Corporate Estate Transfer Strategy

Transcription

1 Transamerica s Monarch Series Advisor Guide Corporate Estate Transfer Strategy Monarch Series The logic behind the solution TM

2 What does a pine cone have to do with life insurance? The connection is subtle yet profound. Like many things in nature, the physical design of a pine cone is influenced by a natural logic. Although it may be hidden from the eye, this underlying order helps shape the balanced results that we see. Likewise, Transamerica s Corporate Estate Transfer Strategy supplies the underlying order to create balanced financial results for our clients.

3 Advisor Guide December 2004 Contents The opportunity... 2 Target client profile... 2 Achieving a successful corporate estate transfer... 3 Why use a holding company?... 4 Unique client benefits Case Study #1: Standard approach... 6 Create a powerful illustration with LifeView... 7 (a) Choose a sales concept... 7 (b) Configure the UL policy... 8 (c) Plan the premiums... 9 (d) Input an alternate investment...9 (e) Analyze and compare the results Case Study #2: Fund value payout option (a) Configure the UL policy for a payout on each death...11 (b) Analyze and compare the results Give your client a fully-customized report Use charts for maximum impact Use the built in client slide presentation Before implementing the strategy Administrative considerations Underwriting requirements Marketing tools and support Monarch Series: The right strategy for every situation Glossary of terms Appendix A: Additional references Appendix B: 2004 Individual and corporate tax rates All tax and planning information provide in this guide is intended to be general only. This guide is not designed to provide tax, legal, accounting or other professional advice. If you are not a qualified tax advisor, you should suggest that your client seek the advice of a tax professional. The sections that reference ta Tax Act (Canada) and the regulations thereunder to prospective Owners of WealthADVANTAGE and EstateADVANTAGE policies who are residents of Canada. 1

4 Monarch Series Corporate Estate Transfer Strategy Transamerica s Corporate Estate Transfer Strategy enables business owners to transfer surplus cash and other liquid assets within their corporation to their heirs in a tax-efficient manner upon death using a universal life insurance policy. Transamerica can help you tap into the immense market for corporate estate planning, and implement successful strategies that will protect the wealth of your clients and prospects. The opportunity The last decade has seen tremendous growth in small business start-ups in Canada with more than 2.4 million self-employed individuals as of Many of these entrepreneurs have accumulated cash reserves in a holding company and, since they have other means of financing their retirement, may want to pass the holding company s assets to their heirs. However, the deemed disposition* of shares in a privately held Canadian corporation upon death of the shareholder can trigger significant capital gains tax for the estate of the deceased. What s more, if the shareholder or the shareholder s heirs withdraw any funds from the company, these funds will be subject to dividend tax. This heavy tax burden creates what is referred to as the company s trapped surplus. These funds are a surplus in the sense that they are not needed to fund the client s lifestyle, and they are considered trapped due to the high tax cost of removing them from the corporation. The Corporate Estate Transfer Strategy is designed to free the surplus by minimizing the tax impact of converting it into cash in the hands of a client s heirs. Target client profile Transamerica s Corporate Estate Transfer Strategy is designed for clients who own a holding company with significant retained earnings, or who own an operating company with excess cash flow that can be transferred to their holding company. The holding company s assets should be constant or increasing on an annual basis. Ideally, the operating company should not need access to these funds, however, policy loans, withdrawals or third-party collateral loans can make access possible once the strategy is implemented. The holding company should be owned by either an individual or a couple to reduce complications at death. The strategy can also work without a holding company in place, but most successful small businesses will use this dual structure. The client should be aged 50 or over and in reasonably good health as they may need to qualify for a large amount of insurance. It is also important that the clients do not have a personal need for the corporate assets, and that they wish to maximize the value of the estate they leave to their loved ones or to a charitable organization. Note: This strategy depends on your client s circumstances and the application of certain sections of the Income Tax Act (ITA) and its regulations pertaining to those circumstances. * Subsection 89(1) of ITA, Definition of private corporation 1 Source: Statistics Canada, CANSIM, table and Catalogue no. 89F0133XIE. 2

