CORPORATE LEGACY BUILDER
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1 CORPORATE LEGACY BUILDER June Proposal For Corporate Legacy Builder Prepared By: Retail Insurance Marketing Victoria Park Ave Toronto, ON M2J5A (fax)
2 What is the Corporate Legacy Builder? Corporate Legacy Builder is a strategy that gives business owners an opportunity to grow passive assets and/or surplus profits within an insurance policy on a tax-deferred basis. This alternative to traditional investments is designed to provide a business with funds that can be paid tax-free to shareholders or their estates when a business owner or key person dies. The business can also access cash for business needs while the owner or key person is alive. Under current tax laws, when a business insures one of its owners or a key person and the insured person dies, the company receives the insurance proceeds tax-free and is Providing funds that can be paid tax free to shareholders using your company s surplus profits entitled to credit its capital dividend account with an amount equal to the insurance proceeds minus the adjusted cost basis of the policy. Credits in the company s capital dividend account can be paid out to its shareholders tax-free. This strategy is best suited for client ages 50+ who own corporations with large retained earnings that sit in or can be moved to holding companies, investment or management companies and need liquid dollars if they or a key person dies, to fund buy sell agreements, cover collateral arrangements and bank loans and/or capital gains liabilities. How the Corporate Legacy Builder works? Holding Companies are often set up to protect retained earnings of the operating company from potential liabilities. Excess funds are transferred from the operating company to the holding company to maintain the small business status of the operating company and allow it to remain eligible for lower tax rates. The Corporate Legacy Builder strategy uses a portion of retained earnings (passive assets) to fund a life insurance contract to take advantage of tax-sheltered growth inside the life insurance contract. The strategy capitalizes on the tax-free payment of life insurance proceeds to the company on the death of the person insured and minimizes Capital Gains tax. Companies can also take advantage of the Corporate Capital Dividend Account to pay the insurance proceeds less the adjusted cost basis of the policy tax-free to its shareholders. This is in contrast to the personal tax rates that apply when regular dividends are paid to shareholders. The information is for general information purposes only and is not to be construed as providing legal, tax, financial or professional advice. The Empire Life Insurance Company assumes no responsibility for any reliance made on or misuse or omissions of the information contained in this document. Please seek professional advice before making any decision. Trademark of The Empire Life Insurance Company. Policies are issued by The Empire Life Insurance Company June E.&O.E. Page 2 of 12
3 The Corporate Legacy Builder Strategy The Opportunity Business owners benefit from the ability to grow corporate assets on a tax-deferred basis within a life insurance policy during their lifetime. They are able to access cash while they are alive for business needs such as key person, debts and buy sell agreements. The tax-free life insurance proceeds received by the company at death can be paid out to the business owner s estate and used to fund donations to charity or leave a legacy for heirs. The strategy provides and effective mechanism to remove funds form the holding company and can be used to optimize the business owners estate value at death by reducing capital gains exposure. This is accomplished by using corporate assets to fund life insurance. The Fair Market Value of corporate shares immediately prior to death only reflects the cash surrender values of