Protecting your business with holistic retirementv advice

a Let’s talk about the Corporate Shelter strategy

a Life insurance is wealth protection Total wealth = human capital + financial capital Make the Connection with a best practice approach

ONE SIMPLE OBJECTIVE:

Make it easy for advisors like you to start conversations with your clients about wealth protection solutions. Disclaimer

• The following information is being presented with the understanding that it is intended for information purposes only. • Neither Sun Life Assurance Company of Canada nor the presenter has been engaged for the purpose of providing legal, accounting, taxation, or other professional advice. • No one should act upon the examples/information without a thorough examination of the legal/tax situation with their own professional advisors, after the facts of the specific case are considered. What you’ll learn today

Corporate investment shelter (CIS) overview What it is and how it works

Case Study

Illustrating the CIS strategy

Sales and marketing support available Corporate investment shelter 101

Compares the benefits of a corporately owned participating whole life insurance solution to a traditional non-registered investment • Maximize corporate asset value by minimizing the erosion of investment assets through taxes and other costs • Use of capital dividend account (CDA) and refundable dividend tax on hand credits (RDTOH) The corporate tax challenge Challenges with traditional

Challenges while living •Taxes payable on investment income – Interest – Dividends – Realized capital gains Passive investment income •Attracts tax at top corporate rate •No small business deduction Erosion through income taxes = Reduced growth of corporate assets

The corporate tax challenge Challenges with traditional investments

• Challenges at death – Taxes payable on deferred capital gains – Taxes payable on transfers to shareholder’s estate

Erosion through taxes at death = Less assets available for estate The corporate investment shelter Addressing the tax challenges

• Addressing tax challenges while living – CIS uses a participating whole life insurance policy • Policy earnings grow tax exempt

• Addressing tax challenges at death – Policy proceeds can be paid tax free to the corporation (no deferred gains) – Amount of death benefit in excess of the policy’s adjusted cost basis can be paid as a tax-free capital dividend to the shareholder’s estate Target client profile

• Owner / significant shareholder of a Canadian controlled private corporation (CCPC) • Age 50+ and healthy • A corporate life insurance need exists • Corporation has: – excess cash flow and/or, – investment assets not needed for business purposes • Wants to maximize estate and transfer assets in a tax- efficient manner • Looking for stable and consistent asset growth

CIS suitability questionnaire

Does the shareholder / corporation CIS have a business succession plan in place? √ want to reduce tax on corporate investment income? √ have a desire to pass corporate assets to a beneficiary? √

have a corporate life insurance need? √ own taxable passive investment assets? √ own corporate investment assets with a deferred capital √ gain? want a minimum amount of estate value to be √ guaranteed? Corporate investment shelter A picture is worth a thousand words CIS is not just tax efficient Some additional benefits

• Insurance immediately increases estate value • Reduction of investment risk gives greater For the certainty to estate value shareholder • CDA credit improves estate value • Life insurance policy dividends provide stable long-term growth

• Convincing, professional demonstration • Proof of insurance as a cost-effective For you solution for asset transfer at death • Increased client loyalty

Capital dividend account The finer points…

Is this eligible for CDA Corporate income type credit?

Interest earned No

Dividends earned No No, only when these Deferred capital gains gains are realized

Realized capital gains Yes, only the non- taxable portions Yes, amounts in excess Life insurance death benefit of the policy ACB The benefits of a CIS with par whole life insurance from

• Access to the steady and consistent performance of the Sun Life Par Account through the crediting of policyholder dividends – managed with a long-term perspective – Investment experience is a key factor influencing dividends • Potential to reduce investment volatility • No need to make ongoing investment decisions • Opportunity for asset diversification The Sun Life Participating Account Asset Allocation The Sun Life Participating Account historical returns

40%

30%

20%

10%

0% 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 -10%

-20%

-30%

-40% Dividend CPI S&P/TSX Total Return 5-Year GIC 10-Year GOC Case study – Bruce’s story

• Access to corporate assets for retirement • $60,000/yr of dividend income for 20 years starting at age 65 •Investment assets must deliver stable and Age 54 consistent returns Time to 11 years •At death, corporate retirement assets will be passed $1.25 million to his children Retained (equity + fixed earnings income)

Bruce’s concerns

• Bruce’s corporate investment income is being taxed at the highest rate. • Capital gains taxes are due at his death. • Assets paid from the corporation to his estate are taxed as a dividend. • A significant market correction will decrease the estate value of his corporate assets. The solution Corporate investment shelter

