Advocis Banff School 2007

1. Advocis Banff School 2007 Understanding Triple Back-to-Backs Florence Marino, LLB, TEP AVP Tax & Estate Planning Group

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3. Goals of this presentation • Truly understand who the right client is for TBTB • Distinguishing TBTB sale from other HNW insurance planning opportunities

4. Agenda • Overview • Insured annuity basics and Corporate Insured Annuity case study • Triple back-to-back • Structure • Case example • Strategies • Benefits • Issues • Client • Distinguishing TBTB from other HNW insurance planning opportunities

5. Insured Annuity basics • Investment vehicle for seniors • A marriage of two contracts • A life annuity • A life insurance policy

6. The Annuity • Invest a capital sum into an annuity • Provides a regular payment stream until death • Non-commutable • Taxable portion of annuity payment

7. Prescribed Annuities vs. Non-Prescribed Annuities • Defined in Regulation 304 – prescribed annuity cannot be corporate owned • Taxation Non–Prescribed Annuity Tax Payable Prescribed Annuity Life Expectancy Age

8. The Life Insurance • Purchase a life insurance policy • Replaces the capital invested in the annuity • Premiums paid with cash from annuity • Permanent insurance with guaranteed premiums • Often T-100 but not always

9. Corporate Insured Annuity – Case Study: Harry Client • M 75 NS, no spouse • Has holding company which: • Has liquid capital that would be taxed if withdrawn • Has accrued gains on its shares that will be taxable on death • Receives dividend income from corporate investment income • Conservative liquid corporate investment portfolio • Wants to reduce tax

10. Annuity $112,000 /yr LI Life Insurance Face = $1 million Premium = $58k/yr Corporate Insured Annuity Case Study Harry FMV = $1 million ACB = NIL Annuity Holdco Liquid Assets $1 million

11. Annuity LI Premium 58K Cash 35K Taxes 18,600 Corporate Insured Annuity (Illustration of Flow of Funds (yr 3) Holdco Life Insurance Face = $1 million Annuity 112K

12. Comparison to Term Deposit – Corporate cash flow

13. Comparison to Term Deposit – Shareholder Cash flow

14. Comparison to Term Deposit – Net Estate Value to Shareholder

15. Capital Gains on Holdco? • When Harry dies, what is the value of Holdco? Does initial capital of $1 million disappear? • Insurance policy value • Annuity value?

16. Corporate Insured Annuity Client Issues • Older aged individual: • Locked in for life • Insurability of the client • Initial capital is redundant • Client does not want/need access to the capital • Capital will go to estate/heirs • Increasing shareholder income with capital replacement - the goal

17. Corporate Insured Annuity Client Profile • Shareholder of private Canadian corporation • Affluent, with capital that exceeds lifestyle requirements • Age 65 + • In good health • Company’s investment portfolio includes conservative investments (e.g. GIC’s, bonds, bank accounts) • Large capital gains tax exposure at death re: company shares • Interest income from investments is currently used to enhance shareholder’s lifestyle • Wants to leave a legacy at death • Open to long-term planning – passive/locked-in

18. Triple back-to-back • Structures • Strategies • Benefits • Issues • Client

19. Annuity TBTB Structures Activeco Working capital or investments Loan Bank Annuity Life Insurance

20. TBTB Structures Holdco Activeco Annuity Loan Working capital or investments Bank Life Insurance

21. Case Study – What’s different about Harry • 75 Male NS, no spouse: • Shareholder who is willing to take on more complex planning/risk • Large capital gains tax exposure on death • Company with: • Significant continuing income – can use deductions • Wants to leave corporate assets + growth • Goal: • Not about increasing income to shareholder • Not about replacing fixed amount of capital to heirs, rather leaving corporate assets + growth andCDA

22. Annuity LI Premium 58,512 Pre-tax Cash (26,588) Interest 80,000 Case Study: Corporate Cash Flows (yr. 3) Activeco (18,686) Tax on annuity payment +27,280 Tax savings int +19,638 Tax savings NCPI = 1,644 After- tax Life Insurance Face = $1M Annuity 111,924

23. Strategies • Increasing annuity payments • Shop around • Impaired annuities • Reducing taxable portion of annuity • Increasing deductions – interpretations/issues • Interest deductibility technical details • NCPI interpretation variation across carriers • Product choices • T-100 or UL • Special quotes

24. Benefits of the Triple Back-to-Back Strategy • Increased corporate cash flow today • Provide access to tax-free corporate funds in the future • Potentially reduce capital gains tax liability on shares at death • Maintain company’s working capital and investments

25. Issues • Can the corporation realize tax savings? • Sufficient corporate taxable income in excess of deductions • Requirements for deductibility have been met

26. Issues • Impact of economic uncertainties • Loan renewal not guaranteed • Interest rate on loan may change at renewal • Death during term of loan – prepayment penalties may arise • Tax rates may change

27. Issues • Client fit • Locked-in strategy • Cash flows are not intended to enhance shareholder income

28. Issues • Risk that capital gain is not reduced by as much as anticipated • Valuation of the company

29. Issues • Structural tax risks • Characterization as one contract? Denial of CDA credit? GAAR? • Tax shelter rules?

30. Practical Issues • Underwriting older ages • Medical underwriting • Financial underwriting • Insured must have personal net worth to qualify for amount of insurance • Must be a shareholder • Complex planning with seniors

31. Is this strategy the right fit? Is your client…. • Age 65+ and in good health? • The shareholder of a corporation, with substantial taxable income, that will continue to operate until his/her death? • Comfortable with long term debt? • Comfortable with a strategy that is locked-in for life? • Willing to implement complex tax planning to realize the benefits of this strategy? • Willing to seek professional advice?

33. Educating your client • Illustration output: • Description page • Checklist • Numerical analysis • Summary of cash flows • Tax information • Disclosure page • Interest sensitivity analysis

34. Educating your client

35. Educating your client • Additional client resources • Consumer guide • Advisor resources • Client profile • Tax Topics • Canadian Taxation of Life Insurance

36. Advocis Banff School 2007 Understanding Triple Back-to-Backs Florence Marino, LLB, TEP AVP Tax & Estate Planning Group