5 Advisor Guide December 2004 Achieving a successful corporate estate transfer The Corporate Estate Transfer Strategy is a mechanism to minimize the tax liability when a business owner passes the shares of a holding company to his or her beneficiaries. It allows the company s trapped surplus to be converted into a non-taxable sum that can be distributed to the heirs in the form of tax-free capital dividends. This results in a dramatically more valuable inheritance on an after-tax basis. Here s how it works: 1. The holding company moves its liquid assets into a universal life policy such as Transamerica s EstateAdvantage 3 over the course of four to 10 years. This transfer may be funded by cash already on hand or by future cash flow. The insurance policy is owned by the holding company with the client/shareholder as the life insured. The holding company is also the policy s beneficiary. 2. Upon the insured s death, the death benefit of the insurance policy is paid to the holding company, tax-free. 3. Only the policy s cash surrender value (CSV) is included in the value of shares when the shareholder is deemed to dispose of the shares upon death, which may minimize capital gains tax due. 4. The death benefit minus the policy s adjusted cost basis (ACB) can flow into the company s capital dividend account (CDA), from where the company may elect to pay tax-free capital dividends to the inheriting Canadian-resident shareholders within prescribed limits.* Note that any remaining death benefit that did not qualify for the CDA may also be distributed to the heirs as a taxable dividend. Step 1 Holding company moves liquid assets into a corporate-owned UL policy over period of four to 10 years. Step 3 Only the CSV of the policy is reflected in the value of the shares upon deemed disposition, at death. Step 2 Upon shareholder s death, a tax-fee death benefit is paid to holding company. Step 4 Policy s death benefit minus its ACB flows into CDA, from where tax-free capital dividends may be paid to inheriting Canadian-resident shareholders. A successful corporate estate transfer has been achieved once the company s value has been passed to the client s heirs with minimal taxation. # Subsection 89(1) of ITA, Form T2054, other rules and requirements may apply 3

6 Monarch Series Corporate Estate Transfer Strategy Why use a holding company? Having separate holding and operating companies may seem unnecessarily complicated, but there are advantages to doing so. Retained earnings Generally, a holding company s primary purpose is owning shares of one or more operating companies. The holding company is typically used to store the retained earnings that are not required to run the day-to-day business. Since the holding company does not conduct business activities itself, it has less exposure to liability, and is a safer place for the company s accumulated wealth. Creditor protection To further minimize risk, a business s most valuable non-operating assets are often owned by the holding company and leased to the operating company. This secures these assets from creditors and minimizes the amount of potentially vulnerable assets held by the operating company. And, when the operating company needs to buy operating assets, it can borrow money from the holding company. Again, this protects the assets, because the holding company is treated as a priority creditor, allowing it to remove cash from the operating company through loan repayments. Tax efficiency Approximately the first $300,000 of corporate income is taxed at a low corporate rate. Typically, the business owner will draw a salary from the after-tax earnings of the company, and this money is taxed at his or her higher personal rate. However, the remaining earnings of the operating company may be paid as a dividend to the holding company without any further taxation. A business owner can use a holding company to protect corporate earnings against risk, to defer taxation, and as we ll see, to implement the Corporate Estate Transfer Strategy effectively. If your client has not yet established a holding company, they may still be able to do so by taking advantage of rollover provisions in the Income Tax Act. We recommend that they speak with a tax or accounting professional for more information. Unique client benefits The Corporate Estate Transfer strategy offers a number of unique benefits while a business owner is still living, and when it is time to settle his or her estate. 1. Achieve tax-deferred growth Passive investment income attracts tax at the top corporate rate and does not qualify for small business deductions. As such, income from corporate-owned investments such as stocks, bonds, mutual funds, and GICs can be taxed heavily. However, exempt life insurance policies such as Transamerica s universal life insurance plans, allow funds to be deposited into a range of investment options and grow tax-free*. Funds may also be transferred from one investment option to another within the policy without triggering any capital gains tax. The amount of tax-deferred savings available to each client depends on many factors, such as the amount of insurance purchased, the length of time the policy has been in-force, the investment return of the selected investment options and the insured s age, gender and smoking status. Transamerica s LifeView illustration software will automatically forecast this limit based on your client s circumstances (see Transamerica s UL Marketing Guide (LP660) for details). Should the operating company ever require capital; the holding company can still access the funds in the policy by taking a policy loan, withdrawing funds (subject to surrender charges, if applicable), or using the policy as collateral to obtain a third-party loan. * within the limits of Income Tax Regulation

