1. The hidden cost of tax and how to save more
Corporate tax grind+
The hidden cost of tax and how to save more
This document is for wholesaler use only.
June 2018

2. Agenda Corporate tax grind+ A case study The tool Client suitability
When to use it
A case study
Hidden cost of tax
Saving clients money and getting them more
Agenda:
Corporate tax grind+
The tool
Client suitability
When to use it
A case study
Hidden cost of tax
Saving clients money and getting them more

3. A tax-advantaged way to enhance business owner investments
CORPORATE tax grind+
A tax-advantaged way to enhance business owner investments

4. Major update to existing calculator Now features two options:
The tool
Major update to existing calculator
Now features two options:
Ability to show investments only
Asset mix
Investment growth as well as the amount of money lost to tax
Ability to import permanent life insurance policy
Comparing investments to insurance
Cumulative amount paid and net estate value
The corporate tax grind + now goes beyond your basic calculator. It’s more advisor and client-friendly – both in terms of input and report.
The new tool can do everything the old calculator can do plus more.
Now you have the opportunity to speak to clients about their business’ asset mix and the substantial cost of tax on growth. Plus, there’s the opportunity to import a permanent life insurance policy. By bringing insurance into the conversation, you’re able to show clients how insurance can provide an opportunity for reduced taxes on growth, which can drive higher returns.

5. Has annual tax obligations from investments
Who is this tool for?
Business owners
Needs life insurance and is interested in the opportunity permanent life insurance offers
Has annual tax obligations from investments
Has a desire to reduce taxes on investment income
Wants to leave a legacy
Business owner clients who can benefit most from this strategy include people 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

6. Putting the tool into action
Case study
Putting the tool into action

7. Meet June
55-year-old woman
Lives in Manitoba
Traditionally, has focused on growing her business, not as much on planning
Looking to retire in years
Has a daughter, Kristy, age 30, who is now starting to work for the family business
$500,000 of corporate retained earnings not required for daily operations in the Holding company

8. June owns and runs a successful consulting business
How you know June
June is a client that you acquired when you recently purchased a book of business
June owns and runs a successful consulting business
You meet annually with June to discuss insurance and investments
She currently has:
Term life insurance policy owned by the corporation
Investments that are corporately owned
You want to further the conversation by talking to her about:
Retirement
Succession planning
Estate planning for her business
UPDATE NOTES

9. A snapshot of June’s scenario
Trust
Common shares
Kristy
Common shares
Operating company
Preferred shares
Holding company

10. Limit investment risk exposure Provide a legacy Minimize tax
June’s goals
Limit investment risk exposure
Provide a legacy
Minimize tax
Maintain a reasonable return
After getting to know June a little more, we’re able to break down her top goals:
Limit investment risk exposure
Provide a legacy
Minimize tax
Maintain a reasonable return

11. June’s place in the planning cycle
To better understand where June fits in terms of her goals, insurance needs and net worth, we can place her near the centre *click* of the Changing needs diagram. Knowing where she generally falls on this moving scale can help you as you determine the type of conversation you’re going to have and what type of strategy you might want to consider using. But before we go down the path too far, let’s look at June’s current investments.

12. June’s investment portfolio
Asset class
Investment mix
Growth rate
Tax rate
Fixed income
75% 4%
50%
Taxable dividends
25% 5%
38.33%
A look at June’s investments tells us that the majority of her company’s investments are fixed income. This is because as she prepares for retirement, she wants to limit her exposure to market ups and downs. So she’s begun to transition most of her company’s non-registered investments into mainly fixed income and some equities.

13. Strategic diversification
June knows the importance of strategic diversification but she doesn’t understand how permanent life insurance can complement her other assets. 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 strategic diversification.
Each asset class has its own growth and risk characteristics. By considering the differences between asset classes, you can create a plan specific to the needs of a client like June and strategically diversify their net worth to help reduce risk while maximizing returns. It’s important to remember that we’re simply showing June how she can distribute her existing or future investments in a new way that will help reduce volatility risk/taxes while providing an enhanced return.
For June, we’re specifically going to look at fixed-income investments, equity investments *click* and life insurance *click*.
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 (i.e., 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
Can result in loss of money if forced to sell in a down market
May be subject to probate (estate administration tax) if any
Life insurance:
Tax-free death benefit is paid to named beneficiaries
If the accumulation stays within prescribed limits, the cash value is only subject to income tax when it’s withdrawn
Not subject to probate (estate administration tax) if any, if a beneficiary other than the estate is named
Death benefit and beneficiaries can be 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
For clients interested or owning business and real estate some of the characteristics of these assets are:
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
If forced to sell in a down market, can lose money

14. Amount of growth lost due to tax: $1,032,519
The hidden cost of tax
Amount invested: $500,000
Amount of time: 30 years
Amount of growth lost due to tax: $1,032,519
As mentioned earlier, June views insurance as a cost and investments as money set aside. What we want to show June is that investments also presents itself with cost – hidden as tax and lost growth.

