Stop double taxation by doing this...

Happy Easter Weekend to those celebrating. As for my little family, we’re off to The Billing Estate for an Easter Egg Hunt and I wish you all a great weekend.

First off, I want to thank all of you who completed the survey last week. It was very helpful to understand where everyone is at. However, Survey Monkey wanted to charge me a King’s ransom to get the last few entries. They had the gall to ask me for $129/month US to get the final responses. Suffice to say I didn’t pay and therefore I didn’t get the last few entries (and won’t be using their services again, thank you very much). If you asked for a follow up, it’s possible I didn’t get it, so just send me an email here.

Second, I wanted to give you an update on the charitable giving solution I mentioned. A few people wanted that info, which I provided. But I also got a chance to talk with them.

So here’s how it works. You must have a client with a term policy that they don’t want/need anymore and they would donate that policy to this charity. The charity would take that policy and convert it to permanent insurance and pay the premiums. The client would get a tax credit for the Fair Market Value (FMV, determined by an independent actuary that they will pay for) and of course you as the Advisor would get the conversion compensation. But, according to CRA, the term policy must be in-force at least 3 years and 1 day (it’s an official ruling).

As well, this charity is not interested in all policies. But mainly people who would either be declined for insurance today or a heavy rating (so the insurance pays out sooner). Obviously, this is a niche opportunity. But if you have people that fit that bill, let me know. There are solutions.

Finally, I have been getting a lot of people reaching out to me about my new job at PPI and are interested to learn more if it would be a good fit for them.

So here’s what I’ve been telling them.

PPI is not for everyone. We require people to be at a certain production level to join (which I don’t think is too high), but there are requirements. If you want to know what those are, send me a message.

However, PPI’s approach is different. There are no conferences in exotic locations. Instead, they spend their money on experienced and expensive insurance professionals (cough, cough…the reason I’m here) and advanced planning folks (Senior Underwriters, Tax Lawyers, Advanced Planning Specialists), and these people aren’t exactly cheap. They also spend their money on educating Advisors through their conferences (which they call Symposiums), which coincidentally in next week in Ottawa (see some of you there).

Everything costs money. But PPI has realized that Advisors who want to grow their business to the next level don’t need another gold watch or ziplining in Costa Rica (don’t get me wrong, those are fun). Instead, they need a team that can take them to the next level. So they put their money into people who can help them grow.

This is not the philosophy of all MGAs but how PPI views the world.

If that aligns with your values and goals, you want to grow your insurance business, and you’re looking for a partner who can help you make it a reality, reach out. We can chat and see if PPI fits for you.

Now, let's go to what I wanted to talk about. There were a lot of people who didn’t know what I meant by “double taxation” in the survey, so I wanted to spend some time on it this morning. For some of you, this will be a refresher.

When we look at corporations on the estate planning side, we mention that these business owners will be subject to double taxation, and this is what we mean.

When a business owner dies, we must dispose of all property they own, including the value of their corporation. For all intents, this means we would “sell” the company at the Fair Market Value (FMV).

This is accomplished by adding up all the assets in the corporation less any liabilities (it’s a bit more complicated than this, but good enough for our discussion). This gives us the value of the company.

Then, we need to figure out the Adjusted Cost Base (ACB) which you can typically get from their accountant.

You take the FMV less the ACB = taxable gain.

For example, if the company had a FMV of $1,000,000 and ACB of $100,000, the gain would be $900,000 ($1,000,000 less $100,000).

As you are probably aware, only 50% of a capital gain is included in the taxable income. This would mean $450,000 would be included in income (50% of the $900,000).

Then, let’s assume this is taxed at a 50% level. The tax owed would be $225,000 (50% of $450,000).

That’s the first tax.

But this tax bill is owed personally, not corporately. Where will the money come from to pay this $225,000?

If all the remaining money is inside the company, to pay this $225,000 tax bill, we’d have to take a large dividend out of the company to net out $225,000 to pay the capital gains tax.

To net out $225,000 through a dividend, the company would need to pay $478,000 (at a 47% rate, which is tops here in Ontario).

So, if the company was worth $1,000,000 just before the business owner died and we had to pay $478,000 in total taxes. How badly did we destroy wealth here?

Our discussion with clients should be, “how do we maximize your wealth”?

Using a life insurance policy to pay the capital gain tax will eliminate double taxation.

Why?

Because when death benefits pay out to a corporation, it will create a Capital Dividend Account (CDA) credit.

As you may know, CDA credits allow for tax-free dividends.

And, that $225,000 life insurance policy, won’t cost anywhere near $225,000 in cash contributions.

Here’s the lesson:

You can eliminate double taxation by using a life insurance policy.

So now you know.

Have a wonderful weekend, and see you next week,

Andrew