corporate owned life insurance immediately prior to death (as described in Subsection 70(5.3) of the Income Tax Act (Canada). The Challenge Operating companies, holding companies and management companies often contain retained earnings or surplus cash that are not used in active business. These assets are often retained and invested by the company because usually they can only be paid out to the individual shareholders as taxable distributions unless the company s capital dividend account has a credit balance. Frequently, retained earnings or surplus cash are invested in GICs or other short-term investments that may offer guarantees and easy access to cash in exchange for low rates of return. While active business income may be taxed at the small business rate, invested retained earnings and surplus cash are treated as passive income and are taxed at the top marginal tax rates. Business owners may wish to leave something to a church, favorite charity, school, community, etc. when they die in addition to leaving something to children or grandchildren but may feel that don t have enough money to do both. The information in this document is for general information purposes only and is not to be construed as providing legal, tax, financial or professional advice. The Empire Life Insurance Company assumes no responsibility for any reliance made on or misuse or omissions of the information contained in this document. Please seek professional advice before making any decision. Trademark of The Empire Life Insurance Company. Policies are issued by The Empire Life Insurance Company June E.&O.E. Page 3 of 12
4 CONCEPT ASSUMPTIONS Insureds Insured...Corporate Legacy Builder, Male, Age 50, Non-Smoker Product Name... $830,009 Optimax Wealth, Single Life Planned Deposits (8 s) Alternative Investment Growth Breakdown % Interest Effective Tax Rate On Interest % Projected Annual Growth Rate % Special Notes Withdrawals from the policy may be subject to income tax, depending on the adjusted cost basis (ACB) of the policy, at the time of withdrawal. However, the proceeds of a life insurance policy upon death of the insured are received taxfree in the hands of the beneficiaries. Important Information This illustration is not a contract and the values are not The tax treatment of this illustration is based on the current Canadian Federal Income Tax laws and regulations. Any changes will affect the amounts shown on the illustration. It is advisable to contact a competent professional advisor in determining whether this Strategy is suitable to your situation. If this strategy shows a corporately owned scenario with an Alternate Investment, this illustration shows the net estate value assuming that the alternative investment and the insurance are paid out as a dividend at death. It does not reflect any capital gain on the deemed disposition of the shares at death. This strategy uses an Empire Life insurance policy. The amounts shown in the illustration may or may not be achieved depending on assumptions used. Corporate Owned Life Insurance only: The General anti-avoidance Rule (GAAR) in the Income Tax Act may deny a tax benefit that is the result of an avoidance transaction, unless it is undertaken primarily for purposes other than to obtain the tax benefit. Since the main purpose of this strategy is to provide a business with a higher tax-free value of the business for the estate or surviving shareholders, the GAAR rule is unlikely to apply. This document consists of two parts: the presentation and the Empire Life illustration. The presentation and the illustration are designed to read together, to fully understand how some of the values shown in the illustrations may vary. If either part is missing, this document is non-compliant and incomplete. This document is for illustrative purposes only and is not a contract or offer of insurance. Illustrated values are not Empire Life and its employees, distribution partners, and independent advisors do not provide specific legal, accounting, or tax advice. The provision of information provided on this presentation and corresponding illustration and any oral or written communication regarding the same should not be construed as such. This illustration is incomplete without all pages. Registered trademark of The Empire Life Insurance Company. Policies are issued by The Empire Life Insurance Company. June E.&O.E. Page 4 of 12
