Owners of very successful private corporations are well aware of the importance of cash flow. Many are protective of how they allocate corporate capital so that business ventures are adequately funded and investment opportunities are not missed.
The Immediate Financing Arrangement offers an opportunity to provide life insurance coverage and accumulate wealth on a tax-advantaged basis without impairing corporate cash flow.
An IFA is a financial and estate planning strategy that:
· Combines permanent, cash value life insurance with a conservative leverage program allowing the dollars allocated to the life insurance premiums to do double duty by still being available for business and investment purposes;
· In the right circumstances and when structured properly so that all possible tax deductions are used, an improvement in cash flow could result.
IFA`s are not for everyone. For those situations that best match the necessary criteria, however, significant results can be achieved. The best candidates for an IFA usually are:
· Successful, affluent individuals who are active investors or owners of thriving privately held corporations who require permanent life insurance protection;
· Of good health, non-smokers, and preferably under age 60;
· Enjoying a steady cash flow exceeding lifestyle requirements;
· Paying income tax at the highest rate and will continue to do so throughout their life.
· An individual or company purchases a cash value permanent life insurance policy and contributes allowable maximum premiums;
· The policy is assigned to a bank as collateral for a line of credit;
· The business or individual uses the loan advances to replace cash used for insurance purchase and re-invests in business operations or to make investments to produce income. This is done annually;
· The borrower pays interest only and can borrow back the interest at year end;
· At the insured’s death the proceeds of the life insurance policy retire the outstanding line of credit with the balance going to the insured’s beneficiary;
· If corporately owned, up to the entire amount of the life insurance death benefit is available for Capital Dividend Account purposes.
Proper planning and execution is essential for the Immediate Financing Arrangement. However, if you fit the appropriate profile, you could benefit substantially from this strategy.
If you wish to investigate this strategy and whether it can be of benefit to you, please contact me and I would be happy to discuss this with you. As always, feel free to use the sharing icons below to forward this to someone who might find this of interest.
Many business owners know the important role that life insurance plays in effective corporate planning. Whether it be the funding of a shareholder’s agreement, life insuring corporate debt, or protecting against loss from the death of a key employee, life insurance is of great value in underpinning the financial success of a corporation. Just as life insurance needs for families change over time the same is also true for requirements of the business. If it has been some time since you have reviewed your corporate insurance needs then it is probably time for a corporate insurance audit. This is especially true if the company has enjoyed consistent or significant growth since the time the insurance was first implemented. The scope of the audit and the insurance related issues include the following:
Current corporately owned life insurance
Have the factors which affect pricing changed?
If the current coverage is renewable term insurance should the policy be re-written now before it renews at a substantial increase?
Term Life Insurance policies usually have a conversion period until age 70 or 75 allowing the policy to be converted to a permanent policy without medical evidence. If the policy is nearing the end of the conversion period your options should definitely be explored, especially if you would no longer qualify for new life insurance. Are the beneficiary and ownership designations still compliant with current income tax regulations and Canada Revenue Agency policy? For example, if your corporately owned policy has a beneficiary designated other than the corporate owner, you may wish to review that arrangement to confirm that you are not attracting any shareholder benefit or other undue re-assessment risk. Also confirm that that the beneficiary designation is consistent with Capital Dividend Account planning.
Life insurance funding of the Shareholders Agreement
Has the share value of the company increased? If it has, then the amount of life insurance that the company owns to fund the shareholders agreement should be reviewed and increased. If new shareholders have been added to the agreement, then those new shareholders should be insured in similar fashion to the others. If the company continues to grow and thrive, it may be appropriate to change the type of life insurance held to something longer term or more permanent. For example, if it is obvious that ten-year renewable term insurance does not provide a long enough term, then the coverage should be changed to 20 year term or longer, or perhaps term to 100 or permanent coverage. Insurability can be lost at any time and the longer the term of the policy the longer the current premium will continue.
