Corporate asset transfer+ A tax-advantaged way to enhance corporate investments and access cash Have business owners asked you about how they can: Build a foundation of financial security for themselves, their families and their corporations? Make their dollar go further using corporate money instead of personal income? Leave a legacy for loved ones or a favourite charity? Today’s tax environment favours retained earnings. Decreasing corporate tax rates have resulted in the phasing out of ‘bonusing down’. This means business owners are increasingly investing their savings in holding companies. But is this the best option? Permanent life insurance may be a better option – one that can help them save money, build a foundation of financial security and can help them leave a legacy. To show clients the advantages of using insurance compared to using investments, we’re going to look at the corporate asset transfer strategy as well as two of the accessing methods available – partial surrenders/cash withdrawals and policy loans. This document is for wholesaler use only. November 2016

Corporate asset transfer strategy Agenda Corporate asset transfer strategy The strategy The set-up Client suitability A unique asset class Keeping more wealth Accessing cash Partial surrender/cash withdrawals Policy loans The tool Navigating through the sales process Case study Agenda Corporate asset transfer strategy The strategy The set-up Client suitability A unique asset class Keeping more wealth Accessing cash Partial surrender/ cash withdrawals Policy loans The tool Navigating through the sales process Case study

Corporate asset transfer A tax-advantaged way to enhance corporate investments Corporations can use life insurance to help preserve their capital and enhance their net estate values all while taking advantage of tax-advantaged growth.

Ensure a smooth exit strategy The strategy Protect business Immediate enhancement Leave a legacy Reduce annual taxes payable Death benefit provides a credit to the capital dividend account Ensure a smooth exit strategy Buy/sell Life insurance can help: Protect business Provides an initial death benefit that grows over time, and enhances the shareholder’s estate in later years Can help prevent the unexpected from financially harming – or even destroying – the business they’ve worked so hard to build Life insurance funds can be used to help pay debts and expenses to help keep the business going, find and train suitable replacements, assure creditors and suppliers that funds are available to meet commitments and reassure customers the business has the means to continue Leave a legacy Permanent life insurance can help maximize what’s left behind by reducing annual taxes payable and growing the corporation’s total net worth The money provided to the named beneficiaries is tax free Ensure a smooth exit strategy Life insurance can help business owners do more with their money and fund their transition plan whether they want to sell their business, liquidate their business or pass it along to family Let’s see how this strategy works.

Corporation is owner, premium-payer and beneficiary of the policy The set up Corporation is owner, premium-payer and beneficiary of the policy When insured dies, corporation receives death benefit This credits its capital dividend account Corporation may elect to pay shareholders capital dividends A private corporation resident in Canada owns a life insurance policy and is the named beneficiary.   When the insured dies, the corporation receives the death benefit, which credits its capital dividend account by an amount equal to the death benefit less the adjusted cost basis of the insurance policy. If the policy is used to secure the indebtedness of the corporation, the corporation receives a credit to its capital dividend account on the same basis – even when the death benefit is paid directly to the creditor. Corporations have the flexibility to determine when they elect to pay capital dividends. The balance available in the capital dividend account may be reduced by the capital losses realized after receiving the death benefit.

Have annual tax obligations from investments Client suitability Need life insurance and are interested in the benefits permanent life insurance offers Have annual tax obligations from investments Have a desire to reduce taxes on investment income Want to leave a legacy Want the option of accessing cash value from their life insurance policy Clients who can benefit most from this strategy include business owners with: Life insurance needs Able to qualify and pay for life insurance Annual tax obligations from investments A desire to reduce taxes on investment income A wish to leave a legacy An interest in the option of accessing cash value from their life insurance policy

Business life cycle We’ve already discussed which clients may be most suitable for this strategy, but in terms of the business life cycle and their needs, typically clients will be nearing or at the transfer phase. People suitable for this strategy are nearing the transfer phase. They don’t necessarily have the same insurance needs as people in earlier stages; they are more focused on the insurance opportunity of estate planning while still having an insurance need. They have money they don’t need to access in their lifetime, which they want to transfer to next generation as tax-efficiently as possible, while still having access to the money if needed.

Growth. Access. Transfer Businesses generating more cash than needed for day-to-day operations may wish to consider redirecting their assets from investments into a permanent life insurance policy. There’s also the opportunity to access cash value in the policy should the company need it.

Helping the client understand the versatility of insurance A unique asset class Helping the client understand the versatility of insurance Once you’ve identified the appropriate clients, you can help business owners understand how insurance is a unique asset class and how permanent life insurance can complement the fixed-income portion of a client’s financial security portfolio.

