How the Corporate Insured Annuity works

Your situation

Your company’s investment portfolio includes interest-bearing investments such as GICs, term deposits, bonds, bank accounts, etc. You’re using the interest earned by the investments to supplement your income. You want to maximize the income you’re receiving today, while preserving your investment capital to make a gift when you die.

An alternative – Corporate Insured Annuity

This financial planning strategy requires your corporation to liquidate these investments. The resulting cash is used to purchase a life annuity contract, which effectively eliminates your access to this capital during your lifetime. By using these funds to buy an annuity and combining it with a life insurance policy, this strategy is designed to give you increased income today, while ensuring funds are available to make a gift when you die.

How does the Corporate Insured Annuity work?

Your corporation purchases a non-prescribed life annuity contract and an exempt life insurance policy, with you as the life insured and the corporation as the beneficiary. The cash flow from the annuity is used to pay the life insurance premium and the tax on the annuity. The remaining amount is used to supplement your income.

When you die, your company receives the tax-free death benefit from the life insurance policy. The excess of the death benefit over the adjusted cost basis of the policy is credited to the corporation’s capital dividend account. Your corporation then uses the proceeds to pay a dividend to your estate. This dividend is a tax-free capital dividend up to the amount available in the corporation’s capital dividend account; the remainder, if any, is paid as a taxable dividend. Your estate can then gift the funds received as directed in your will.

Insured Annuity … A Client Profile

Who is it for?
• shareholder of a private Canadian corporation
• affluent, with capital that exceeds lifestyle requirements
• age 65 and older
• in good health
• company’s investment portfolio includes conservative investments, such as GICs, bonds and bank accounts
• interest income from investments is currently used to enhance shareholder’s lifestyle
• shareholder’s priority is to leave a legacy at death
• shareholder is not adverse to long-term planning strategies

Why does it work ?
• The non-prescribed annuity generates a higher return than traditional fixed-rate investments.
• The corporate tax paid on annuity income generates Refundable Dividend Tax on Hand (RDTOH) balances that are available to enhance the shareholder’s income.
• The taxable portion of the annuity is less than the interest earned on the investments, which reduces the amount of corporate tax paid annually.
• The payment from the annuity includes a combination of interest and principal, while the fixed rate investment returns interest only.
• The insurance proceeds replace the capital used to purchase the annuity.
• When the shareholder dies, the life insurance proceeds are paid to the company and generate a credit to its Capital Dividend Account (CDA). The insurance proceeds can then be paid tax free to the shareholder’s estate (via a tax free capital dividend) and distributed to heirs or charity, as directed in the Will.

An example ...

Your client is the owner-manager of a private Canadian company. He is a male, 71, non-smoker. The company has $500,000 of interest-bearing investments earning 5%. The interest income is being paid as a taxable dividend to the shareholder annually. The shareholder’s personal dividend tax rate is 30%. The corporate tax rate on interest income is 50%. (see the next page for comparative values).