1. 1 How Is Your Debt Insured? Collateral Insurance and the Capital Dividend Account (CDA)

2. 2 Corporate Debt Questions Does your client have any corporate debts? Are they insured? Who is the beneficiary on the policy? Will the policy create a Capital Dividend Account Credit? What is the Capital Dividend Account?

3. 3 Capital Dividend Account Why we have it –Based upon the principle of integration –Income earned by a private corporation and distributed as a dividend to its shareholders is “supposedly” subject to the same amount of tax as if the shareholder earned the funds directly CDA is a mechanism to accomplish this

4. 4 Capital Dividend Account The purpose of the CDA is to keep track of certain amounts received by the corporation that if received by the shareholder directly would have been free of tax –Non-taxable portion of capital gains –portion of life insurance proceeds payable at death These receipts can be passed through to the shareholder on a tax-free basis

5. 5 CDA - Did you Know CDA only available to private corporations, public companies do not have CDA CDA credit is equal to death benefit less the ACB of the policy ACB is generally equal to (issued after Dec 1/82) premiums paid for the policy, less NCPI (net cost of pure insurance)

6. 6 Collateral Insurance and Maximizing the CDA Shareholders Annual Tax Savings (Premium/NCPI) CCRA Bank Life Insurance Policy (from a life insurance co.) Business Loan Collateral Assignment (required) OPCO Stage 1: During Life Stage 2: Death of a Shareholder Remaining Shareholder CCRA Bank Life Insurance Policy OPCO Business Loan Repaid Life Insurance Proceeds Tax Savings on future Dividends CDA Credit

7. 7 Collateral Insurance and the CDAInsurance through a Bankan Insurance Co. Loan Amount $500,000 $500,000 Death Benefit Amount $500,000$500,000 Loan Amount after Death Benefit $0$0 Credit to CDA $0$500,000 Future tax savings from CDA $0$160,000 (32%) Collateral insurance should be purchased from a life insurance company and collaterally assigned to be eligible for a CDA credit. Life Insurance Policy