7 Advisor Guide December 2004 Unique client benefits Continued 2. Reduce the company s value for tax purposes By transferring corporate funds into a life insurance policy, your client can reduce the Fair Market Value (FMV) of their holding company for the purpose of calculating capital gains tax due upon death. This is because most liquid assets held by a company are fully reflected in its FMV, but only the cash surrender value (CSV) of a life insurance policy is included in this calculation. Since the CSV will be significantly less than the death benefit actually received by the company, this provision effectively spares a large portion of the company s assets from being included in the taxable capital gain upon death. Income Tax Act 70(5.3): For the purposes of subsections (5) and 104(4) and section 128.1, the fair market value at any time of any property deemed to have been disposed of at that time as a consequence of a particular individual s death or as a consequence of the particular individual becoming or ceasing to be resident in Canada shall be determined as though the fair market value at that time of any life insurance policy, under which the particular individual (or any other individual not dealing at arm s length with the particular individual at that time or at the time the policy was issued) was a person whose life was insured, were the cash surrender value (as defined in subsection 148(9)) of the policy immediately before the particular individual died or became or ceased to be resident in Canada, as the case may be. * Within the limits of Income Tax Regulation 306 2a. Added advantages for spouses A joint-last-to-die policy can be structured to take even greater advantage of the FMV calculation. On death of the first spouse, the holding company can elect to receive a fund value 1 payout as a tax-free 2 death benefit 3. That amount, minus the policy s ACB, is credited to the holding company s CDA and can be paid to the Canadian-resident shareholder tax-free. If the shares are left to the surviving spouse by the deceased, they are automatically transferred on a rollover basis and the company s valuation on disposition of the shares for tax purposes will only matter on second death. At second death, because of the earlier fund value payout, the policy s CSV will be far lower, resulting in less tax payable in respect of the disposition of the policy. 3. Access tax-free dividends The CDA is a notional tax account that tracks a private corporation s various tax-free surpluses, including: The excess of the non-taxable portion of capital gains over the non-deductible portion of capital losses The aggregate of capital dividends received by the corporation The non-taxable portion of gains resulting from the disposition of eligible capital property The proceeds of a life insurance policy (less the policy s ACB) These surpluses may flow into the CDA and be distributed as a tax-free capital dividend to the corporation s Canadian-resident shareholders. In the case of the Corporate Estate Transfer Strategy, the policy s death benefit minus its ACB can be credited to the CDA. The ACB of a universal life policy, where there are no withdrawals or policy loans, is calculated as the total premiums paid minus the annual Net Cost of Pure Insurance (NCPI). In most cases, the ACB will grow during the policy s early years as the NCPI is less than the premiums paid. However, the cumulative NCPI will rise with age, and if it exceeds the cumulative premiums paid, the ACB can eventually be reduced to zero. When this happens, the entire death benefit is eligible for the CDA and may be distributed to the company s shareholders as a tax-free capital dividend. Summary of benefits Earn tax-free growth on surplus funds that are deposited into a corporate-owned universal life policy such as EstateADVANTAGE 3. Reduce capital gains tax upon the shareholder s death, or the death of their surviving spouse. Give the client s Canadian-resident heirs access to tax-free capital dividends from the company. Immediately enhance the net estate value based on the amount of life insurance purchased. 1 The fund value payout option must be selected at issue. 2 Based on current federal income tax laws 3 Where permitted 5

8 Monarch Series Corporate Estate Transfer Strategy Case Study #1: Standard approach Rick and Susan are both 55 and co-own a construction company. Their two sons currently work for the company, and Rick and Susan want to ensure that their sons can enjoy the same lifestyle they have enjoyed. They have formed a holding company, RS HoldCo, that owns 100% of the shares of RS Construction. The holding company also holds most of the surplus cash created through the operation of RS Construction. Rick and Susan s retirement has already been funded through other means, so they intend for their sons to inherit 100% of RS Holdco and its assets. The holding company currently owns a portfolio of Guaranteed Investment Certificates (GICs) worth $1,500,000 that earns 5% annually. Identify the need The income from RS HoldCo s GICs is currently taxed at 46% and, if Rick and Susan do not plan a successful corporate estate transfer, a significant capital gains tax liability will arise when the company s shares are transferred to their sons. Further, their sons will only be able to access the company s wealth through taxable dividends. Let s look at the tax issues Rick and Susan will incur at life expectancy, 36 years from now: RS HoldCo s GIC portfolio will have grown to $3,360,983 (assuming 5% interest and annual taxation) The whole amount will be subject to capital gains tax of $773,026 ($3,360,983 x 50% x 46%) when Rick and Susan s deemed disposition takes place at death. If the sons extract money from the holding company, they will incur dividend tax of $1,382,623 ([$3,360,983 + $959,714 RDTOH*] x 32%). So, without an effective estate transfer strategy in place, Rick and Susan s heirs will inherit a net amount of $2,165,048 ($3,360,983 - $773,026 - $1,382,623 + $959,714 RDTOH). Now, let s look at how the Corporate Estate Transfer strategy can help you structure a solution to increase this amount by up to three and a half times, and present the solution to your client in a clear and compelling manner using our LifeView illustration software. # Refer to the Glossary of Terms for a definition. 6

