CWM Investment Group Specialists in Advising Professional Corporations
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1 CORPORATE-OWNED INSURED RETIREMENT PLAN This report is available both on our website and in hard copy. The rate of tax on dividends paid from your corporation has increased to 33.8%* in Tax on interest income in your corporate account is 46.2%* from dollar one. *As per KPMG tax facts January 1, A Solution A Corporate-owned Insured Retirement Plan (CIRP) can give you a tax-free pension outside of your corporation and pay out the value of the portfolio to your estate without tax. It is obvious why owners of operating and holding companies feel this is an excellent strategy to remove assets from the corporation without tax. In our example below, a corporate investment of $500,000 in Manulife Performax Gold spread over 10 years, earning 6% would pay out from the corporation to its owners $1.1 million in the form of a tax-free annual income and a lump sum death benefit to the heirs from the corporation s capital dividend account. A GIC at 6% would pay owners about $520,000 after tax compared to the $1.1 million tax-free income from the CIRP. That s nearly $600,000 extra compared to investing in a GIC. Corporate Insured Retirement Program PERFORMAX GOLD vs. GIC AT 6.00% Corporate Insured Retirement Program Alternative Investment GIC Based Year Age Total Annual Contribution Tax Free Loan Advance Net Estate Value After Tax Amount To Shareholder Net Estate Value , , , , , , , , , , , , ,000 1,016, , ,000 23,173 1,031,585 23, , ,000 23,173 1,047,203 23, , ,000 23,173 1,063,356 23, , ,000 23,173 1,081,123 23, , ,000 23,173 1,100,614 23, , ,173 1,062,866 23, , ,173 1,030,004 23, , ,173 1,002,247 23, , , ,740 23, , , ,582 23, , , ,199 23, , , ,790 23, , , ,021 23, , , ,010 23, , , ,852 23, , , ,014 23, , , ,836 23, , , ,173 23,173 94, , ,972 23,173 75, , ,182 23,173 54, , ,746 23,173 32, , ,609 23,173 9, LE 0 23, ,711 9, , , , , , , ,672 0 Total Income: $532, CIRP Advantage: $595,119 CIRP Total Return: $1,114,690 GIC Total Return: $519,571 1
2 It should be noted that you cannot find a 6% GIC these days with interest rates being so low. Below I have shown the income difference of investing $500,000 in a five-year GIC at today s average rate of 2.7%. The Advantages of Performax Gold: 1. The corporation invests $50,000 annually for 10 years. 2. Your corporation s investment portfolio grows tax free. In the example that follows, the average annualized return over a 15-year period ending in 2011 was 8.4%. 3. You can structure your corporation to pay out the entire investment to your heirs tax free. There are many options to suit your needs. 4. The insurance value is approximately $898,000 from day one. 5. Starting in your sixth year, you can receive about $23,000 in tax-free income each year for 23 years, amounting to about $533,000. This is equivalent to a pre-tax dividend of $35,000 or a 12.9% bond if you were taxed at the top marginal tax bracket. 6. At second death at life expectancy your heirs receive almost $582,000 tax free. 7. Having the $1.1 million personally is equivalent to $1.7 million in the corporation based on the tax of 33.8% on dividends paid out to you. We have not included other taxes on the estate if funds are left in the corporation. 8. The investment portfolio invests in commercial properties, and commercial mortgages and bonds on a tax-free basis. 9. The best feature of this strategy is the investment itself. It allows you to diversify into professionally managed commercial real estate properties, bonds and commercial mortgages. 10. Returns in the plan are tax free and returns can be guaranteed at a 2.25% annual performance guarantee. 11. Can be used as an ongoing source of tax-free retirement income. 12. Provides insurance if both spouses were to die unexpectedly. 