Insured Annuity: Can be of two types- Corporate Insured Annuity and Personal Insured Annuity Who is it for?
1. Shareholder of a private Canadian corporation.
2. Affluent, with capital that exceeds lifestyle requirements.
3. Age 65 and older, In good health.
4. Company’s investment portfolio includes conservative investments, such as GICs, bonds and bank accounts.
5. Interest income from investments is currently used to enhance shareholder’s lifestyle.
6. Shareholder’s priority is to leave a legacy at death.
7. Shareholder is not adverse to long-term planning strategies.
How does it work?
The investments of Business owner are liquidated by the company and are used to purchase a non-prescribed life annuity contract and an exempt life insurance policy. The shareholder is the life insured and the corporation is named as the beneficiary. The annuity payments are used to pay the life insurance premium and the tax on the annuity. The amount remaining is used to enhance the shareholder’s lifestyle. When the shareholder dies, the life insurance proceeds pay for a gift to his or her heirs or favourite charity.
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).