Strategies and

A custom approach

To ensure the development and deployment of optimum solutions for each client, different strategies and financial concepts may be used as leverage.

Here are some of the approaches to consider.

The immediate financing arrangement (IFA) is a financial strategy that allows clients to benefit from permanent life insurance coverage while allowing clients who adhere to it to retain access to the necessary liquidity to sustain their company's growth.

The interested party holds life insurance that generates high surrender values. The policyholder pays the insurance premiums and makes additional deposits to grow the surrender value as quickly as possible, according to the fiscal limits determined by the Income Tax Act (ITA). The surrender value of the life insurance policy accumulates tax-free.

Once the surrender value starts to accumulate, it is used as security to obtain financing from an external financial institution. The liquidity generated by the loans is reinvested in the course of the company's activities. When the conditions are respected, the interest on the loans and a portion of the premiums paid are deductible for tax purposes. New loans are issued each year to optimize the strategy.

When the insured dies, the death benefit is paid tax-free. A portion of this benefit serves to repay the loan to the financial institution. The balance of the death benefit then is paid to the named beneficiaries.

To learn more:

Immediate financing arrangement – Implementation Guide (PDF)file_download

When you work with business owners, it is important to discuss protection of human capital and preservation of financial capital.

For the short-term and medium-term insurance needs, such as coverage for a loan, term insurance is a good alternative. If the needs are long term, this type of life insurance may become detrimental. Payment of the premiums becomes an expense that results in a reduction of cash flows or retained earnings when these amounts could be used to support the company's growth.

Permanent insurance is therefore a much more interesting solution. In addition to lifetime coverage, it procures the following benefits:

  • Allows tax-free accumulation of funds and can allow reduction of the company's liabilities
  • These funds are added to the death benefit, in whole or in part, and are not taxable at death
  • The amount of paid-up capital, minus the ACB, procures an amount that can be included in the capital dividend account (CDA). The amounts in the CDA are paid to the shareholders in the form of non-taxable dividends
  • The surrender values in an insurance policy are considered assets on the balance sheet

To learn more:

Balance sheet strengtheningfile_download

Estate planning is a financial strategy that allows improvement of the estate patrimony, while offering the potential benefits of permanent life insurance.

To carry out the strategy, the payments are maximized in a permanent life insurance policy for the life of the person insured. The policyholder prefers payments to the insurance policy instead of purchasing unregistered fixed-income securities. The returns generated on the deposits paid into the policy and the surrender value are accumulated tax-free for the life of the insured.

At the time of the insured's death, the death benefit, improved by the excess contributions to the life insurance policy, is paid to the named beneficiaries, without tax consequences.

When the estate has a need, the insurance sometimes can be used as an investment, and even as a separate asset class. Its implied after-tax rate of return will depend on several factors, such as the premiums payable, the underlying investments, the management fees, the possibilities of use of the capital dividend accounts, etc.

In many situations, the after-tax rate of return will turn out to be excellent, even beyond the client’s life expectancy. It must then be considered whether it would be possible to obtain an equivalent pre-tax gross rate of return excluding the policy. Because the date of death is unknown, it is important to establish a strategy in case of premature death. Finally, life insurance can very well be inserted in the prudent portion of a diversified portfolio.

Taxation can consume a substantial portion of a portfolio's returns. This is why it is important to optimize the investment of certain asset classes under the different tax systems. This optimization will account for the client’s situation: the client's investor profile, the after-tax amounts available in the different accounts, the type of tax system, etc. For example, we will try whenever possible to put growth securities in a tax-free savings account or to avoid foreign income in a holding. Ultimately, the goal is to obtain a higher overall value for the portfolio without increasing the risk.

Insured retirement is a financial strategy that provides the benefits of a life insurance policy while offering the possibility of flexible retirement income.

Amounts are invested in a permanent life insurance policy for the active life of the insured. The income generated on the investments made in the policy and the surrender value are accumulated tax-free for the life of the insured.

Upon retirement, the insurance policy is assigned as security to a financial institution. The financial institution issues loans to the policyholder depending on the needs. The amounts loaned by the financial institution are non-taxable and serve as retirement income.

Depending on the conditions, the amount of the loan authorized by the financial institution is limited to a predetermined proportion of the surrender value of the insurance policy or of the premiums. Generally, the borrower does not have to repay the loans or the interest during his or her lifetime.

At death, the financial institution receives the portion of the death benefit that corresponds to the balance of the loans, plus the unpaid interest. The loan is repaid according to the terms and conditions of the agreement made between the policyholder and the financial institution. The balance of the death benefit then is paid to the named beneficiaries.

Some clients benefit from an enviable situation and wish they can provide a solid financial basis for their child or grandchild. The intergenerational wealth transfer strategy allows them to do this tax-efficiently:

  • A parent or grandparent takes out participating life insurance (such as iA PAR) or any other permanent life insurance product that includes a surrender value, for their child or grandchild
  • To release the policy from payment, the subscriber pays the premiums in 10 or 20 years. The subscriber may also make excess premium payments, thus creating a tax-free surrender value over the years
  • When the child reaches adulthood, the parent or one of the grandparents may assign ownership of the full paid-up life insurance policy to that person. Under subsection 148(8) of the Income Tax Act (ITA), this transfer has no tax consequences
  • The child or grandchild may benefit from the surrender value accumulated in the life insurance policy to assume certain expenses or benefit from growth later

The primary objective of shared ownership critical illness insurance is to allow the shareholder of a private company to benefit from coverage in case of critical illness covered by the policy. But when a company and its shareholder take out a critical illness policy on the shareholder, this strategy also offers other advantages:

  • The policy provides for payment of a benefit to the company in case the shareholder suffers from one of the illnesses or medical conditions covered.
  • The contract is taken out with a premium repayment option if the critical illness benefit has not been paid upon termination or expiration of the insurance policy (for example, after 15 years).
  • This option is payable personally by the shareholder through a higher salary or dividend, or by the company, and consequently becomes a taxable benefit. However, after a certain number of years, it provides for repayment of all premiums, namely those of the company and those of the shareholder, all tax-free and net of management fees. This amount is paid personally to the shareholder, tax-free.
  • In addition to allowing the money to be released by the company, this option allows an interesting off-balance sheet return in several situations, especially if the shareholder’s marginal rate is high. Similarly, this could allow reduction of the amounts of liabilities and the risk of losing the advantageous corporate rate.

Life insurance is an excellent way to finance the shareholder agreement in case of death or invalidity of a shareholder of a business corporation (company). The company takes out policies on behalf of each shareholder and is their beneficiary. At the time of a loss, the amounts paid to the company serve to redeem the shares of the deceased or disabled shareholder.

If the shares are held by more than one person when a business corporation is constituted, it is recommended – in certain mandatory cases – that the shareholders sign an agreement. This shareholder agreement is a contract that establishes the general by-laws, the operation and structure of the company, the nature of the relations among the shareholders and their commitment to the company.

The agreement provides, in particular, for the actions to be taken in different situations to avoid cases of disagreement among the shareholders (for example: a shareholder wants to sell his or her share of the business, declares personal bankruptcy, dies, etc.).