5 Insurance After-Tax Legacy Benefit After-Tax Benefit EXECUTIVE SUMMARY (1) Investment After- Tax Legacy Benefit After-Tax Benefit Insurance vs. Investment Comparison Insurance % Increase over Investment Equivalent Pre-Tax Return (%) 10 $768,417 $336,275 $432, % % 20 $1,037,906 $394,899 $643, % 7.58 % 30 $1,447,324 $463,743 $983, % 6.01 % 40 $2,045,764 $544,590 $1,501, % 5.34 % 50 $2,790,673 $639,531 $2,151, % 4.87 % ** Values shown beginning/ end of policy. Tax payable is not withheld from the policy and may be higher or lower and is not June E.&O.E. Page 5 of 12
6 Insurance After-Tax Legacy Benefit After-Tax Benefit EXECUTIVE SUMMARY (2) Investment After- Tax Legacy Benefit After-Tax Benefit Insurance vs. Investment Comparison Insurance % Increase over Investment Equivalent Pre-Tax Return (%) 1 $817,680 $38,452 $779,228 2, % 1, % 2 $807,232 $77,528 $729, % % 3 $796,791 $117,236 $679, % % 4 $786,358 $157,588 $628, % % 5 $775,935 $198,593 $577, % % 6 $765,520 $240,263 $525, % % 7 $755,116 $282,608 $472, % % 8 $744,720 $325,638 $419, % % 9 $746,853 $330,914 $415, % % 10 $768,417 $336,275 $432, % % 11 $790,756 $341,722 $449, % % 12 $813,937 $347,258 $466, % % 13 $838,032 $352,884 $485, % % 14 $863,119 $358,600 $504, % % 15 $889,281 $364,410 $524, % 9.46 % 16 $916,623 $370,313 $546, % 8.96 % 17 $945,211 $376,312 $568, % 8.54 % 18 $974,913 $382,408 $592, % 8.18 % 19 $1,005,783 $388,604 $617, % 7.86 % 20 $1,037,906 $394,899 $643, % 7.58 % 21 $1,071,382 $401,296 $670, % 7.34 % 22 $1,106,273 $407,797 $698, % 7.12 % 23 $1,142,674 $414,404 $728, % 6.93 % 24 $1,180,679 $421,117 $759, % 6.75 % 25 $1,220,373 $427,939 $792, % 6.60 % 26 $1,261,846 $434,872 $826, % 6.46 % 27 $1,305,189 $441,917 $863, % 6.33 % 28 $1,350,489 $449,076 $901, % 6.21 % 29 $1,397,836 $456,351 $941, % 6.11 % 30 $1,447,324 $463,743 $983, % 6.01 % 31 $1,499,050 $471,256 $1,027, % 5.93 % 32 $1,553,089 $478,890 $1,074, % 5.85 % 33 $1,609,508 $486,649 $1,122, % 5.77 % 34 $1,668,395 $494,532 $1,173, % 5.70 % 35 $1,729,823 $502,544 $1,227, % 5.64 % 36 $1,793,876 $510,685 $1,283, % 5.58 % 37 $1,858,054 $518,958 $1,339, % 5.52 % 38 $1,918,382 $527,365 $1,391, % 5.45 % 39 $1,980,939 $535,908 $1,445, % 5.39 % 40 $2,045,764 $544,590 $1,501, % 5.34 % 41 $2,112,874 $553,412 $1,559, % 5.28 % 42 $2,182,254 $562,378 $1,619, % 5.23 % 43 $2,253,872 $571,488 $1,682, % 5.18 % 44 $2,327,640 $580,746 $1,746, % 5.13 % 45 $2,403,405 $590,154 $1,813, % 5.09 % 46 $2,480,877 $599,715 $1,881, % 5.04 % 47 $2,559,550 $609,430 $1,950, % 5.00 % ** Values shown beginning/ end of policy. Tax payable is not withheld from the policy and may be higher or lower and is not June E.&O.E. Page 6 of 12
7 Insurance After-Tax Legacy Benefit After-Tax Benefit EXECUTIVE SUMMARY (2) Investment After- Tax Legacy Benefit After-Tax Benefit Insurance vs. Investment Comparison Insurance % Increase over Investment Equivalent Pre-Tax Return (%) 48 $2,638,589 $619,303 $2,019, % 4.96 % 49 $2,716,492 $629,336 $2,087, % 4.91 % 50 $2,790,673 $639,531 $2,151, % 4.87 % ** Values shown beginning/ end of policy. Tax payable is not withheld from the policy and may be higher or lower and is not June E.&O.E. Page 7 of 12
