Tax Exempt Insurance Planning (Deadline – January 1, 2017)

This post is directed to all Holliswealth investment advisors.

I work closely with several advisors in Ontario.  With the upcoming changes in the tax exempt legislation, I’ve been very busy explaining the new legislation to clients and their professionals.  I wrote this piece (which I customize for every client) to help better understand the Tax Exempt Structure.  More specifically, I often have a meeting with the client first, they often “understand it” as well as can be expected.  Then I provide them this document as a FAQ sheet so they know what questions they should be asking.

This is complicated stuff and I strongly encourage everybody to reach out to me, or their Insurance Consultant to learn more.

Below is a sample of the document I provide to clients:

PS.  Kindly recommend or forward this article to whomever you think would like to learn about this.  It’s vital that we educate our clients before this opportunity is gone…for good!


Prepared for: Dale & Chris Sample (1234567 Ontario Inc.)


Certain life insurance products are commonly utilized as investment vehicles that accumulate assets in a tax-sheltered environment. Quite often, the only reason such a product is missing from an investor’s wealth management program is that the investor is unaware of “tax-exempt life insurance” (referred to as “The Shelter” in this document).

These investment vehicles are permanent life insurance products, which provide life-long insurance coverage and include a savings component. The investment opportunity stems from tax rules found in section 148(3) of the federal Income Tax Act. That’s where it specifies that assets in a life insurance product accumulate free of annual taxation.

In addition to tax-sheltered investing, rules in the Income Tax Act provide for a second tax advantage: Proceeds from the policy, including any accumulated assets, are ultimately distributed to the estate or directly to beneficiaries tax-free. Consequently, this feature makes tax-exempt life insurance ideal for estate planning – especially for those who have significant corporate accumulation.

The government has introduced new tax legislation that’s designed to modernize life insurance exempt testing. The legislation, which reflects the fact that people are living longer and that their insurance policies will pay out later, received royal assent on December 16, 2014 and comes into effect as of January 1, 2017.

Although all existing contracts (up to January 1, 2017) will be grandfathered, this particular tax strategy will no longer be available once the 2016 calendar year has passed.

Assumptions for this Summary

There are many factors that affect the impact of the structure.  Some of those factors are age, the deposit amount/frequency and the assumed investment rate of return.  Below are the assumptions used for this customized FAQ sheet:

  • Chris Sample, non-smoker (DOB: March 13, 1957)
  • Dale Sample, non-smoker (DOB: April 9, 1958)
  • Deposit Assumption: Assumes $1,000,000 lump sum deposit from the corporation
  • Rate of Return Assumption (Min. 1.75% 10 Year GIC) – Although a wide variety of investment options are available, for this illustration an index-linked GIC earning 3.50% will be used for this illustration.

Frequently Asked Questions (FAQ’s) and Information Sheet

1. Who are the best candidates for this type of tax shelter?

Individuals and/or families that have (or will have) accumulated significant non-registered assets.  There does not necessarily have to be a need for life insurance, but rather those who pay significant tax on large investment portfolios.

The concept is especially effective for those who have a corporation(s) that has, or will have, significant accumulation.

Comment: You currently have a corporate investment portfolio that is invested in a bond portfolio.  Your corporate investments are currently exposed to tax (in Ontario, the tax payable on a fixed income investment is 46.17%).  This money can be invested using the same/similar investment products inside of the insurance tax shelter.

  1. What other tax efficient investment vehicles/strategies are available?

Personal and corporate dollars are taxed differently.  In general, investment portfolios (personal and corporate) are taxed on the gains of the portfolio (ie. interest, dividend and capital gains).  Savvy investors often use different investment products to change the tax treatment to deferred capital gains (specifically, Corporate Class Mutual Funds).

Up until March 22, 2016, corporate class investments were a terrific tax deferral tool with great flexibility to switch money between mutual funds without incurring a taxable gain.  Justin Trudeau announced the following unexpected surprise to the investment industry.  Click the following link to read an article from the Globe and Mail dated March 23, 2016.

With the changes of corporate class set to be implemented on October 1, 2016 and the change of tax-exempt insurance changing on January 1, 2017, the tools used by planners are disappearing (or changing dramatically).