15. Taxable investments at age 85
$1,756,517
$1,032,519
$723,998
If June’s company were to invest a total of $500,000 over a period of 30 years, $1,032,519 in growth is lost due to tax.
Investment assumptions:
$500,000 lump-sum investment deposit at age 55, comparison age 85
Investment mix:
75% Fixed Income, 4% growth rate and 50.17% tax rate
25% Taxable Dividends 5% growth rate and 38.33% tax rate
Investment assumptions: $500,000 lump-sum deposit at age % fixed income, 4% growth rate and 50.17% tax rate, and 25% dividends (equities), 5% growth rate and 38.33% tax rate.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

16. Loss of future growth due to tax
Year
Cash invested
Investment value
Growth
Annual tax
Net estate value to shareholder
Growth lost due to tax 1
$500,000 -
$21,250
$9,921
$283,896
$237,354 … 5
$546,949
$23,289
$10,849
$328,030
$287,750 30
$966,231
$41,665
$19,118
$723,998
$1,032,519
In taking a closer look at June’s corporate investments, we see that although her investments are growing, they are also taxed quite heavily. By the corporation holding onto investments, the company is losing a significant amount to taxes.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

17. Investments compared to insurance
How to save more
Investments compared to insurance
Now that you’ve shown June the hidden cost of tax and how investing may be like taking two steps forward and one step back, we want to assure her how she may be able to save more and get further ahead.

18. Investments compared to insurance
Year
Cash invested/premium paid
Investments – Net estate value to shareholder
Insurance plus residual investment –
Net estate value to shareholder 1
$55,203
$283,896
$1,755,576 2 - 3 4 5
$276,015
$328,030
$1,568,504
... 10 15 20 30
$552,030
$723,998
$1,414,248
Insurance assumptions:
55-year old female, non-smoker, standard risk.
Universal Life Limited 10 pay $55,203 for 10 years assuming a guaranteed-insurability option 10 year on the investment account.
Insurance assumptions: 55-year old female, non-smoker, standard risk.
Universal Life Limited 10 pay (guaranteed insurability option10 year 1.5%). Initial death benefit $1,527,000.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

19. Investments compared to insurance
What your business paid
What your business gets
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

20. Which one would June rather have?
At age 85:
Investments
Insurance
Difference
Cash invested/premium paid
$500,000 $ %
Net estate value
$723,998
$1,414,248
$690,250
95%
To get the same net estate value with investments as June does with insurance would require a yearly after-tax rate of return of 3.53%
After running a report for June using the revamped Corporate tax grind+ tool, we can see there’s a significant increase to her estate value to shareholder. For example, if June were to die at age 85, her net estate value to shareholders would be $1,414,248 using life insurance compared to $723,998 with using investments.
To get the same net estate value with investments as June would using insurance would require a yearly after-tax rate of return of 3.53%.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

21. Insured solution – summary
If the accumulation stays within the prescribed limits while it remains in the policy, the cash value is only subject to income tax when it’s withdrawn
The death benefit is payable tax-free to the corporation and has the option to distribute the money to a shareholder*
Guaranteed paid up in 10 years
Option to access guaranteed cash value if needed
No surrender charges
Besides increasing June’s net estate value, we want to show her that permanent life insurance and its various options can provide her with flexibility, something she wasn’t sure life insurance could do.
The product we chose for June was based on how much she was able to spend, her desire to leave behind money for her daughters and her plans to retire in the near future.
We chose Universal Life Limited 10 pay with a guaranteed interest option 10 year.
By choosing a universal life insurance product (with a 10 year COI), she’s able to start at a high initial death benefit– while being assured that the policy is paid up in 10 years. In addition, if an emergency was to arise the LP10 product provides guaranteed cash value and the ability to withdraw cash without any surrender charges if needed (which will require a reduction in death benefit).
* This may incur tax if the insurance payout exceeds the credit to the capital dividend account.

22. Continue the conversation with a strategy
What’s next?
Continue the conversation with a strategy
Corporate asset transfer+
Corporate asset diversification
Now that June has learned about the benefits life insurance can offer, she’s open to hearing more. That’s where the Corporate asset transfer+ or Corporate asset diversification strategies come into play. They can provide her with customized reports that go into greater detail about having access to cash or only using a portion of her investments to increase her net estate value.
Wherever the conversation goes, there’s a strategy that can help support the conversation.