A Case Study

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I have been working with Joan and her husband Don for several years. They are two medical specialists working in 2 different hospitals in Kingston Ontario and they have 3 very active, sports minded children, two of whom have now finished university. Joan called me to tell me that she and Don had just completed the process of incorporating their practices and wanted some help in figuring out what affect this would have on their overall financial and estate planning. They each had good insurance programs covering Life, Disability and Critical Illness. I had introduced them to the Manulife Private Wealth Management advisor who manages their investments and we meet regularly to make certain that all of their objectives are working in unison. I had also introduced Joan and Don to the accountant that they have been dealing with for the past 5 years, who in turn referred them to a corporate lawyer who helped set up their new professional corporation. While this was being completed, I questioned Don and Joan about their Wills and Powers of Attorney as my records showed they didn't have them completed at the time of our last review and when they said they still hadn't gotten around to do it, I recommended that they use the same lawyer to complete that task, which they have since done.

 

After speaking with Joan, the first thing I did was request an evaluation of their universal life insurance policies to see what fair market value could be established so that the corporation could buy them. It turned out that Joan’s life insurance policy was valued at $185,000 and Don’s was $275,000; funds they could receive tax free when their corporation bought the policies from them. Fortunately, we completed the actuarial calculations and transferred these policies prior to the recent changes made in the last federal budget, so they were not affected by them.

 

While that was being worked on I began looking at the possibility of moving their disability insurance policies into the corporation, since the CRA has recently clarified that these policies could form a special type of Wage Loss Replacement Program (WLRP) whereby the premiums would be tax deductible to the corporation. When I finished the calculations, I was able to show that by moving their disability policies into the corporation I could reduce their net after tax premiums by almost 27% while at the same time maintaining the same net after tax income if they were to become disabled. With this information, I prepared a report for their accountant who, after studying it, said she hadn't known that this could be done and liked the idea very much. She agreed that this was the proper planning for our mutual clients follow.

 

With this information compiled and approved by the accountant, I met with the Investment Counsellor as well as the Tax and Estate Planning advisor to look at their investments and see what could be done with the retained earnings that had grown substantially over the past 18 months inside the corporation. We were now ready to meet with our clients.

 

Active income (i.e. earned income) in the corporation is taxed in Ontario at the small corporation tax rate of 15%, but inactive income from investments are taxed at much higher rate. With this in mind the following recommendations were presented to the clients when we met with them:

 

1) Sell the life Insurance policies to the corporation and receive a promissory note from the corporation for $460,000.

2) Move the Disability Insurance policies into a wage Loss Replacement Program in the corporation to gain the tax deductibility on the premiums.

3) Use some of the excess cash in the corporation to “maximum fund” the life insurance policies as this extra money going into the policies will grow tax sheltered and therefore not attract the current high rate of tax as is presently being experienced on the inactive corporate investment income.

4) Use corporate class funds for any other investments being left in the corporation to minimize the taxes as well.

 

The client agreed with the recommendations we made and we moved forward with all of the planning. The underwriting of the additional Disability Income Insurance and the additional Life Insurance that Joan and Don wanted was approved and the investments in the corporation are now being set up.