9 Advisor Guide December 2004 Create a powerful illustration with LifeView Our solution for Rick and Susan is to transfer their $1.5 million trapped surplus into a UL policy over a period of 10 years. Rick and Susan will be applying as the joint life insureds, and RS HoldCo will be both the owner and beneficiary of the policy. Transamerica s LifeView software makes it easy to illustrate this solution, and will also help Transamerica serve Rick and Susan long after the sale. When a LifeView concept illustration is submitted with the insurance application, Transamerica will keep track of which strategy is being used, and support Rick, Susan and their advisor with strategy-specific information and statement messages, relevant tax bulletins, and even assistance with related sales ideas in the future. To start, open LifeView and follow these steps: (a) Choose a sales concept From the main menu, select Corporate Sales Concepts From the side bar or link, select Corporate Estate Transfer Strategy 7

10 Monarch Series Corporate Estate Transfer Strategy Create a powerful illustration with LifeView Continued (b) Configure the UL policy LifeView s default illustration uses the EstateAdvantage 3 UL policy with the Accumulation Bonus, but this can be changed to WealthAdvantage 3 or EstateAdvantage 3 with the low-fee, deferred bonus option as well. Choose the policy features that best reflect your clients time frame, cash flow, and preferred investment options. For Rick and Susan, we ve chosen the recommended product options for the Corporate Estate Transfer Strategy. TIP: Execute solve button On the Coverage tab, here s what we selected: Product: EstateADVANTAGE 3 with the Accumulation Bonus option Coverage type: Joint last-to-die with deductions to last death Fund value payout: Last death Death benefit: Increasing Cost of insurance (COI): Level Tax rate: For Rick and Susan s personal rate, we used 46%. Face amount: You can select Calculate for CETS to have LifeView solve for the maximum death benefit at life expectancy or choose a more conservative face amount by selecting solve for minimum face amount. 8

11 Advisor Guide December 2004 (c) Plan the premiums The amount and schedule of premiums to be deposited to the plan depends on the amount of the holding company s liquid assets to be sheltered, as well as the legislative limits on the amount of tax-deferral available in each year. For Rick and Susan, we re going to transfer RS HoldCo s $1,500,000 portfolio of GICs into a UL plan using 10 annual deposits of $150,000. We ve also selected imaxx TOP Balanced Portfolio as the interest option in which to invest the policy s fund value, with an assumed net rate of return of 4% annually. On the Premiums tab, here s what we selected: Payment mode: Annual Premium type: Specified Amount: $150,000 Pay period: 10 years Interest option: imaxx TOP Balanced Portfolio (d) Input an alternate investment LifeView can compare the results of the strategy to continuing to hold taxable investments. This can be a real eye-opener for the client. For Rick and Susan, we selected a Before Tax Return on Equity of 5%, which is consistent with the returns RS HoldCo would earn on its portfolio of GICs. Note: that we chose a rate higher than inside the universal life plan. On the Alternative Investment tab, we entered an assumed rate of return of 5% for RS HoldCo s portfolio of GICs. TIP: The Share Redemption checkbox allows capital gains to be eliminated where a deemed dividend has been paid. The deemed dividend creates a capital loss, which offsets the capital gain on the deemed disposition of the share at death. 9