  1. Explain to me how/why the tax exempt insurance is better than a typical non-registered investment portfolio?

If you have a personal or corporate investment portfolio, you are currently paying tax on the growth of the portfolio.  This isn’t new news, but CRA is generating revenue from your investment returns.  At second death, there are tax and costs (probate) associated with your portfolio that are eliminated using the shelter.

The Structure allows an investor to have a personal or corporate investment portfolio and shelter all growth from tax (exactly like an RRSP) and eliminate most, if not all, estate costs.

Comment: Below is the projected annual (and cumulative) costs to implement a shelter a $1,000,000 lump sum.


In other words, to avoid paying any tax on the growth of your corporate investments, the cost for the tax shelter is only $6,099 in year #1.

  1. What are the investment options within the contract?

The contract offers over 400 different investment options from well-known mutual fund companies.  CI Funds, Dynamic, Templeton, Mackenzie and Fidelity are some of the companies that you can invest with.  As of the writing of this document, BMO offers a 10 year GIC at 1.75%.

One of the more attractive investment options are Guaranteed Market Index Accounts (GMIA’s) (click here for more information).  These investments offer principal protection of returns linked to equity market performance, but your investment portfolio can never be negative (ie. You can never lose money).

  1. How much does it cost?

The cost to implement the shelter is the cost of the life insurance contract.  In other words, unlike many insurance purchases (whereas you purchase insurance to protect against a financial loss), this structure requires that you purchase the lowest cost insurance possible to shelter the amount of deposit. Moreover, the cost of the shelter will reduce over time, whereas tax will continue to grow as your investment portfolio grows.

The reason why this structure works so well is simple…the cost of the insurance (ie. the shelter) is cheaper than the tax you are already paying on your portfolio.  Also, over time, we reduce the amount of insurance to keep costs low.

Depending on your situation, an individual life contract can be used (whereas there is a need for life insurance on one individual) or; a joint last-to-die contract can be used (whereas there is no need for insurance when an individual dies — joint last-to-die (JLTD) allows for a cheaper shelter, and promotes more investment returns).  Most often, a JLTD contract is ideal.

Comment: Below is a comparison of the tax cost of investing inside of the corporation (3.50%) versus investing inside of the tax exempt contract:


In the first year, the cost of the shelter is 58.5% less than the tax you’re currently paying.  After 10 years, the cost to implement the insurance shelter is 89.3% less than the tax you would otherwise have to pay.

 6. What is the deposit flexibility? What if I can’t commit to a deposit in the future?

One of the most attractive elements of this structure is the flexibility.  Often, the owner of the contract commits to a deposit schedule.  For example: $100,000 for 4 years.  Each year, this structure has minimum deposits and maximum deposits.  Often, the minimum deposit is a small fraction of the scheduled deposit ($11,209 in this example).  As long as the minimum premium is satisfied, the Shelter remains in effect.

The maximum deposit room (also known as Maximum Tax Accumulation Reserve (MTAR)) is the maximum allowed by section 148(3) of the federal Income Tax Act.  In simple language, MTAR is the line that tells an investor how much can be invested in a tax sheltered environment of a life insurance policy.  MTAR is calculated each policy anniversary and will reduce from year 4 to year 10.  It is possible to “maximum fund” a contract where there is no more room available.

To ensure effectiveness of the structure, it is important to determine a deposit schedule at the onset.

Comment: Below is an example showing planned deposits ($1,000,000 lump sum) compared with the minimum and maximum deposits.  For example, theoretically you can deposit $11,209 in year number 1 and have $2,105,445 of maximum room in year 3.  Consider the following:


7. What if I need money in the future, how do I get access to it?

Similar to an RRSP, if you withdraw money from the Shelter, you will pay tax on the investment gains.  It is not advisable to ever withdraw money from the tax shelter but rather borrow against the cash surrender value (ie. this is called an insured retirement program or IRP).

The Shelter is just like any other assets whereas a bank will provide a tax-free loan against the value.  If invested in the GMIA (index linked GIC’s), you can receive a 90% loan-to-value on the cash surrender value (less if you’re invested in equity based investments).

What’s nice about this particular loan is that you don’t necessarily have to pay it back during your lifetime. Since there is a life insurance element, it is possible that you keep the loan and the death benefit will pay back the loan at death (this can be used to maximize CDA planning as well).