Insuring the human life value
Key person life insurance is used to reimburse a company for loss in the event of the death of an employee which would severely affect profitability or share value of the corporation. Periodically the company should review the policies it maintains for this purpose to ensure that the proper amount of coverage is in place. If there is no key person insurance determine whether there should be by identifying those employees whose death would adversely affect the bottom line of the corporation.
Life insurance collateral deduction
When considering the advantages of the Capital Dividend Account it is recommended that corporate debt be life insured. If a shareholder whose life is insured for this purpose dies and the insurance proceeds retire the outstanding bank debt, even though there may not be any residual proceeds remaining a Capital Dividend Account is created that is up to 100% of the death benefit. Capital dividends can be distributed tax free to the surviving shareholders making insuring corporate debt very advantageous. In addition, the corporation can deduct from income the net cost of pure insurance of the insurance policy.
If the corporation owns life insurance on a shareholder or key employee for this purpose check to make sure that the right amount of coverage is in place. If not, there should be an additional policy purchased or perhaps a re-write of existing coverage that results in the appropriate amount. If there is current collateral term insurance in place that has been issued with a rating due to less than ideal health or other factors it is recommended that an attempt be made to re-write that coverage. It is possible that the insured can now qualify for lower standard rates of insurance resulting in a lower premium.
If the current insurance was issued with an additional risk premium due to health or other issues this would be another reason to re-write the coverage. This is because substandard policies (those with a rating) issued after December 31, 2016 now have a higher net cost of pure insurance and therefore a higher collateral insurance deduction than those issued before this date.
Be careful to protect Generation 2 policies
The provisions of the Income Tax Act dealing with the taxation of life insurance policy were changed effective January 1, 2017. These changes modified certain factors that ultimately result in the amount of death benefit that can be credited to the Capital Dividend Account. Policies issued between December 1, 1982 and December 31, 2016 are referred to as Generation 2 policies and those contracts generally provide a larger CDA contribution, that Generation 3 policies issued in 2017 and later. As a result, unless there are extremely extenuating circumstances, those policies should be maintained in their current form.
Given the demands of running a business, it’s easy to put off what may seem to be a low priority item on your to do list. Life is unpredictable so it is advisable to always be prepared for events that are out of your control. Reviewing corporate insurance coverage periodically will help to ensure that the right amount and the proper plan is in place. With the help of an experienced advisor, an insurance audit can be very advantageous and have a positive effect on both the bottom line and the balance sheet of the corporation. If you think now is the right time, give me a call and I’ll be happy to assist. As always, please feel free to share this information with anyone that may find it of interest.
The 2018 budget for Alberta focuses on the diversification of its post-recession economy, with the aim of creating more stability and less vulnerability to future fluctuations in oil prices. Here are some of the highlights:
Interactive Digital Media Tax Credit
Alberta intends to bring in a new Interactive Digital Media Tax Credit with a maximum funding of $20 million per year, which aims to offer eligible companies with a benefit of 25% of eligible labour costs. This benefit relates to costs incurred after April 1, 2018 and is aiming to better support the interactive digital media sector in the province.
Alberta Investor Tax Credit
The 2018 budget extends the existing Alberta Investor Tax Credit until 2012-22. The existing program offers a 30% tax credit to both individuals and corporations who commit to making equity investments in eligible Alberta businesses, such as those involved in research, development, digital animation and various others.
Diversity & Inclusion Credit
Relating to the Interactive Digital Media Tax Credit and Alberta Investor Tax Credit, the budget notes a 5% diversity and inclusion credit enhancement which could be claimed if the company offers employment to an individual from an under-represented group.
Capital Investment Tax Credit
The budget announces that the Capital Investment Tax Credit, a 10% non-refundable tax credit of up to $5 million for a corporation’s eligible capital expenditures on manufacturing, processing and tourism infrastructure, will also be extended until 2021-22.
Alberta Child Benefit
The 2018 budget details increases to these benefits for families with 1, 2, 3 and 4 plus children, as well as increasing the phase-out threshold for family net income from $41,786 to $42,287.