13. Returns do not create probate fees if a dual will is implemented. Example Why an RRSP contribution may not make sense for a business owner See report on our website in the tax corner titled The Compensation Conundrum: Will it be salary or dividends? The Problem Annual Income After Tax $23, $7, Monthly Income After Tax $1, $ The following example shows a couple, male age 66 and female age 62, with a very large RRSP and a worsening tax problem. In the year that the second spouse dies, the value of the RRSPs is considered taxable with top tax rate of 50% for income over $500,000. If both spouses die, the RRSP is fully taxed to the estate as income based on the personal income tax rates. The RRSP may not be the only asset that gets taxed in this year. IRP IRP Advantage: $16, Contribution Year End Balance Net Estate Effective Tax Rate Tax Paid By Estate $50, $ 100,000 74, % 25,600 $50, , , % 50,341 $50, , , % 50,341 $50, , , % 102,186 $50, , , % 138,389 $50, , , % 167,063 $50, , , % 205,497 $50, , , % 245,004 $50, , , % 281,737 $50, , , % 320,799 $50, , , % 341,138 GIC 2
3 A Solution Rather than make RRSP contributions, they could invest in a Corporate Insured Retirement Plan (CIRP). The policy is owned by a corporation either an operating or holding company. If you decide not to take out any income, the original $500,000 would, by age 93, grow to nearly $1.5 million. Or they could receive tax-free income, which as you can see, the later the money is received, the higher your tax-free income. CIRP 1: $23,173 6 th Year CIRP 2: $33, th Year CIRP 3: $51, th Year Comparison of PERFORMAX GOLD STANDARD to Three Examples of Corporate Insured Retirement Programs Performax Gold PC Rate Initial Death Benefit 6% $875,000 Prepared For Example Bank Loan Rate 4.00% Performax Gold Policy No Loans CIRP 1 CIRP 2 CIRP 3 Year Age Total Annual Contribution Total Death Benefit Total Cancellation Cash Value Tax Free Loan Advance Net Estate Value Tax Free Loan Advance Net Estate Value Tax Free Loan Advance Net Estate Value , ,884 19, , , , , ,922 41, , , , , ,741 64, , , , ,000 1,040,824 90, , , , ,000 1,092, ,129 1,016,057 1,016,057 1,016, ,000 1,145, ,290 23,173 1,031,585 1,055,685 1,055, ,000 1,199, ,383 23,173 1,047,203 1,096,367 1,096, ,000 1,253, ,039 23,173 1,063,356 1,138,587 1,138, ,000 1,310, ,189 23,173 1,081,123 1,183,462 1,183, ,000 1,368, ,607 23,173 1,100,614 1,231,147 1,231, ,352, ,000 23,173 1,062,866 33,088 1,188,308 1,222, ,341, ,884 23,173 1,030,004 33,088 1,150,153 1,220, ,335, ,528 23,173 1,002,247 33,088 1,116,891 1,224, ,335, ,190 23, ,740 33,088 1,088,658 1,234, ,340, ,162 23, ,582 33,088 1,065,544 1,251, ,348, ,188 23, ,199 33,088 1,045,968 51,035 1,221, ,358, ,572 23, ,790 33,088 1,028,119 51,035 1,191, ,371, ,295 23, ,021 33,088 1,011,651 51,035 1,163, ,386, ,524 23, ,010 33, ,674 51,035 1,135, ,405, ,437 23, ,852 33, ,270 51,035 1,108, ,407, ,296 23, ,014 33, ,898 51,035 1,055, ,411, ,076 23, ,836 33, ,883 51, , ,417, ,814 23, ,173 33, ,070 51, , ,423, ,550 23, ,972 33, ,394 51, , ,431, ,340 23, ,182 33, ,789 51, , ,441, ,243 23, ,746 33, ,186 51, , ,451, ,338 23, ,609 33, ,515 51, , ,464, ,564 23, ,711 33, ,701 51, , ,477,874 1,012, , , , ,493,030 1,046, , , , ,509,687 1,081, , , , ,515,376 1,106, , , , ,522,006 1,132, , , , ,529,549 1,159, , , , ,537,975 1,185, , , , , , ,455 3
4 Insured retirement plan annual performance 8.4% over 15 years. Tax-equivalent yield of 16.42%. PERFORMANCE Average Annualized Returns The values in this table are as at December 31, They are updated annually. Year Par Fund Yield S&P/TSX Composite Scotia Capital Universe Bond 5-Year GIC Consumer Price 1 6.8% -11.1% 9.7% 1.9% 2.5% 3 6.6% 11.4% 7.3% 1.9% 2.1% 5 7.2% 1.3% 6.4% 2.4% 2.0% % 6.6% 6.5% 2.8% 2.2% % 6.5% 6.7% 3.4% 2.0% Average Annualized Return (Since 1985) Standard Deviation (Since 1985) 9.6% 7.4% 9.3% 5.8% 2.5% 2.0% 16.2% 6.2% 3.1% 1.4% Investment Performance The following shows the historical results and annualized returns for the participating account (after the deduction of investment expenses) relative to other economic indicators. All values show full year return. Year Par Fund Yield S&P/TSX Composite Scotia Capital Universe Bond 5-Year GIC Consumer Price % 20.5% 21.2% 10.8% 4.4% % 6.0% 14.7% 9.7% 4.2% % 3.1% 4.0% 9.6% 4.1% % 7.3% 9.8% 10.1% 4.0% % 17.1% 12.8% 10.3% 5.2% % -18.0% 7.5% 11.2% 5.0% % 7.8% 22.1% 9.3% 3.8% % -4.6% 9.8% 7.7% 2.1% % 29.0% 18.1% 6.4% 1.7% % -2.5% -4.3% 7.4% 0.2% % 11.9% 20.7% 7.1% 1.8% % 25.7% 12.3% 5.7% 2.2% % 13.0% 9.6% 4.7% 0.8% % -3.2% 9.2% 4.4% 1.0% % 29.7% -1.1% 4.8% 2.6% % 6.2% 10.3% 5.3% 3.2% % -13.9% 8.1% 4.0% 0.7% % -14.0% 8.7% 3.9% 3.9% % 24.3% 6.7% 2.9% 2.0% % 12.5% 7.2% 2.8% 2.1% % 21.9% 6.5% 2.7% 2.2% % 14.5% 4.1% 3.2% 1.6% % 7.2% 3.7% 3.3% 2.4% % -35.0% 6.4% 3.0% 1.2% % 30.7% 5.4% 2.0% 1.3% % 14.5% 6.7% 2.0% 2.4% % -11.1% 9.67% 1.87% 2.5% 4
