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Business Insurance Part 1 Working with Business Owners. A PARTNER YOU CAN TRUST. Jorge Ramos , CFP ,CLU Director of Advanced Marketing. 1. Business Structures and Taxation. A PARTNER YOU CAN TRUST. 1. Business Structures. Self Employed Partnerships Incorporated private business CCPC

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slide1

Business Insurance

Part 1

Working with Business Owners

A PARTNER YOU CAN TRUST.

Jorge Ramos, CFP ,CLUDirector of Advanced Marketing

1

slide2

Business Structures and Taxation

A PARTNER YOU CAN TRUST.

1

business structures
Business Structures
  • Self Employed
  • Partnerships
  • Incorporated private business
  • CCPC
  • Publicly listed corporation
  • Professional Corporations
business taxation 101
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
business taxation 1011
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
canadian controlled private corporation
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
ccpc advantages
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
capital gains exemption
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
publicly listed corporation
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
slide10

Professional Corporations

A PARTNER YOU CAN TRUST.

1

professional corporations
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
when to set up a professional corp
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
professional corp advantages
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
professional corp disadvantages
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
slide15

The Mechanics of Corporate Policies

A PARTNER YOU CAN TRUST.

1

theory of tax integration
Theory of Tax Integration
  • Income earned at a corporate level may ultimately end up being distributed to someone and as a bonus/income or as a dividend to someone personally.
  • Income should be Tax Neutral, ie: taxed equally whether income is earned corporately or personally.
  • There are various mechanisms used by CRA to ensure that this is true:
      • RDTOH – Refundable Dividend tax on hand
      • CDA – Capital Dividend Account
rdtoh refundable dividend tax on hand
RDTOH – Refundable Dividend Tax on Hand
  • Acts as a disincentive to accumulate investment income in the corporation.
  • The federal government levies a tax on any investment income earned by a CCPC, the tax goes into the company’s RDTOH account (functioning like an inventory) with CRA and is refunded to the CCPC when it pays a taxable dividend to shareholders.
  • For every $3 in taxable dividends that are paid to shareholders, the company is refunded $1 up to the balance of the RDTOH account.
cda capital dividend account
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.
calculating cda
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
slide20
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
slide21
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
calculating cda1
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
impact of cda
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 $66,219.24
  • 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 $2 million)

impact of cda year 5
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?
impact of cda year 51
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
cda tax trap
CDA Tax Trap
  • Problem:
    • Potential death benefit shortfall created by CDA/ACB
    • Net death benefit may fall short of required amount
      • Buy-sell
  • Solution:
    • 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
deductibility of insurance premiums
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:
    • Group insurance premiums
    • Charitable gifting of a life insurance policy
    • Collateral insurance
1 group insurance premiums
1. Group Insurance Premiums
  • Group medical insurance
  • Group life insurance
  • IPP’s
  • RCA’s
2 charitable gifting of a life insurance policy
2. Charitable gifting of a life insurance policy
  • Policy assigned to charity
    • Charity issues a tax receipt equal to actual premiums paid
    • Death benefit does not trigger a tax receipt
  • 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
3 collateral insurance
3. Collateral Insurance
  • Client secures a loan from a restricted financial institution
  • Lender requires a policy as collateral to secure the loan
  • The policy is assigned to the lender
  • Loan proceeds are invested in a qualified income generating investment
  • Interest on loan must be tax deductible
collateral insurance interest deductibility
Collateral Insurance - Interest Deductibility
  • Loans must be invested to earn income
    • Rent, dividends, profit, interest
    • Capital gains does not qualify
  • Interest must be paid or payable in the year
  • There must be a legal obligation to pay the interest
  • Interest deduction can only be taken by policy owner
  • Policy loan interest must be confirmed by insurer
    • Form T2210
collateral insurance allowable deduction
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

slide34
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.
mtar two major tests
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
exempt test policy etp
Exempt Test Policy (ETP)
  • Based upon the actuarial reserves required for a 20 pay policy to endow (cash surrender value equal to death benefit) at age 85
issues with exempt test
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
250 percent rule anti dump in rule
250 percent rule (anti dump-in rule)
  • 10th year test
    • Maximum deposit in year 10 is
    • Year 7 Fund value times 250%
    • Growth in fund value is considered new money
  • Prior to 7th Year
    • Need to start contributing more than the minimum
slide39

Corporate Financial Statements

A PARTNER YOU CAN TRUST.

1

income statement
Income Statement
    • Premiums paid minus increase in CSV

= Net Insurance Expense

  • Increase in CSV minus premiums paid

= Income

balance sheet
Balance Sheet
  • Cash surrender value of policy

= Asset

corporate minutes
Corporate Minutes
  • Approve purchase of Life insurance
    • Key-Man
    • Buy-Sell
    • IPP/RCA
    • IRIS
financial notes
Financial notes

Notes to reflect that policy pledged as collateral

corporate insurance advantages
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
corporate insurance disadvantages
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
slide48

Thank You

Jorge Ramos, CFP, CLU

Director of Advanced Marketing

416-206-7050

jorge.ramos@inalco.com