Strategic diversification Note – For more information, see Balancing to reduce risk (form 46-8374). This piece helps clients understand the value of strategic diversification and how life insurance can help diversify their portfolios. Generally, business owners understand the importance of strategic diversification but they might not understand how permanent life insurance can complement their other assets.   To understand how, let’s look at the features of each asset class. This is an opportunity to review how each asset class works with other assets to provide clients with strategic diversification. Different asset classes have different features. For example, each asset class has its own growth and risk components. By considering the differences between asset classes, you can create a plan specific to your clients’ needs, and strategically diversify their net worth to help manage risk.     Fixed-income investments Secure, accessible Returns are generally lower as risk is lower Risk of returns being eroded by inflation Taxed at highest marginal rate May be subject to probate (estate administration tax) if any Equity investments Potential for higher returns and higher risk Returns fluctuate with market volatility, political instability Subject to capital gains tax Death can trigger tax, without immediate liquidity to pay tax If forced to sell in a down market, can lose money Business, real estate, etc. Value fluctuates with market Investors usually rely on slow, steady growth Limited access to capital, depending on how quickly and at what price goods can be sold May be subject to capital gains tax Death can trigger tax, without liquidity to pay tax Life insurance Tax-free death benefit is paid to named beneficiaries Tax-advantaged growth within the policy, within prescribed limits, while living Not subject to probate (estate administration tax) if any, if a beneficiary other than the estate is named Death benefit and beneficiaries are kept private Exception – In Saskatchewan, executors must disclose all known life insurance policies owned by the deceased, including segregated fund policies. They must list the insurance company, policy number, designated beneficiaries and the value at the date of death. Potential creditor protection Creditor protection depends on court decisions and applicable legislation Can be subject to change and can vary from each province – it can never be guaranteed Clients should talk to their lawyers to find out more about the potential for creditor protection for their specific situations

Investment growth can be costly Keeping more wealth Investment growth can be costly Corporations with more cash than needed for day-to-day operations may consider investing. Investing the excess cash is an option, but it may not be the best option. It can end up costing more than they thought because growth on investments may be subject to a higher corporate tax rate.

Investment growth can be costly EXPENSES $ REVENUE 15% ACTIVE BUSINESS TAX RATE PROFIT OPERATIONS DEFERRED TAX SHARE VALUE CAPITAL GAINS INVESTMENTS TAXABLE GROWTH PASSIVE INCOME TAX RATE 50% Life insurance or investments? Investment growth can be costly. Putting money into investments may be costing more than business owners think. In fact, it could end up costing them thousands each year because growth on investments can be subject to the highest corporate tax rate.   Permanent life insurance may be an effective solution for corporations looking for tax-efficiencies and options. Life insurance can help business owners accumulate more cash value during their lifetime and may allow them to leave larger estates to their shareholders than investments can. VALUE FOR DISTRIBUTION PROCEEDS OF DISPOSITION INCOME (SALARY / DIVIDENDS)

Money lost to taxes Pre Tax After Tax Non-taxable Taxable Proposed Solution Non-Taxable Non-taxable Non-Taxable Pre Tax Taxable Taxable Taxable Let’s take a closer look at investments and tax. Passive income held in taxable investments is taxed at the highest corporate marginal tax rate (varies by province). That means year after year, taxes are eating away at investment growth. Instead of compound growth, this tax erosion can be seen as compound reduction. Every dollar paid to Canada Revenue Agency (CRA) has the potential to cost more than one dollar over time – that’s because the ability to reinvest that dollar is lost forever.   As the chart shows, taxes can dramatically reduce the net cash the corporation receives. Although corporations may be paying more in tax than necessary, that doesn’t have to be the case. Business owners can reduce tax with permanent life insurance. Example assumptions Insured person: Fifty-year old male, non-smoker, standard rating with $25,000 annual deposit Four per cent interest growth (100 per cent interest) non-registered Legacy Generator – guaranteed 20 pay, no additional deposit option Province: Ontario Corporate tax rate: 50 per cent $692,318 initial death benefit Annual premium: $25,000 Dividend option: Paid-up additions Non-eligible dividend tax rate: 45.30 per cent The above example is for illustrative purposes only. Situations will vary according to specific circumstances. After Tax Assumptions: 50-year-old with $25,000 to invest annually for the next 20 years. Portfolio: 100% interest, growing at 4%, Corporate Tax Rate 46.17%, Dividend Rate 36.47% (Ineligible), Personal MTR 46.41%. This graph compares the net estate value if investments were not exposed to tax on the growth annually (pre-tax) and what the after-tax reality looks like. The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

Paying shareholder dividends or expanding business Accessing cash Paying shareholder dividends or expanding business If a corporation needs money to pay shareholder dividends or expand business, it can access the policy’s accumulated cash value, after enough cash value has been built up in the policy. Two accessing methods include partial surrenders/cash withdrawals and policy loans.