12 Monarch Series Corporate Estate Transfer Strategy Create a powerful illustration with LifeView Continued (e) Analyze and compare the results When the Execute Solve button is pressed, LifeView will calculate the minimum life insurance face amount required to shelter Rick and Susan s planned premiums. On the Coverage tab, we see that LifeView recommends a face amount of $3,778,859. Now we can click on View Spreadsheet or View Report and see how the strategy will affect Rick and Susan s financial situation at life expectancy: In 36 years, when it is expected that both Rick and Susan will have passed away, the insurance face amount and accumulated tax-deferred fund value will create a total death benefit of $8,921,342, which is paid to RS HoldCo. At year 36, the CSV of the policy will be $5,142,484, resulting in capital gains tax of $1,182,771 ($5,142,484 x 50% x 46%). The remaining death benefit minus the ACB of the policy may be reported to the CDA of RS HoldCo. At year 36, the ACB will be zero, allowing RS HoldCo to distribute the entire $7,738,571 ($8,921,342 - $1,182,771) to the sons tax-free. The $7,738,571 net estate value created by the Corporate Estate Transfer Strategy is well over three times greater than if RS HoldCo were to continue to hold a portfolio of fully-taxable GICs. Snapshot: No estate plan Value of GICs at year 36 Minus: Capital Gains tax Minus: Dividend tax Plus: Cumulative RDTOH $3,360,983 $773,026 $1,382,623 $959,714 Net estate value $2,165,048 Snapshot: Corporate Estate Transfer Strategy Death Benefit of policy at year 36 Minus: Capital gains tax Minus: Dividend tax Plus: Cumulative RDTOH $8,921,342 $1,182,771 $0 N/A Net estate value $7,738,571 The case study has been prepared for information and educational purposes, and will not form part of any policy. It is intended to demonstrate features based on specific assumptions. These assumptions will change over the life of the universal life policy and should be considered hypothetical. 10

13 Advisor Guide December 2004 Case Study #2: Fund value payout option In this scenario, Rick and Susan would like the longestliving spouse to receive a potentially tax-free fund value payout upon the death of the first spouse. This can be achieved by selecting the fund value payout on each death option when structuring their UL policy. But first, let s look at what would happen if RS HoldCo continued to hold the $1.5 million GIC portfolio until Rick and Susan s life expectancy, 36 years from now: RS HoldCo s GIC portfolio will have grown to $3,360,983. The whole amount will be subject to capital gains tax of $773,026 ($3,360,983 x 50% x 46%) If Rick and Susan s sons withdraw all of the GIC value from the holding company, they will incur dividend tax of $1,382,623 ($3,360,983 + $959,714 RDTOH x 32%). So, in this scenario, if Rick and Susan do not implement the strategy, their heirs will inherit a net amount of $2,165,048 ($3,360,983 - $773,026 $1,382,623 + $959,714 RDTOH). Now, let s run another LifeView illustration, except this time, we ll select the fund value payout on each death option on the Coverage tab. (a) Configure the UL policy for a payout on each death We ve once again chosen the recommended product features for the Corporate Estate Transfer Strategy, and also selected the fund value payout on each death option. On the Coverage tab, here s what we selected: Product: EstateADVANTAGE 3 with the Accumulation Bonus option Coverage type: Joint last-to-die with deductions to first death Fund value payout: Each death Death benefit: Increasing Cost of insurance (COI): Level Tax rate: For Rick and Susan s personal rate, we used 46% Face amount: You can select Calculate for CETS to have LifeView solve for the optimal face amount or choose a more conservative face amount by selecting solve for minimum face amount. 11