For many sophisticated investors, leverage, and the tax-deductible interest on those loans is understood.  The contract provides the exact same benefits.

Important to understand

In the early years, the structure has a ‘surrender charge’.  The surrender charge is the main ingredient that ‘creates’ the shelter.  A surrender charge is similar to a deferred sales charge or fee if you discharge a mortgage before maturity.  If you cancel the contract at any point in the first 10 years, there is a fee.  The policy owner can borrow 90% of the cash value (not 90% of the account value, which is higher the first 10 years of the contract).  After 10 years, there are no more surrender charges.

8. I never plan on using this money. What impact does it have on my estate/heirs?

The shelter is a life insurance contract.  Therefore, the proceeds of the investment portfolio is paid as a ‘death benefit’ for tax purposes (if corporate, the death benefit less the ACB equals a capital dividend credit which is tax free – this is being “neutered in January 2017”.  CDA will be lower moving forward).

In other words, if you are never going to spend the investment portfolio, this is an ideal solution to tax shelter the money, have access vie-to-vie leveraging and enhance the estate with the insurance.

The statement is magnified in a corporate context.  Without the shelter, any accumulation in the corporation would attract 42% dividend tax to your children (at second death).  The structure creates a ‘Capital Dividend Account’ which allows for a tax-free (0%) dividend to the children instead.

Comment: Below is a comparison of a typical corporate investment (3.50%) compared with the same investment inside of the shelter (3.50%).  There is no better estate planning tool than corporate insurance.


9. Why would I not implement this structure? What are the drawbacks?

It is very important to understand 3 key factors for these contracts:

  • Borrowing capacity and liquidity (see #7 in this FAQ sheet). You must understand how to access the cash without triggering tax.  It is NOT fully liquid for 10 years!
  • These contracts cannot handle negative returns. The structure has a monthly cost of insurance deduction (from your investments).  For example, if the investments dip 30%, plus a deduction for the costs of the shelter, it’s tough for the investment performance to recover.  The solution is simple, illustrate a conservative rate of return using GIC’s or GMIA’s.  These investments cannot lose money….ever.  The structure works great when there are no ‘down’ years.
  • You are NOT buying insurance for the typical purposes. You are purchasing low-cost (term/YRT) insurance to create a tax shelter.  Don’t fall in love with the insurance.  It’s great that there is a life insurance component, but remember it is NOT guaranteed cost life insurance (ie. whole life or level cost of insurance/T100).

 10. Does this mean you have to qualify for insurance?

Yes. Given the insurance (net amount of risk) for the insurance company reduces over time, even those with pre-existing medical conditions (ie. heart attack, diabetes, some instances of cancer, etc.) should consider taking advantage of this structure.  An insurance application is necessary to determine actual costs.

11. I’m interested. What are the next steps?

The process to implement any life insurance contract is the same….we need to complete a life insurance application.  Below are the steps:

  • Sign an Insurance Application – 2 signatures (1 signature is to allow the insurance company to share information with your doctor, the other is confirm that you are telling the truth)
  • Sign anti-money laundering/anti-terrorist Forms – These are required at the time of application. Given the inherent cash values that accumulate in these shelters, the insurance company needs to verify your identity (a picture of your driver’s license is needed)
  • Sign Compliance Documents – Anti-spamming legislation and a disclosure document is required at the time of application

 Important considerations:

  • No payment is required until there is an approval and a contract is signed
  • Applications can be withdrawn at any time
  • You do not need to commit to a specific deposit schedule until after an application has been approved

12. How long does this take?

Depending on the complexity of your medical and/or corporate situation, the application can take anywhere between 6 and 20 weeks.

13. Why are your encouraging me to apply today? I’m still thinking about it.

Finance has provided a drop-dead date of January 1, 2017.  Any cases not approved or not delivered prior to this date are gone.  No extensions.

The process often takes several months.  Once summer hits, physicians and underwriters go on vacation.  Things literally stop if the doctor doesn’t provide information to the insurance company.  If we get an application in today, we make sure there is enough time to get an approval.  Once we have an approval, we have ample time to finalize the figures and have a contract issued.