Alberta Family Employment Tax Credit
Increases have also been announced in the budget to offer more benefits for working families who have income from employment of more than $2,760 per year. The phase-out threshold has been extended from a family net income of $41,786 to $42,287, as well as increases to the benefit amounts for each family size.
The budget covers the agreement made by Alberta to adhere to a structured tax framework with the Canadian government for a period of two years after the legalization of cannabis for recreational purposes. Specifically, either $1 per gram or 10% of the producer price (whichever is greater) will be collected and the province will receive 75% of this tax room, both to be collected by the federal government. In addition, an additional tax of a maximum of 10% of the retail price may also be collected by the province.
Education Property Tax
A freeze has been set on education property tax collection, but the current rates have increased as follows:
· From $2.48 to $2.56 per $1,000 or equalized assessment for residential/farmland property.
From $3.64 to £3.76 for non-residential property
The government’s 2018 federal budget focuses on a number of tax tightening measures for business owners. It introduces a new regime for holding passive investments inside a Canadian Controlled Private Corporation (CCPC). (Previously proposed in July 2017.)
Here are the highlights:
Small Business Tax Rate Reduction Confirmed
Lower small business tax rate from 10% (from 10.5%), effective January 1, 2018 and to 9% effective January 1, 2019.
Limiting Access to the Small Business Tax Rate
A key objective of the budget is to decrease the small business limit for CCPCs with a set threshold of income generated from passive investments. This will apply to CCPCs with between $50,000 and $150,000 of investment income. It reduces the small business deduction by $5 for each $1 of investment income which falls over the threshold of $50,000. This new regulation will go hand in hand with the current business limit reduction for taxable capital.
Limiting access to refundable taxes
Another important feature of the budget is to reduce the tax advantages that CCPCs can gain to access refundable taxes on the distribution of dividends. Currently, a corporation can receive a refundable dividend tax on hand (known as a RDTOH) when they pay a particular dividend, whereas the new proposals aim to permit such a refund only where a private corporation pays non-eligible dividends, though exceptions apply regarding RDTOH deriving from eligible portfolio dividends.
The new RDTOH account referred to “eligible RDTOH” will be tracked under Part IV of the Income Tax Act while the current RDTOH account will be redefined as “non-eligible RDTOH” and will be tracked under Part I of the Income Tax Act. This means when a corporation pays non-eligible dividends, it’s required to obtain a refund from its non-eligible RDTOH account before it obtains a refund from its eligible RDTOH account.
Health and welfare trusts
The budget states that it will end the Health and Welfare Trust tax regime and transition it to Employee Life and Health Trusts. The current tax position of Health and Welfare Trusts are linked to the administrative rules as stated by the CRA, but the income Tax Act includes specific rules relating to the Employee Life and Heath Trusts which are similar. The budget will simplify this arrangement to have one set of rules across both arrangements.
It has certainly been a busy week in terms of announcements regarding financial policies for small businesses. Following the series of proposed tax reforms that the government announced back in July, various tweaks and changes have subsequently been made, owing, perhaps in part, to confusion and frustration expressed among the small business community. This week Finance Minister, Bill Morneau, has made further clarifications and adjustments to his original set of proposals, aiming to bring more of a sense of balance to the plans. Like all policy changes, the detail can be a little overwhelming, so here is a summary of the key points for your reference:
Of course, this is one area of government policy which is not only constantly changing, but particularly controversial in the current climate, so keep yourself updated regularly on new announcements and news, to ensure your understanding in this area and its potential impact on your family and business. If you have any questions, please talk to us.
The month of July saw a set of proposed tax changes announced by the Federal Minister of Canada which are potentially the most impactful and significant amendments since the large-scale tax reform of 1972. We will go on to describe the detail and impact of the proposals, which fall into three main areas, below. In summary, however, the purpose of the changes introduced by the government is broadly to close the potential current perceived tax loopholes that exist for higher earners and owners of private corporations. In response to the proposals, the government is inviting views and opinions on the changes during a consultation period which will last until October 2 2017.