Can be a one-time or series of cash withdrawals to: Accessing cash value Can be a one-time or series of cash withdrawals to: Supplement retirement income Create another tax-advantaged account Use for unexpected life events Alternative to accessing income from corporate assets Accessing cash value can be a one-time withdrawal, or a series of cash withdrawals. Withdrawing cash value may reduce the total death benefit while maintaining the initial base life insurance coverage amount. Let’s compare partial surrenders/cash withdrawals and policy loans, as each one works differently. If a client borrows against or withdraws money from the policy, it may reduce the policy’s cash value and death benefit and may be subject to tax.

Partial surrender/cash withdrawal A partial surrender/cash withdrawal is contractually guaranteed, giving the corporation access to the accumulated values as long as the dividend cash value or account value is available and is not securing an existing policy loan. Since repayment isn’t allowed, any money borrowed or withdrawn from the policy reduces both the cash value and death benefit and may be subject to tax. How it works: A cash withdrawal is taken from the built-up cash in your policy. It’s contractually guaranteed and is available as long as it isn’t securing an existing policy loan. Since repayment isn’t allowed, cash withdrawals will affect the remaining cash available in your policy and the amount payable when you die. If you withdraw all the cash value, the policy ends.

Policy loan A policy loan is a contractually guaranteed agreement between the client and us, their insurance provider. The corporation can choose to repay the loan, or any unpaid loan and interest accrued will be deducted from the payout when the insured person dies. The loan does not reduce your coverage. How it works: The insurance company advances a loan, secured against the policy’s cash value. The loan minus the adjusted cost basis is taxable. When the loan is repaid, a tax deduction may be available, up to the previously taxable amount.

Accessing cash – methods and considerations Accessing consideration Partial surrender (participating life insurance) Partial withdrawal (universal life insurance) Policy loan Contractually guaranteed  Taxation of amount accessed Maintain full control of policy Repayment × Tax deductions Not applicable Credit to the capital dividend account isn’t reduced at death When considering what accessing method to use, client needs need to be assessed. What exactly is the client trying to achieve? In order to determine what might be the most appropriate accessing method, the Plan comparison with accessing cash tool can prove useful. For an expanded version of this table, complete with details, refer to the Accessing cash – methods and considerations PDF found in the Plan comparison with accessing cash tool’s input page.

Corporate asset transfer+ One tool. Three options. When speaking to business owners about the Corporate asset transfer strategy, you can use the Corporate asset transfer+ tool. The tool can tell three stories in one: Corporate asset transfer Corporate asset transfer and cash withdrawals Corporate asset transfer and policy loans

Corporate asset transfer + Generates a customized report that illustrates: How taxes can erode wealth Tax-advantaged way to transfer assets from the corporation The life insurance advantage How life insurance stacks up When the corporation breaks even Comparing life insurance to investments Corporate investments – detailed Life insurance - detailed Depending on whether you select a summary or detailed report, discussions in the report can include: How taxes can erode wealth – tax grind Tax-advantaged way to transfer assets from the corporation The life insurance advantage How life insurance stacks up When the corporation breaks even Comparing life insurance to investments Corporate investments – detailed Life insurance - detailed

Navigating through the sales process Putting it into action

Case study Case study Case study Case study Meet John As a recap of today’s conversation and to see just how you might be able to use this with a client, let’s meet John from Ontario. John is a 50-year-old man, non-smoker, standard risk. He’s a corporate business owner with an insurance need. Case study Case study

Identifying Client needs What are your clients looking for? As advisors, it’s our job to match client needs with the right product and strategy solution.

Business owner is risk and debt-averse Client needs Corporation is generating more wealth than needed for day-to-day operations Business owner is risk and debt-averse Wants the ability to access cash and make repayment When we take a look at John, we can see that: His corporation is generating more wealth than needed for day-to-day operations He’s risk and debt-averse He’s interested in the possibility of accessing cash and the flexibility to make repayments

Corporate plan comparison with accessing cash The tool allows you to: Compare up to four term and/or permanent life insurance products Compare up to three accessing cash methods using one product Partial surrender/cash withdrawal Policy loan Collateral loan* *Under Quebec law, the policy’s taken as security by way of a movable hypothec. The Corporate plan comparison with accessing cash tool can help you identify what product suits John’s needs. Since accessing cash is also something that may be of interest to John, the Corporate plan comparison with accessing cash tool can also be used. You can choose a product and compare up to three accessing cash methods – Partial surrender/cash withdrawal, policy loan and collateral loan*. *Under Quebec law, the policy’s taken as security by way of a movable hypothec.

Corporate asset transfer+ Report output Corporate asset transfer+ Once we determined the right product and accessing cash method, we can use the Corporate asset transfer+ tool.

