Corporate insured annuity
A strategy for enhancing after-tax estate
values & unlocking the value of the business.
Presented by: Jim Whittaker, IG. Insurance Services
This material is for information purposes only and should not be construed as
legal or tax advice. Every effort has been made to ensure its accuracy, but errors
and omissions are possible. Individual circumstances may vary and specific
legal and tax advice is recommended.
Report on family business
BDO Dunwoody/Compass
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“Entrepreneurs are great at entrance strategies. After all,
they’ve created companies, often from scratch. Their
weakness is exit strategies.”
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44 per cent claim to have an exit strategy
37 per cent if less than 10 employees
If clients are 60 years or older, 57 per cent claim to have an exit strategy
Of those above, only 16 per cent were “in the early stages of thinking about
the matter”
Most business owners’ exit strategies:
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26 per cent sell to an outsider
17 per cent sell to a relative
17 per cent pass it onto family members to run
12 per cent sell to an employee
Nine per cent keep until death, non-family run
Three per cent close the business down
– Source: BDO Dunwoody/Compas Report on Family Business
Business succession planning
In the next decade, close to one trillion
dollars of net worth in Canada will transfer to
the next generation.
 Succession planning has become very
important for all businesses.
But...
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– Only eight per cent are doing something about it
– Of those, only 1.5 per cent plan on closing it
down
This means…
– 98.5 per cent want the most tax-effective and
efficient business transition and still maximize
their personal estates, but have not formulated
the best way to approach it.
Corporate insured annuity strategy
As an ideal client for this strategy, you:
 Are a major shareholder of a private
corporation with surplus capital that is not
required to operate the business
 Are interested in maximizing after-tax
retirement income
 Are concerned about guarantees
 Are looking to enhance the value of your
estate for heirs or your favourite charity
Key questions to ask yourself
1. Am I using non-registered fixed income
investments to
supplement my retirement income?
2. Do I have heirs or a charity to whom I want to
transfer my assets?
3. Do I have a desire to maximize my after-tax
retirement income?
4. Am I willing to commit to a long-term planning
strategy?
The situation
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Your business has surplus capital invested in fixedincome investments to help supplement your
retirement income.
- The Corporate insured annuity strategy’s
combination of a life annuity contract and
permanent life insurance policy provides
an opportunity to assist in enhancing your
estate values and increasing after-tax cash
flow in retirement.
The situation - cont.
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During an estate transfer, the shareholders are
deemed to have disposed of all shares in the
corporation at fair market value including
investment assets.
- Permanent life insurance policies without
cash value (e.g. term 100 policy) have a zero
value for the purpose of share valuation.
- For income tax purposes, the corporation can
reduce the value of the corporation by replacing
the fixed-income portfolio with a life annuity.
Why use holding companies?
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Holding companies (Holdcos) are usually created to protect,
from potential liabilities, surplus cash flow or investments
arising from an operating company (Opco).
Excess funds are transferred to the holding company from the
Opco to maintain the Opco’s small business status and a lower
tax rate.
Personal tax rates apply to taxable dividend distributions.
Holding company considerations
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Funds held within Holdcos and management
companies are taxed at the top rate.
Funds withdrawn from a corporation are taxed
according to the method they are distributed.
Capital gain tax liability will exist at the death of
shareholder.
Passive assets
CORPORATION
$1,000,000 passive assets
DIVIDEND -
$1,000,000
TAX at 33%
330,000
NET
$670,000
TAXABLE
DIVIDENDS
SHAREHOLDER
The Corporate insured annuity
strategy
How it works:
 Purchase a non-prescribed life annuity contract with a
portion or all of the passive assets to provide taxpreferred income for life.

Fund a permanent life insurance policy with a portion of
the additional cash flow generated by the annuity.
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Use the tax-free death benefit proceeds to replace, in
whole or in part, the capital originally intended for heirs.
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Take advantage of the capital dividend account (CDA) to
provide further enhancements to your estate.
Clients should ensure they can obtain life insurance before
purchasing the annuity. Only private corporations are
eligible for the CDA.
How it works
Life annuity contract
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Corporation purchases a non-prescribed annuity
Annuity provides regular payments for life
Annuitant is shareholder
Taxable portion of payments decrease over time
Eligible products
Permanent life insurance
- Term to 100, non-participating whole life
insurance
- Universal life insurance (minimum funded)
Distributing excess funds from a
corporation
Options for retirement income
Refundable dividend tax-on-hand (RDTOH) is available
only if a corporation is a private corporation at the time the
dividend is paid.
RDTOH is accumulated in respect of Canadian and foreign
investment income, if the corporation is a Canadiancontrolled private corporation when income is earned
Corporation can distribute these funds by
- paying salary and/or
- paying a taxable dividend
Comparing distribution methods
Example of comparing dividend or salary distributions
(without Corporate insured annuity strategy)
Private corporation residing in Canada has a GIC
portfolio worth $800,000.
Assumptions
GIC interest rate = 5 per cent.