14 Monarch Series Corporate Estate Transfer Strategy Case Study #2: Fund value payout option Continued (b) Analyze and compare the results After entering the planned premium information and pressing Execute Solve, LifeView recommends an insurance face amount of $3,279,249 in order to shelter Rick and Susan s corporate surplus. Now we can click on View Spreadsheet or View Report to see how the fund value payout on each death option enhances Rick and Susan s financial situation upon each of their deaths. If Rick passes away at his life expectancy 25 years from now, the policy s accumulated fund value of $2,825,694 will be paid to the beneficiary, RS HoldCo. At that time, the ACB of the policy will be $586,402, meaning RS HoldCo can elect to pay a tax-free capital dividend of up to $2,239,292 to Susan. The remaining $586,402 can be paid as a taxable dividend. About eleven years later, when Susan passes away, the policy s face amount of $3,279,249 will be paid to the beneficiary, RS HoldCo. At that time, the ACB of the policy will be $0, meaning RS HoldCo can elect to pay a tax-free capital dividend of $3,279,249 to Rick and Susan s sons. Since the policy s entire fund value was paid out when Rick passed away, the CSV went down to zero, meaning there is no capital gains tax payable. In this scenario, the Corporate Estate Transfer Strategy created two death benefits $2,239,292 at year 25, and $3,279,249 at year 36. In addition, $586,402 remains within RS HoldCo, which may be distributed as a taxable dividend. Without the strategy, the sons would receive less than a third of these amounts, and neither spouse would have enjoyed any financial benefit during their lifetime. Snapshot: No estate plan Value of GICs at year 36 $3,360,983 Minus: Capital Gains tax $773,026 Minus: Dividend tax $1,382,623 Plus: Cumulative RDTOH $959,714 Net estate value $2,165,048 The difference between case study #1 and #2 is that case study 1 shows Joint last-to-die with deductions to last death and only one death benefit is paid out at year 36, the life expectancy of the joint lives. In case study #2, a joint last-to-die with deductions to first death option was used with a fund value payout on each death. We assume that Rick dies at life expectancy, year 25, and the fund value is paid as a death benefit at that time. No further deductions for insurance costs will be taken after that time and the face amount will be paid out in year 36, the life expectancy of the joint lives. The benefit of case study #2 is the financial benefit at first death of $2,638,045 however this reduces the total net estate value eleven years later. Keep in mind this does not account for any investment earnings on the payout on first death between first and second death. Snapshot: Corporate Estate Transfer Strategy Fund Value Payout at year 25 $2,825,694 Minus: Capital gains tax $0 Minus: Dividend tax on $586,402 Plus: Cumulative RDTOH $187,649 N/A Net payout to Susan $2,638,045 Remaining Death Benefit at year 36 $3,279,249 Minus: Capital Gains tax $0 Minus: Dividend tax $0 Plus: Cumulative RDTOH N/A Net estate to sons $3,279,249 Net estate value $5,917,294 You would need to earn a net rate of return of 4.89% between first and second death to match the estate values in case study #1 and case study #2. 12

15 Advisor Guide December 2004 Give your client a fully-customized report Click View Report to generate a detailed client report. The first three pages highlight the advantages of the Corporate Estate Transfer Strategy, while the remaining pages refer to the universal life policy only. Click Design Report to customize this report for each client. You can select the information, format, and charts (see next section) that you feel will most effectively show them the challenges they face, the benefits of corporate estate planning, and the expected results of your solution. Explains the objective of the strategy in plain language Summarizes the most important numbers on one page. Compares the projected estate value of existing corporate assets versus the Corporate Estate Transfer Strategy The sample illustration has been prepared for information and educational purposes, and will not form part of any policy. It is intended to demonstrate features based on specific assumptions. These assumptions will change over the life of the universal life policy and should be considered hypothetical. 13

16 Monarch Series Corporate Estate Transfer Strategy Use charts for maximum impact Numbers don t always jump off the page. However, the charts feature built into LifeView will help you tell your clients the story using pictures for maximum impact. There are a number of charts that you can choose to include, such as: After-tax CSV vs. Death Benefit vs. After tax Alternative Investment TIP: How to select the graphs feature Select Design Report from the illustration d rop-down box Click on the Graphs tab Select the charts that you want in your client s custom report Click OK An upcoming version of LifeView will include this chart. 14

17 Advisor Guide December 2004 Use the built-in client slide presentation If you prefer, you can walk clients through a brief electronic customized slide presentation that highlights the main facts and figures of the Corporate Estate Transfer Strategy. Just click the LifeView presentation icon from the menu bar, and LifeView will automatically populate the data entered in the slide show, including: Business owner name Premium Amount Face Amount Death Benefit type Cost of insurance Primary Rate of return Insurance solution Investment solution It is important to note that the presentation is not complete without all pages and the presentation must be accompanied by an illustration. Before implementing the strategy Business owners generally require a more thorough approach to estate planning than non-business owners as tax and other legislation can be complex and have a large effect on their results. To fully assess the benefits of the Corporate Estate Transfer Strategy for your client, it is recommended that you consult their team of professionals including their accountant or lawyer. Administrative considerations Insurance companies have certain requirements regarding the signatures required on documents relating to corporate-owned insurance policies. At Transamerica, forms such as the Application and Change of Ownership must include: The signature, name and title of the authorized signing officers of the corporation, as stated in the by-laws of the corporation, together with the full legal name of the corporation A copy of the articles of incorporation/amendment showing the corporations correct legal name. Underwriting Requirements Underwriting will require a review of the corporation s financial statements for the past three fiscal years in order to support the face amount. If a financial statement is not sufficient in Transamerica s opinion, we reserve the right to request additional information. We also reserve the right to request additional requirements or medical tests in addition to those published by the company depending on current findings and medical history. Any illustrated future increases in insurance coverages will be subject to underwriting requirements in effect at that time. 15

