A NexGen Tax Primer: Life Insurance & Tax Efficient Wealth Planning

With Dale Durand, VP, Estate & Tax Planning

Disclaimer

Invest better: Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual fund securities are not covered by the Canadian Deposit Insurance Corporation or by any other government deposit insurance. Mutual funds are not guaranteed, their value changes frequently and past performance may not be repeated.

The payment of distributions for Dividend Tax Credit Class and the Return of Capital Class should not be confused with a mutual fund’s performance, rate of return or yield. If distributions paid by a mutual fund are greater than the performance of the fund, then your investment will decline. Distributions paid as a result of capital gains realized by a mutual fund and income and dividends earned by a fund are taxable in your hands in the year they are paid. For Return of Capital Class, your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, then you will have to pay capital gains tax on the amount below zero.

The rates of return, annual distribution rates and income components comprising a given distribution contained in the tax cases and reflected in certain graphs and tables are for illustrative purposes only utilizing various assumptions to demonstrate the importance of compound growth and the effects of taxation on a given investment. They are not intended to reflect, nor should they be interpreted, as an indication of future values or returns on investment in respect of any NexGen Fund.

Tax liabilities on investment income and capital gains earned by a mutual fund cannot be mitigated nor can they be fully managed in all circumstances. The risk increases the greater the investment return earned by the mutual fund. As a result, a mutual fund may be required to make taxable distributions to investors in a NexGen Tax Class for which a distribution or type of distribution is not optimal or in accordance with their tax preference. The tax efficiency of the Return of Capital Class and the Compound Growth Class is enhanced the greater the demand for the Capital Gains Class, Dividend Tax Credit Class and the Registered Fund Class.

The contents and information contained herein are for informational and educational purposes only and should not be construed as legal, tax or investment advice. Information contained here is believed to be accurate and reliable at the date of printing, however, NexGen cannot guarantee that such information is complete or accurate or that it will remain current. The information is subject to change without notice and NexGen cannot be held liable for the use of or reliance upon the information contained here.

Performance + Tax Alpha

As an Investor . . . – You can select investments that suit your needs

However . . . • You cannot control performance but;• You CAN control the impact of taxes

What if you could add 2 or 3 percent to annual after-tax rate of returns?

Improve Your Tax Alpha!

“Tax alpha is the additional after-tax return

you can add to your portfolio by taking steps to

minimize the tax burden”

~ Tim Cestnick, Finance Writer & Tax Authority

Funding Insurance Tax Efficiently

3 Key Benefits:

1.Tax Deferral improves long term wealth creation

2.Tax Efficient Income reduces annual tax bills

3.Life Insurance addresses final tax burden

The Tax Deferral Opportunity

Tax Deferral creates planning opportunities for:– Investors– Their trusted advisors

How?Long term tax deferral can: – Increase account & estate size– Offer better intergenerational planning

Example: Defer Tax to Increase Account Size

NexGen Tax InefficientCorporation PortfolioInvested Capital 2,000,000$ 2,000,000$ Total Growth 4,772,710$ 3,501,788$

Cumulative Annual Tax Burden No Annual Tax Drag 1,616,776-$ Fair Market Value after 25 years 6,772,710$ 3,885,013$

Personal Net Tax Payable on Liquidation 1,742,897-$ 635,602-$ Net to Estate 5,029,813$ 3,249,411$

NexGen Benefit of Tax Deferral 1,780,402$

AssumptionsInitial Investment 2,000,000$ Annual Rate of Return for Both Portfolio 5%Timeframe 25Tax Rates for British Columbia

Tax Deferral Works

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

Ineffi cient Portfol io NexGen Portfol io

The Income & Insurance Opportunity

Purpose– To plan for the tax burden created at death– To create a larger estate

What Life Insurance works best?– Advisors and licensed insurance brokers know what is best for

the client

Important Action:– Funding the insurance premiums tax efficiently

• To minimize annual tax drag• Leave more in the portfolio to compound

Example: Funding Insurance Tax Efficiently

NexGen Tax InefficientCorporation PortfolioInvested Capital 2,000,000$ 2,000,000$ Total Growth less Annual Tax Burden 4,090,897$ 2,943,482$

Cumulative Annual Tax Burden No Annual Tax Drag 1,359,005-$ Insurance Premiums Paid by the Corp 750,000-$ 750,000-$ Fair Market Value after 25 years 5,340,897$ 2,834,477$

PersonalNet Tax Payable on Liquidation 1,342,694-$ 393,845-$ Insurance Payout 1,500,000$ 1,500,000$ Net to Estate 5,498,203$ 3,940,632$

NexGen Benefit 1,557,571$

AssumptionsInitial Investment 2,000,000$ Annual Rate of Return for Both Portfolios 5%Province British ColumbiaLife Insurance Policy 1,500,000$ Annual Premium 30,000$

Summary: Funding Insurance Tax Efficiently

NexGen Tax Inefficient NexGen Tax InefficientPortfolio Portfolio Portfolio Portfolio

Net to Estate 5,029,813$ 3,249,411$ 5,498,203$ 3,940,631$

NexGen Benefit 1,780,402$ 1,557,572$

468,390$ 691,220$ Benefit of Incorporating Life Insurance

Insurance IncorporatedNo Life Insurance

Tax Deferral, Tax Efficient Income & Insurance Benefit = Greater Estate Value

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

$5,000,000

Tax Ineffi cient Portfol io NexGen Portfol io Tax Ineffi cient Portfol io wi th Li fe Insurance NexGen Portfol io wi th Li fe Ins urance

Notes on Funding Insurance Premiums

• Return of Capital income is preferred for funding insurance premiums

• For Corporations– Have the CCPC own the life policy and fund the premiums via ROC– At death of insured, any unrealized growth will be taxed in the final tax

return of the insured– At death, the policy is paid into the CCPC and at year end may be paid to

the estate of the deceased free of all corporate and personal taxes • Via the Capital Dividend Account• May be subject to slight adjustments for ACB

– Ensure the proper corporate reorganization to avoid double taxation• Consult your accounting professional

14

How Does NexGen Add Value?

NexGen’s Innovation

Markets up or down, Tax Planning adds value!– Match your NexGen Fund with the tax solution that matches your

client’s needs

The Big Picture: Funding Insurance Tax Efficiently

3 Key Benefits:

1.Tax Deferral improves long term wealth creation

2.Tax Efficient Income reduces annual tax bills

3.Life Insurance addresses final tax burden

NexGen offers:• Unique tools and strategies to minimize tax• Strong, Diverse Investment Management

Take Action

1. Identify current and prospective clients seeking:• Long term tax deferral • Tax efficient income• Better intergenerational planning

2. Share the wealth of knowledge• Webinar replay• NexGen Fund and tax materials

3. Offer customized portfolio and tax analysis• We can help you with your best prospects

• Individuals, corporate clients, professionals

For more information

Access CLIENT FRIENDLY materials including:– A replay of this presentation (within 48 hours) – Case examples– Educational information– Client-friendly documents on tax efficient

investing and NexGen

www.nexgenfinancial.ca/insurance

Thank You

Questions?

FYI: Personal Tax Rates