Money lost to taxes Pre Tax After Tax Non-taxable Taxable Proposed Solution Non-Taxable Non-taxable Non-Taxable Pre Tax Taxable Taxable Taxable Let’s take a closer look at investments and tax. Passive income held in taxable investments is taxed at the highest corporate marginal tax rate (varies by province). That means year after year, taxes are eating away at investment growth. Instead of compound growth, this tax erosion can be seen as compound reduction. Every dollar paid to Canada Revenue Agency (CRA) has the potential to cost more than one dollar over time – that’s because the ability to reinvest that dollar is lost forever.   As the chart shows, taxes can dramatically reduce the net cash the corporation receives. Although corporations may be paying more in tax than necessary, that doesn’t have to be the case. Business owners can reduce tax with permanent life insurance. Example assumptions Insured person: Fifty-year old male, non-smoker, standard rating with $25,000 annual deposit Four per cent interest growth (100 per cent interest) non-registered Legacy Generator – guaranteed 20 pay, no additional deposit option Province: Ontario Corporate tax rate: 50 per cent $692,318 initial death benefit Annual premium: $25,000 Dividend option: Paid-up additions Non-eligible dividend tax rate: 45.30 per cent The above example is for illustrative purposes only. Situations will vary according to specific circumstances. After Tax The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

Corporate asset transfer with policy loans Investments Life insurance Comparison age: 85 Cumulative cash invested or premiums paid $500,000 Cash flow taken Cumulative net cash flow to shareholder $226,158 Net benefit at death to corporation less the loan balance and interest $547,758 $811,878 Credit to capital dividend account $0 Net benefit to shareholder’s estate $314,514 Internal rate of return 0.34% 3.04% Cost per dollar of cumulative net cash flow plus net value at death $0.92 $0.48 Let’s look more closely at John’s example. Should the corporation access $226,158 of cash value from its insurance policy, at John’s death, the net value of the insurance policy is still worth $811,878 tax-free (net benefit at death to corporation less the loan balance and interest). That’s a total of $1,038,036 when it only cost him $500,000 in cumulative premiums. If he were to take the same amount from his corporate investments, the net value at death is only $547,758. That’s a total of $773,916. When you look at the two, life insurance clearly outperforms investments when speaking to internal rate of returns. Assumptions Sex/smoker status: 50-year old, male, non-smoker, standard risk Premium: $25,000 annually Product: Legacy Generator – guaranteed 20 pay, no additional deposit option Invesment assumptions: 100 per cent interest, four per cent growth rate Corporate tax rate: 50 per cent Deposits: 20 years Income Starting age: 75 Years of income: 10 Policy loan: Interest rate: six per cent Maximum loan ratio: 90 per cent Maximum loan age: 90 Shareholder non-eligible dividend tax rate: 45.30 per cent The example provided is not complete without the London Life illustration, including the cover page, reduced example and product features pages all having the same date. Read each page carefully as they contain important information about the policy.

Net value at death payable to shareholders estate Summary At age 85 $ In $ Out Net value at death payable to shareholders estate $811, 878 Based on output, do you have any clients that would be interested? $500,000 $226,158

Next steps Identify business-owner clients or prospects who may benefit from this strategy Book an appointment with a small business owner Download the tool from advisor site

Important considerations Examples provided are not complete without the London Life illustration, including the cover page, reduced example and product features pages all having the same date. Read each page carefully as they contain important information about the policy. If the accumulation stays within prescribed limits, the cash value is only subject to income tax if it’s withdrawn. Borrowing or withdrawing money from the policy will reduce the policy’s cash value and the death benefit. Examples are for illustrative purposes only. Situations will vary according to specific circumstances. This material is for information purposes only and shouldn’t be construed as legal or tax advice. Every effort has been made to ensure its accuracy, but errors and omissions are possible. All comments related to taxation are general in nature and are based on current Canadian tax legislation for Canadian residents, which is subject to change. For individual circumstances, consult with legal or tax advisors. An exempt life insurance policy is defined in regulations 306 and 307 of the Income Tax Act (federal). Generally, the Income Tax Act provides that the cash value accumulation is exempt from annual accrual taxation, provided certain conditions, as set out in the regulation, are met. Illustration examples: Examples provided are not complete without the London Life illustration, including the cover page, reduced example and product features pages, all having the same date. Read each page carefully, as they contain important information about the policy. This material is for information purposes only and shouldn’t be construed as legal or tax advice. Effort has been made to ensure its accuracy, but errors and omissions are possible. All comments related to taxation are general in nature and are based on current Canadian tax legislation for Canadian residents, which is subject to change. For individual circumstances, consult with legal or tax advisors.

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