18 Monarch Series Corporate Estate Transfer Strategy Marketing tools and support You can order a number of marketing tools from Transamerica s Distributor Resource Centre (DRC) e-order system such as our client and advisor guides to help you learn more about the Corporate Estate Transfer Strategy, and educate your clients, prospects, and professional circles of influence about its benefits. LifeView illustration software Multimedia educational presentation Teach Me Tool CE-approved online course and quiz Corporate Estate Transfer Strategy advisor guide (LP958) Corporate Estate Transfer Strategy client guide (LP957) Sample pre-approach letters for centres of influence and prospects (available in electronic format only through the DRC) Ongoing support As long as you use LifeView to illustrate the Corporate Estate Transfer strategy and include the concept illustration and the basic illustration, signed by the client, attached to the application, Transamerica will know which strategy you recommended to your client. This will help us to assist you in the future by providing strategy-specific statement messages such as the CDA credit amount, relevant tax bulletins, and even assistance with future sales. You can also draw on the support of your Transamerica Sales Director to answer questions or assist with complex cases. DRC Regional Marketing Centres: Eastern Canada Central Canada Western Canada

19 Advisor Guide December 2004 Monarch Series: The right strategy for every situation The Corporate Estate Transfer Strategy is one of several end-to-end insurance solutions from Transamerica that combine the consultation, strategy, product, and support to truly solve your clients needs. To see our full spectrum of solutions at a glance, please download LifeView or order our Monarch Sales Concept Matrix (LP953) today. Whether your clients are individuals or families, retired, employed, or operating an active business, Transamerica has a solution that can be optimized to meet their needs. Personal Sales Concepts Income Replacement Strategy Family Wealth Transfer Plan Transamerica s Insured Retirement Strategy Estate Preservation Strategy Insured Annuity Strategy Personal Estate Transfer Strategy Charitable Giving Strategy Business Sales Concepts Corporate Estate Transfer Strategy Key Person Insurance Strategy Leveraged Corporate Insurance Strategy 17

20 Monarch Series Corporate Estate Transfer Strategy Glossary of terms Adjusted Cost Basis (ACB) The ACB of a universal life policy where there are no withdrawals or policy loans is calculated as the total premiums paid minus the cumulative annual net cost of pure insurance. See section 148 (9) of the Income Tax Act for a complete definition Arm s Length Arm s Length is defined in subsection 251(1) of the Income Tax Act. Related persons do not deal at arm s length. Related persons include blood relatives, corporations and the individuals that control them, and corporations when controlled by the same individual or related individuals. Persons not related to each other may be deemed not to deal at arm s length on a determination by a question of fact. Capital Dividend Account (CDA) An account through which a private corporation tracks tax-free surpluses such as the non-taxable portion of capital gains, aggregate of capital dividends, non-taxable gains from the disposition of eligible capital property, and the net proceeds of a life insurance policy less the ACB of the policy to the corporation. See section 89 (1) of the Income Tax Act for a complete definition. Death Benefit The insurance policy pays a death benefit in accordance with the terms of the contract. This amount includes the fund value of the plan and the face amount. Estate Planning The process of implementing strategies that minimize the impact of tax on the value of an estate, and maximize the benefit to the heirs of the deceased in accordance with the deceased s wishes. Exempt Life Insurance Policy A type of insurance policy, such as universal life, that features a tax-deferred investment component. These policies provide a tax-free death benefit, plus the opportunity to participate in the tax-deferred growth of a variety of investment options Exempt Life Insurance Policies are discussed throughout the Income Tax Act and its regulations. Fair Market Value (FMV) The amount an arm s length party would pay for a property in an open market. The Income Tax Act may impose special rules to calculate FMV in certain circumstances. GIC Guaranteed Investment Certificate. The interest from these vehicles is fully taxable. Holding Company A company that does not actively engage in business activity, but holds shares of one or more operating companies and portfolio investments. It is often used as an asset-protection vehicle. Net Cost of Pure Insurance (NCPI) Reduces the ACB of a policy and is expressed as a specified mortality factor times the NAAR (Net amount at risk). Operating Company A company that actively engages in business activity, and is subject to all the associated risks and liabilities. RDTOH Refundable Dividend Tax On Hand An integration mechanism of the corporate tax level to prevent tax overpayment when passive investment income is paid to shareholders as taxable dividends. This notional account is used to calculate the tax refund available to a corporation when it has paid taxable dividends in a taxation year. Trapped Surplus Retained earnings of a company that cannot be accessed without triggering taxes. 18

