1 / 48

Business Insurance Part 1 Working with Business Owners

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

twila
Download Presentation

Business Insurance Part 1 Working with Business Owners

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Business Insurance Part 1 Working with Business Owners A PARTNER YOU CAN TRUST. Jorge Ramos, CFP ,CLUDirector 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. 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

  17. 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.

  18. 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.

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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)

  24. 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?

  25. 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

  26. 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

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

  28. 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

  29. 1. Group Insurance Premiums • Group medical insurance • Group life insurance • IPP’s • RCA’s

  30. 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

  31. 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

  32. 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

  33. 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

  34. 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.

  35. 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

  36. 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

  37. 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

  38. 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

  39. Corporate Financial Statements A PARTNER YOU CAN TRUST. 1

  40. Income Statement • Premiums paid minus increase in CSV = Net Insurance Expense • Increase in CSV minus premiums paid = Income

  41. Balance Sheet • Cash surrender value of policy = Asset

  42. Corporate Minutes • Approve purchase of Life insurance • Key-Man • Buy-Sell • IPP/RCA • IRIS

  43. Financial notes Notes to reflect that policy pledged as collateral

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

  45. 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

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

  47. 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

  48. Thank You Jorge Ramos, CFP, CLU Director of Advanced Marketing 416-206-7050 jorge.ramos@inalco.com

More Related