8 Annual Deposit/ Premium Life Insurance Proceeds LIFE INSURANCE Adjusted Cost Basis Credit to Capital Dividend Account After-tax Legacy Benefit 1 $50, ,009 49, , ,680 2 $50, ,828 98, , ,232 3 $50, , , , ,791 4 $50, , , , ,358 5 $50, , , , ,935 6 $50, , , , ,520 7 $50, , , , ,116 8 $50, , , , ,720 9 $0 843, , , , $0 864, , , , $0 886, , , , $0 908, , , , $0 932, , , , $0 956, , , , $0 981, , , , $0 1,007, , , , $0 1,034, , , , $0 1,062, , , , $0 1,091, , ,526 1,005, $0 1,121, , ,848 1,037, $0 1,152, , ,187 1,071, $0 1,184, , ,666 1,106, $0 1,218, , ,442 1,142, $0 1,253, , ,672 1,180, $0 1,289, ,158 1,012,505 1,220, $0 1,327, ,335 1,065,095 1,261, $0 1,366, ,118 1,120,600 1,305, $0 1,407, ,424 1,179,171 1,350, $0 1,450, ,166 1,240,962 1,397, $0 1,494, ,264 1,306,126 1,447, $0 1,540, ,636 1,374,823 1,499, $0 1,588, ,209 1,447,183 1,553, $0 1,638, ,911 1,523,324 1,609, $0 1,690,065 86,680 1,603,386 1,668, $0 1,743,938 56,457 1,687,480 1,729, $0 1,799,923 24,191 1,775,733 1,793, $0 1,858, ,858,054 1,858, $0 1,918, ,918,382 1,918, $0 1,980, ,980,939 1,980, $0 2,045, ,045,764 2,045, $0 2,112, ,112,874 2,112, $0 2,182, ,182,254 2,182, $0 2,253, ,253,872 2,253, $0 2,327, ,327,640 2,327, $0 2,403, ,403,405 2,403, $0 2,480, ,480,877 2,480, $0 2,559, ,559,550 2,559, $0 2,638, ,638,589 2,638, $0 2,716, ,716,492 2,716,492 ** Values shown beginning/ end of policy. Tax payable is not withheld from the policy and may be higher or lower and is not June E.&O.E. Page 8 of 12
9 Annual Deposit/ Premium Life Insurance Proceeds LIFE INSURANCE Adjusted Cost Basis Credit to Capital Dividend Account After-tax Legacy Benefit 50 $0 2,790, ,790,673 2,790,673 ** Values shown beginning/ end of policy. Tax payable is not withheld from the policy and may be higher or lower and is not June E.&O.E. Page 9 of 12
10 Annual Deposit/ Premium 3.00 % Annual Growth Tax Due On Growth % ALTERNATE INVESTMENT Tax on unrealized capital gains Total Value After Tax Cumulativ e RDTOH {RDTOH Rate} Total Dividend Tax Payable On Dividend % After-tax Legacy Benefit 1 $50,000 $1,500 $ , ,270 12,817 38,452 2 $50,000 $3,024 $1, , ,370 25,843 77,528 3 $50,000 $4,573 $2, ,913 1, ,315 39, ,236 4 $50,000 $6,147 $2, ,232 1, ,117 52, ,588 5 $50,000 $7,747 $3, ,415 2, ,791 66, ,593 6 $50,000 $9,372 $4, ,476 2, ,351 80, ,263 7 $50,000 $11,024 $5, ,429 3, ,810 94, ,608 8 $50,000 $12,703 $5, ,289 3, , , ,638 9 $0 $12,909 $5, ,260 3, , , , $0 $13,118 $6, ,343 4, , , , $0 $13,330 $6, ,542 4, , , , $0 $13,546 $6, ,857 4, , , , $0 $13,766 $6, ,290 4, , , , $0 $13,989 $6, ,844 4, , , , $0 $14,215 $6, ,520 4, , , , $0 $14,446 $6, ,321 4, , , , $0 $14,680 $6, ,248 4, , , , $0 $14,917 $6, ,303 4, , , , $0 $15,159 $6, ,489 4, , , , $0 $15,405 $7, ,808 4, , , , $0 $15,654 $7, ,261 4, , , , $0 $15,908 $7, ,851 4, , , , $0 $16,166 $7, ,581 4, , , , $0 $16,427 $7, ,451 5, , , , $0 $16,694 $7, ,466 5, , , , $0 $16,964 $7, ,626 5, , , , $0 $17,239 $7, ,935 5, , , , $0 $17,518 $8, ,395 5, , , , $0 $17,802 $8, ,008 5, , , , $0 $18,090 $8, ,777 5, , , , $0 $18,383 $8, ,704 5, , , , $0 $18,681 $8, ,792 5, , , , $0 $18,984 $8, ,043 5, , , , $0 $19,291 $8, ,460 5, , , , $0 $19,604 $9, ,046 6, , , , $0 $19,921 $9, ,804 6, , , , $0 $20,244 $9, ,736 6, , , , $0 $20,572 $9, ,845 6, , , , $0 $20,905 $9, ,133 6, , , , $0 $21,244 $9, ,605 6, , , , $0 $21,588 $9, ,263 6, , , , $0 $21,938 $10, ,109 6, , , , $0 $22,293 $10, ,148 6, , , , $0 $22,654 $10, ,381 6, , , , $0 $23,021 $10, ,813 7, , , , $0 $23,394 $10, ,446 7, , , , $0 $23,773 $10, ,283 7, , , ,430 ** Values shown beginning/ end of policy. Tax payable is not withheld from the policy and may be higher or lower and is not June E.&O.E. Page 10 of 12
11 Annual Deposit/ Premium 3.00 % Annual Growth Tax Due On Growth % ALTERNATE INVESTMENT Tax on unrealized capital gains Total Value After Tax Cumulativ e RDTOH {RDTOH Rate} Total Dividend Tax Payable On Dividend % After-tax Legacy Benefit 48 $0 $24,158 $11, ,329 7, , , , $0 $24,550 $11, ,586 7, , , , $0 $24,948 $11, ,057 7, , , ,531 ** Values shown beginning/ end of policy. Tax payable is not withheld from the policy and may be higher or lower and is not June E.&O.E. Page 11 of 12
12 June E.&O.E. Page 12 of 12
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