21 Advisor Guide December 2004 Appendix A Additional references Topic Taxation of Small Canadian Business Capital Dividend Account (CDA) Small business information Source Appendix B 2004 Individual and Corporation tax rates Continued over Federal Alberta Individuals Top Combined Marginal Rates B.C Manitoba N.B. Nfld & Lab. Interest and ordinary income 29.00% 39.00% 43.70% 46.40% 46.84% 48.64% Capital Gains 14.50% 19.50% 21.85% 23.20% 23.42% 24.32% Canadian Dividends 19.58% 24.08% 31.58% 35.08% 37.26% 37.32% General (Non-manufacturing) 22.12% 33.87% 35.62% 37.62% 35.12% 36.12% Manufacturing & Processing (M&P) 22.12% 33.87% 35.62% 37.62% % Corporations CCPC Active Business Income $250,000 to $300, % 25.37% 26.62% 27.12% 24.87% 36.12% Up to $250, % 16.37% 17.62% 18.12% 15.87% 18.12% Investment Income 35.79% 47.54% 49.29% 51.29% 48.79% 49.79% * For M&P look to M&P rate The $300,000 threshold may be higher in some provinces 19

22 Monarch Series Corporate Estate Transfer Strategy Appendix B 2004 Individual and Corporation tax rates Continued N.W.T Nova Scotia Nunavat Ontario P.E.I Quebec Sask. Individuals Top Combined Marginal Rates Yukon Interest and ordinary income 42.55% 48.25% 40.50% 46.41% 47.37% 48.22% 44.00% 42.40% Capital Gains 21.28% 24.13% 20.25% 23.20% 23.69% 24.11% 22.00% 21.20% Canadian Dividends 29.02% 33.06% 28.96% 31.34% 31.96% 32.81% 28.33% 28.63% General (Non-manufacturing) 36.12% 38.12% 34.12% 36.12% 38.12% 31.02% (Inactive: 38.37%) 39.12% 37.12% Manufacturing & Processing (M&P) 36.12% 38.12% 34.12% 34.12% 29.62% 31.02% 32.12% 24.62% Corporations CCPC Active Business Income $250,000 to $300, % 38.12% 34.12% 27.62% 38.12% 31.02% 27.62% 37.12% * Up to $250, % 18.12% 17.12% 18.62% 20.62% 22.02% 18.62% 19.12% * Investment Income 49.79% 51.79% 47.79% 49.79% 51.79% 52.04% 52.79% 50.79% * For M&P look to M&P rate The $300,000 threshold may be higher in some provinces 20

23 Advisor Guide December 2004 Notes 21

24 Transamerica Life Canada provides Canadians with innovative life insurance and investment products and services. Through a national network of 18,000 independent advisors, Transamerica creates better futures for stakeholders through our core values: Respect, Quality, Transparency and Trust. Transamerica Life Canada is a member of the AEGON Group, one of the world s largest insurers. AEGON N.V. and Transamerica Life Canada have consistently received strong financial ratings from Standard and Poor s, Fitch and A.M. Best Company. In 2003, Transamerica Life Canada earned more than $580 million in life insurance premium income and recorded over $8 billion in total assets under management. Member of the AEGON Group 5000 Yonge Street Toronto, Ontario M2N 7J8 Trademarks of AEGON Canada Inc. The subsidiary companies of AEGON Canada Inc. are licensed to use such marks. Transamerica and the pyramid design are registered trademarks of Transamerica Corporation. Transamerica Life Canada is licensed to use such marks. AEGON is a registered trademark of AEGON N.V. AEGON Canada Inc. and its subsidiary companies are licensed to use such marks. LP958 12/04