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 l Truly understand who the right client is for TBTB l Distinguishing TBTB sale from other HNW insurance planning opportunities

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

5. Insured Annuity basics Investment vehicle for seniors A marriage of two contracts 1.A life annuity 2.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 l Defined in Regulation 304 – prescribed annuity cannot be corporate owned l Taxation Tax Payable Prescribed Annuity Non–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 n Often T-100 but not always

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– Case Study: Harry Client l M 75 NS, no spouse l Has holding company which: Has liquid capital that would be taxed if withdrawn Has accrued gains on its shares that will be taxable on death l Receives dividend income from corporate investment income l Conservative liquid corporate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

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

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

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

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

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

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

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

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: n Significant continuing income – can use deductions n Wants to leave corporate assets + growth Goal: n Not about increasing income to shareholder n Not about replacing fixed amount of capital to heirs, rather leaving corporate assets + growth and CDA

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

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

24. Benefits of the Triple Back-to-Back Strategy ü Increased corporate cash flow today ü Provide access to tax- free corporate funds in the future ü Potentially reduce capital gains tax liability on shares at death ü 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 l Medical underwriting l 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?

32. ProfileCorporate Insured AnnuityTriple Back-to-Back Objectives  Increase income to shareholder  Leave capital from life insurance proceeds to estate/heirs at death  Reduce capital gains  CDA  Reduce capital gains  Maintain and increase corporate cash flow  “Keep doing what I’m doing” Tax  Corporation may not have other taxable income  Tax is NOT driving factor  Large amounts of taxable income  Wants/needs tax deductions Risk Profile  Low-risk tolerance  Conservative and “hands-off” investor  High-risk tolerance  Wants to actively manage investment  Comfortable with complexity, leverage and tax risks

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

34. Educating your client

35. 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