets can be paid tax-free to Bruce’s estate
• Sun Par Protector participating whole life plan provides stable and consistent growth
Bruce’s concerns have been addressed
The results
• Bruce has significantly increased the value of his estate
• Transfers from traditional corporate investments to the tax-exempt Sun Par Protector policy reduce the corporate tax bill
• All or a portion of the life insurance death benefit can be paid tax free to Bruce’s estate
• Capital gains would be minimized at death
• Data entry tabs
– Advisor info
– Alternate investment assumptions
– Tax details
– Estate assumptions
Running the concept
• Create corporate asset transfer opportunities • Minimize erosion of assets to taxes • Opportunity to earn dividends
– Access to a strong and stable par account
Less taxes = larger estate
Wrapping it up
If you’re not talking to your clients about protecting their assets, another advisor will.
*2013 Sun Life Canadian Unretirement Index
The bottom line
Available on: sunlife.ca/maketheconnection
Make the Connection strategy materials
Client email EOS Illustrations
Concept overview Strategy worksheet
NEXT STEPS
1. Identify 4-5 clients/prospects 2. Prepare a CIS proposal for each client 3. Set up appointments to meet with clients
and review the proposal
Disclaimer
• This information is presented with the understanding that it is intended for information purposes only.
• Neither Sun Life Assurance Company of Canada nor the presenter has been engaged for the purpose of providing legal, accounting, taxation, or other professional advice.
• No one should act on the examples/information without a thorough examination of the legal/tax situation with their own professional advisors after the facts of the specific case are considered.