• BL Holdco purchases a participating whole life insurance policy • Transfers funds from taxable investments to policy Policy type Sun Par Protector – 20 pay Face amount $750,000 Dividend option Paid-up additional insurance Annual premium $44,990 – including Plus premium benefit payment of $10,290 Number of payments 10 Premium offset* Beginning in year 11 – under current / - 1% Withdrawals from BL $60,000/yr (indexed) beginning at age Holdco 65 for 20 years * Not guaranteed Is life insurance really necessary? Comparing to corporate owned investments

• Strategy compares CIS against traditional corporate- owned investments

Asset value $1,250,000 ACB $1,000,000

Bond component of portfolio 40% to age 65

earns 4% 60% after age 65

Equity component of 60% to age 65 portfolio earns 6% 40% after age 65

The results What happens at death?

Net to beneficiaries (at death)

Without CIS strategy CIS CIS strategy CIS CIS strategy (current) advantage (current -1%) Advantage Age 55 $908,218 $1,641,374 $733,156 $1,640,877 $732,659

Age 64 $1,383,808 $2,019,798 $635,990 $1,973,799 $589,991

Age 75 $1,246,894 $1,654,109 $407,215 $1,445,060 $198,166

Age 85 $1,067,198 $1,767,438 $700,240 $1,359,327 $292,129

Age 90 $1,303,322 $2,073,810 $770,488 $1,580,980 $277,658

Illustrated net death benefit is after the income stream of $60K + 1% annual inflation to shareholders; illustration includes premium offset The results A closer look CIS net estate value – life insurance

CIS – Life insurance – age 75 Sun Par Protector death $1,116,333 benefit Minus dividend tax payable $81,124

Equals net to estate $1,035,209 A closer look CIS net estate value – corporate investments

CIS – corporate investments – age 75 Investment balance at death $812,913 Minus capital gains taxes $8,484 Plus RDTOH refund $105,720 Equals amount available for $910,148 distribution Minus dividend tax payable $291,249 Equals net to estate $618,899 A closer look CIS net estate value – corporate investments

Net to estate – life insurance $1,035,209

Net to estate – corporate $618,899 investments Total net to estate $1,654,108 Refundable dividend tax on hand RDTOH: How it works

• A notional account • A credit to the RDTOH is created when taxable income is earned • When taxable dividends are paid – Amounts equal to RDTOH balance can be received by corporation – Corporation receives $1 for every $3 of taxable dividend paid to shareholders – Balance of RDTOH is paid at death Refundable dividend tax on hand The finer points…

Corporate income type RDTOH eligibility?

Interest earned Yes, 26.67%

Dividends earned Yes, 33.33%

Realized capital gains Yes, 26.67% of the taxable portion Deferred capital gains No

Life insurance death No benefit Bruce’s concerns have been addressed

• Tax on corporate investment income has been reduced • Capital gains on corporate assets at death have been reduced • A significant portion of corporate assets can be paid tax-free to Bruce’s estate • Sun Par Protector participating whole life plan provides stable and consistent growth

The results

• Bruce has significantly increased the value of his estate • Transfers from traditional corporate investments to the tax-exempt Sun Par Protector policy reduce the corporate tax bill • All or a portion of the life insurance death benefit can be paid tax free to Bruce’s estate • Capital gains would be minimized at death Running the concept

Select the concept

Select ‘NO’

Import data Running the concept

• Data entry tabs – Advisor info – Alternate investment assumptions – Tax details – Estate assumptions Sample report pages Marketing support

Client and advisor Financial CIS fact sheet product guides Advisor Bulletin Wrapping it up

• Create corporate asset transfer opportunities • Minimize erosion of assets to taxes • Opportunity to earn dividends – Access to a strong and stable par account

Less taxes = larger estate The bottom line

If you’re not talking to your clients about protecting their assets, another advisor will.

*2013 Sun Life Canadian Unretirement Index Make the Connection strategy materials

Strategy worksheet Concept overview

Client email EOS Illustrations Available on: sunlife.ca/maketheconnection NEXT STEPS

1. Identify 4-5 clients/prospects 2. Prepare a CIS proposal for each client 3. Set up appointments to meet with clients and review the proposal Disclaimer

• This information is presented with the understanding that it is intended for information purposes only. • Neither Sun Life Assurance Company of Canada nor the presenter has been engaged for the purpose of providing legal, accounting, taxation, or other professional advice. • No one should act on the examples/information without a thorough examination of the legal/tax situation with their own professional advisors after the facts of the specific case are considered.