“Prescription Before Diagnosis, is Malpractice”

Back in 2012, I attended an education conference in Las Vegas.  Frankly, I was disappointed at how little product and tax education that was being provided.  Instead of education, it seemed that the entire conference was focused on sales strategies (ie. increase sales, increase production, etc. etc.).  Honestly, I was having a really hard time sticking around.

On the second day of the conference, there was a speaker who during his ‘sales-focused’ session, used the phrase, “Prescription before diagnosis, is malpractice.” For those who do not know, I spent the first 8 years of my career working directly with physicians, so I started thinking really hard about what that expression meant in the context of my business (insurance/planning).

This was my conclusion……… my opinion, the reason so many people hate talking to insurance agents (investment advisors aren’t too far behind), is that traditionally, insurance agents “prescribed” insurance products to their clients.  No time or effort was used to diagnose what insurance (if any) a person/family needed (often, the only insurance discussed was mortgage insurance).  Worse still, professionals have never been required by their governing body for a needs analysis or plan before “prescribing” their insurance and/or investment product to make sure the client was well educated and informed (although things have been changing in recent years).

In the Financial Planning industry, “diagnosis” comes in the form of a financial plan and tax planning.  I rephrased the old expression to read, “Insurance and/or investment products that are sold, before a financial plan and tax planning, is non-compliant”.

My point is simple… should not be “prescribed” until a financial plan or needs analysis has been complete.  The case studies in this blog are examples of detailed “diagnosis”.

If you have never gone through the financial planning process, or have never had an insurance needs analysis completed, I strongly recommend reaching out to your financial advisor and book a meeting.

How Much Life Term Insurance do I Need? Let’s find out!

For the past several years I have met with hundreds of advisors.  Some of these advisors have a difficult time having the “insurance discussion” with their clients.  Others are only comfortable with the idea of using life insurance instead of mortgage/creditor insurance with their local bank.

There is a very simple method of going through a life insurance needs analysis.  There are two distinct steps:

  1. Do the Math
  2. Do you care?

Do the Math

There are 3 main factors that determine a term life insurance needs analysis.  Never forget these three:

  1. Debt Elimination (mortgage included): This number is very easy.  How much debt do you currently have as a family?  If one spouse were to pre-decease the other, ideally, this expense would be eliminated
  2. Education Costs for Children: The question I ask to every family is, “how much do you think education will cost for your children?” — there is no ‘right’ answer, but based on the education cost calculator provided by MacKenzie Financial, for 4 years of school plus living expenses, based on Ontario costs and inflation rates, will cost approximately $80-100,000/child (present value).
  3. Income Replacement to your Family/Surviving Spouse: Let’s assume that after death, your surviving spouse has no more debt, no need to save for education AND a family without a spouse/parent.  Things are much different. To me, you should want to calculate a certain level of income for as long as the children live in the house (let’s say age 20).  Below is a table that I created many years ago.  The top row is the number of years to replace income and the column to the left is the after-tax amount of income provided.    I literally print this table and allow client(s) pick their own number.


Let’s do an example:

Bob and Susan have a $500,000 mortgage and two young children (2 & 4).  Susan stays home with the kids and Bob earns approximately $100,000/yr gross (after-tax $70,000/yr).  What happens if Bob dies prematurely:

  • Debt: $500,000
  • Education: $200,000
  • Income Replacement ($40,000/yr for 20 years – see table): $676,000
  • Less: Current Insurance
  • Less: Current RESP’s

Make sense?

Do you Care?

As a professional, my job is to show the math and explain where life insurance fits.

However, as a client, you may not “care”.  You would be surprised how many times I’ve been told that, “we’ll just sell the house”.  My response to that specific objection is, “let’s me get this straight…Dad dies, mom has no husband, there is no more paycheques and the solution is to uproot the family from their home?  Really?”

My job is to make sure we have this awkward conversation and for me to challenge these conventional objections and help better educate.  Not everybody has to be a believer, but ALL advisors should have this conversation with their clients.

A Collaborative Conversation with an Old Friend

Last week an old friend and former colleague of mine (John Cruise) had one of those ‘random and unexpected’ great telephone conversations.  I was driving from a meeting and called John to shoot-the-breeze.  45 minutes, later, I arrived at the office and felt invigorated about our conversation and wanted to share.