If a high earning individual moves a proportion of their income to a family member such as children or a spouse who hold a lower tax rate in an attempt to reduce the total amount of tax payable, this is known as income sprinkling. To mitigate this, the government is proposing to include adult children in the eligibility rules in addition to minors, as well as taking a “reasonability” approach to assessing their income and thus which rate the transferred income should be taxed at. This will mark a change to the current TOSI (tax on split income) rules which currently apply.
2. Minimizing the incentives of keeping passive investments in CCPCs
Currently, it can be advantageous for corporations to keep excess funds in a CCPC due to the fact that the corporate tax rate on the first $500,000 of taxable income is often much lower than the tax that would be payable by an individual. The government is moving to make this option less beneficial by the following two initiatives: firstly, by the removal of the option of crediting the capital dividend account (known as the CDA) equal to the amount of the non-taxable portion of any capital gains and secondly by removing the refundability of passive investment taxes.
3. Reducing the transfer of corporate surpluses to capital gains
Tax advantages can currently be achieved by the sharing out of corporate surpluses to shareholders through dividends or salaries, which are often taxed at a lower rate than if earned as personal income. This is due to the fact that just 50% of capital gains are taxable.
Finance Minister Bill Morneau delivered the government’s 2017 federal budget on March 22, 2017. The budget expects a deficit of $23 billion for fiscal 2016-2017 and forecasts a deficit of $28.5 billion for 2017-2018. Find out what this means for businesses.
While no specific measures are mentioned, the government will review the use of tax planning strategies involving private corporations “that inappropriately reduce personal taxes of high-income earners.” including:
The government eliminated a tax deferral opportunity for certain professionals. Accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors will no longer be able to elect to exclude the value of work in progress in computing their income. This will be phased-in over two taxation years, starting with taxation years that begin after this budget.
Please don’t hesitate to contact us if you have any questions.
Alberta Finance Minister Joe Ceci delivered the province’s 2017 budget on March 16, 2017. The budget anticipates a deficit of $10.3 billion for the 2017-2018 fiscal year, $9.7 billion for 2018-2019 and $7.2 billion for 2019-2020.
No changes to corporate taxes were announced.
|Corporate Income Tax Rates- As of January 1, 2017|
|Alberta||Combined Federal & Alta|
|*on first $500,000 of active business income|
Introduction of legislation to adjust Alberta’s dividend tax credit rate on non-eligible dividends for 2017 and subsequent years to address federal tax changes, however no further details were provided.
|Personal Combined Federal/Provincial Top Marginal Rates|
|Interest and regular income||48.0%|
Please don’t hesitate to contact us if you have any questions.
BC Finance Minister Michael de Jong delivered the province’s 2017 budget on Feb. 21, 2017. The budget anticipates a surplus of $295 million for the current year, $244 million in 2018-2019 and $223 million in 2019-2020.
Reduction in Corporate income Tax Rate from 2.5% to 2.0% effective April 1, 2017
|Corporate Income Tax Rates- As of January 1, 2017|
|British Columbia||Combined Federal & BC|
|*on first $500,000 of active business income **effective April 1, 2017|
Increase in the personal tax rate from 40.61% to 40.95% for ineligible dividends effective January 1, 2017.
|Personal Combined Federal/Provincial Top Marginal Rates|
|Interest and regular income||47.70%|
Medical Services Plan Premiums: Rate will remain at $75/month/adult. Effective Jan 1, 2018: 50% MSP premium reduction for households with annual net incomes up to $120,000.
Firefighter & Search & Rescue Volunteer Tax Credit: Non-refundable tax credit of up to $3,000 for 2017.
Back to School Tax Credit: Non-refundable tax credit of $250 per child (ages 5 to 17) for 2016 to 2018. Effective Jan 1, 2018, the education tax credit will be eliminated.
Electricity- Provincial Sales Tax Act: Effective Oct 1, 2017, the tax rate is reduced to 3.5% of the purchase price.
Property transfer tax: For first time home buyers to save property transfer tax on the purchase of their property the partial exemption has been increased to $500,000 from $475,000.