5 OVERVIEW OF CIRPS As the investments in the holding company and/or the RRSPs continue to grow, the tax bill will also grow. The Corporate Insured Retirement Program (CIRP) is well suited to provide an excellent alternative to RRSPs, mortgage funds or real estate investment trust (REIT) dividends. Many people do not know that REITS and mortgages are taxed at 46.2% from dollar one in your corporation. An 8% mortgage would net you 4.3% in your corporation. The corporation invests $50,000 each year for 10 years in Performax Gold, a corporate insured retirement plan. These pre-tax deposits fund two separate parts of the CIRP: 1. Premiums paid by the corporation. 2. The investment account which is overfunded and can grow its assets tax free. In most cases the policy could be paid up in seven to eight years, depending on client age, but it is recommended that 10 annual contributions be made to the plan. The company is both the owner and beneficiary of the policy, which is written on the lives of both spouses. The individual benefits will be paid tax free to beneficiaries of the corporation for the benefit of the heirs. In the example, the insurance benefit of about $821,000 would pay out if both spouses were to die in the first year and it could grow to $1 million by the tenth year. All returns on investments are tax free and all proceeds at second death from the insurance are paid out tax free to the company s Capital Dividend Account which can pay out to the estate without taxation. Why at second death? If the insurance is joint last to die, the insurance costs are considered equivalent to one person who is 10 years younger because there is a lower risk of both spouses passing away together. This lowers the insurance cost so you can put more money towards the investment component. Also, any tax is due when the last spouse dies. Rather than withdrawing the taxable funds from your corporation and paying personal income tax, keep it in the corporation and invest it with pre-tax dollars. Tax on interest income for holding companies is 46.2%. There is no tax on returns in a CIRP. INSURED RETIREMENT PLAN INVESTMENTS 48% in bonds and only 18% in stocks Private Equities 4% Public Equities 14% Public Bond 48% Real Estate 11% Private Debt 7% Mortgages 16% 5
6 COMMERCIAL MORTGAGES The mortgage segment is managed by Manulife Financial s mortgage division. The segment consists of commercial mortgages, which are diversified by location and property type and consists almost entirely of first mortgages. REAL ESTATE Real estate is also managed by Manulife Financial s real estate division. The portfolio focuses on top quality office buildings located in superior downtown and large suburban markets across Canada. The portfolio is diversified by location and property type. The real estate operation tracks the total yield of all real estate and then allocates the yield to Manulife s different asset segments. This results in more stability in returns since specific buildings are not allocated to specific investments. ADVANTAGES OF PAYING FOR THE POLICY WITH CORPORATE DOLLARS VS. PERSONAL Advantages of Corporate-Owned Life Insurance Personal Ontario 49.53% Corporate Ontario 15.50% *New Highest Personal Tax Bracket 49.53% May 31, 2013 Take advantage of cheaper corporate dollars to pay insurance premiums Example: Annual life insurance premiums $10,000 non-deductible Paid personally Earn $18,180 to net $10,000 (45% personal tax rate) Paid corporately Earn $11, to net $10,000 (15.5% corporate tax rate) Savings: $6, annually This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. CIBC World Markets Inc Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed. Their values change frequently and past performance may not be repeated. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor. Nick Steele, CFP is an Associate Investment Advisor working with Murray Chalmers Investment Advisor. Insurance services are available through CIBC Wood Gundy Financial Services Inc. In Quebec, insurance services are available through CIBC Wood Gundy Financial Services (Quebec) Inc. 6
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