By way of background, John is a CFA (Chartered Financial Analyst) and does the same type of advanced financial planning that I do (  We were talking about client situations and John asked me the following question:

“When you look at a specific client situation and you had to rank the importance of the following 5 planning items, how would you rank them?  Those 5 items are: Tax Planning, Goal Setting, Investment Selection/Allocation, understanding the behaviour(s) of the client and developing a financial plan?”

There was only one difference between John’s answer and mine, but that’s what made this conversation so thought-provoking.  John told me that his list, ranked most important to least important was:

  1. Goal Setting
  2. Create a Financial Plan
  3. Understanding the Behaviour(s) of the client
  4. Tax Planning
  5. Investment Selection/Allocation

My ranking was as follows:

  1. Understanding the Behaviour(s) of the client
  2. Create a Financial Plan
  3. Goal Setting
  4. Tax Planning
  5. Investment Selection/Allocation

In just about every introductory financial planning meeting that I’ve had, when I ask the client about their financial goals, they always tend to be the same; “I want to have enough money to retire”, “pay off debt”, or “travel more” (in fact, most financial planning questionnaire’s include these as pre-populated answers).  These goals are not only predictable, but they are not specific enough for me to provide any expertise or clarity.  There is no emotion and absolutely no substance or rationale to help me develop a plan.

Instead, my goal for the first meeting is to learn the behaviour(s) of my client and try to understand the psychology of “why” have they amassed a certain level of wealth.  I try to figure out “why” they want to retire (I’ve learned that most don’t want to stop working, but rather work less).  I challenge business owners.  “Who’s going to buy your business?  How much is it worth?”

My goal is to ask a lot of pointed, personal, strange, engaging and otherwise ‘different’ questions to inspire discussion and get reactions (ie. Do they roll their eyes?  Do they get excited/angry?  Do they noticeably pause before answering specific questions?).

My point?  I use the information and emotions that I collected from the first meeting to develop the first draft of their financial plan.  When we have our next meeting, we have a new, more powerful and engaging conversation.  Better questions are asked, more clarity arises and “presto”, we start developing more specific goals based on the financial context to our conversation (ie. they see where their cash flow will come from.  I demonstrate what impact this has on the money left to their heirs, etc.).  The plan often needs to be revised/tweaked, but by then, the solution(s) start to become more obvious (ie. investment selection, tax planning, etc.).

Thoughts?  Please provide some comments.

My Friend Lisa…..Group Disability Claim

Several years ago (2009), before I owned my own firm, I worked with a wonderful woman named Lisa.  She was a mother of 4 boys and an active rep hockey/lacrosse mom.  Her husband was a homicide detective on the local Regional Police.

At the time, our employer had group life insurance which paid 60% of our earnings.  Employees had the premiums deducted from their paycheque to make sure that the proceeds of the insurance (if needed) would be paid tax-free.

The Incident

One unassuming day, Lisa came to work and announced that her doctor has ordered her to stay home from work.  She explained that she was diagnosed with “Intestinal perforation” (ie. this condition causes the contents of the intestines to leak into the abdominal cavity).  This condition is caused by Chrones Disease and made worse by stress (which 4 boys and a husband who works shifts can cause).  What made things more complicated was when the infection spreads throughout the body, it can cause “Sepsis”, which is very serious and can cause death.

Over the next 11-13 months, the doctors had a difficult time managing the correct dosages of medication.  Once the medication started to work, Lisa fell into a depression.  She was no longer able to participate in her children’s sports, she couldn’t work and overall her life was turned upside down.

Recently (ie. 3 months ago), Lisa finally returned to work….she lasted 4 hours and never returned.

How did the Group Long Term Disability Help?

The group disability policy had been paying Lisa a monthly tax-free benefit after she satisfied the 120 day waiting period.  It continued to pay for over 3 years.  After 3 years, the insurance company acknowledged that she was considered “totally disabled” and wrote a lump sum cheque for the full amount owing to her age 65.

Employers and individuals needs to recognize the financial risks of not being able to work.  Thankfully, our former employer implemented a group long term disability plan.  It protected Lisa from having to sell their home and they were able to modify their lifestyle despite her condition.

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