Corporate tax rate on investment income = 49.79 per
cent.
Personal dividend tax rate = 31.34 per cent.
Personal income tax rate = 46.41 per cent.
Shareholder does not require distributed cash to live on,
but still wants to annually remove after-tax income from
the corporation.
Comparing distribution methods
Dividend versus Salary
Distributed as
salary
Distributed as taxable
dividend
Interest income ($800,000 x 5%)
$40,000
$40,000
Salary1
$40,000
$0
Taxable income
$0
$40,000
Corporate taxes payable before dividend2
$0
$19,916
Net cash flow to corporation
$0
$20,084
RDTOH recovery3
-
$10,042
Taxable dividend issued to shareholder
$30, 126
Dividend received from corporation
$30,126
Salary income
$40,000
Taxes payable by shareholder
$18,560
$9,453
Personal after-tax cash flow
$21,440
$20,685
1. Tax-deductible to the corporation.
2. Based on assumed corporate tax rate of 49.79 per cent noted above. Includes a RDTOH balance generated on taxable
income, before dividend, of $10,668 (26 2/3 per cent of $40,000).
3. The amount of the taxable dividend issued to the shareholder is limited to the amount of funds within the corporation.
Here, there are no other available sources of income or cash. The full RDTOH balance cannot immediately be refunded to
the corporation. It has a remaining RDTOH balance of $626 after taxable dividends are paid.
Comparing distribution methods
Corporate insured annuity advantage
Client profile
Joe Martin is a major shareholder of A1 Holdings Inc., a
CCPC.
- Joe, male , age 70, non smoker
Joe is looking at retiring and wants to ensure that sound
estate and financial planning solutions are in place to:
- maximize after-tax estate values
- supplement his retirement income
The situation
Joe works with his financial advisor John Thomas and
determines:
- he has $800,000 surplus capital in A1 Holdings Inc.
- the surplus capital is invested in GICs
Joe believes that this investment approach is the only solution
to maximize after-tax estate values while supplementing his
retirement income.
But…
Further discussions with John have determined that there are
alternative options available to him.
Key assumptions
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Male, age 70
Non smoker, standard risk
Annual premium for Dynaterm 100, $800,000 face
amount
Corporate tax rate 49.79 per cent
Personal tax rate 46.40 per cent
Non-prescribed annuity, single life, zero guarantee period
with an underlying interest rate of 5 per cent
Insurance solution
The Corporate insured annuity strategy
– Ascertain insurability.
– Corporation uses capital to purchase a life annuity
with a lump sum payment of $800,000.
– Receive tax-preferred income.
– Use excess income from the annuity to purchase a
Term to 100 permanent life insurance policy.
– Death benefit is paid to A1 Holdings tax-free.
Corporate insured annuity advantage
Corporate insured annuity versus an
alternative investment
$800,000 lump sum
Corporate
Alternative investment
insured annuity
5-year GIC at 5 per
cent
Distribution method
Dividend
Dividend
Gross annual annuity
$73,051
$40,000
payment/GIC income
Insurance premium
$33,395
N/A
Corporate insured annuity advantage
Corporate insured
annuity
Year
1
5
10
15
20
25
30
Alternative investment in
5-year GIC at 5 per cent
Net estate
Personal
Net estate
benefit to
after-tax
benefit to
shareholder* cash flow shareholder*
$791,738
$25,460
$549,710
$766,800
$754,435
$783,682
$800,000**
$800,000**
$800,000**
$22,765
$23,692
$24,630
$25,659
$27,085
$27,228
$551,429
$553,578
$555,727
$557,876
$560,025
$562,174
*Assumes the insured has died and a tax-free dividend is paid to the estate through the
CDA
**ACB is zero at year 16
Personal
after-tax
cash flow
$20,685
$20,685
$20,685
$20,685
$20,685
$20,685
$20,685
Annual: net estate values
Implementing the plan
Joe decides to implement the plan given that:
 His after-tax retirement income within a life annuity will
exceed what he would gain with a traditional fixedincome investment.
 The value of his estate will be enhanced by replacing the
assets used to purchase the annuity with a permanent life
insurance policy.
Corporate insured annuity
considerations
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Prescribed annuity cannot be changed once it is in place it’s permanent.
No access to funds over and above the income from the
prescribed annuity.
Client must be insurable.
Two separate products/contracts - each must be
administered separately.
The Corporate insured annuity strategy
offers:
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The potential to enhance the value of a shareholder’s estate
for their heirs or favourite charities.
The opportunity to transfer the surplus capital to
shareholders, tax-free, from a private corporation’s CDA.
Permanent life insurance that will replace the value of the
assets used to purchase the annuity.
The potential to supplemental retirement income.
A guaranteed annuity income for the life of the
annuitant/life insured.
Some other opportunities?
What about all those PC’s ?
 What happens when a business is sold and
all the proceeds end up in the Holdco?
 What about exit plans for MD’s
 What about Dentist’s?
 Lets talk!
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Questions