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Plan now to attend CALU’s

18th Annual Meeting

May 3 - 6, 2009

Westin Hotel, Ottawa

INFOexchange2008, Vol. 4

INFOexchange is published byThe Conference forAdvanced Life UnderwritingAdministrative office:#141 - 92 Caplan AveBarrie, ON L4N 0Z7www.calu.com

Editorial BoardMary-Ellen GaskinLea KoivFlorence MarinoHélène MarquisKevin Wark

StaffEditor:

Ted BallantyneExecutive Director:

Paul McKayDesign & Administration:

Val Osborne

IN THIS ISSUETFSAs: PlanningOpportunities &Pitfalls /1

CALU News / 6

Creditor Insurance andthe Capital DividendAccount / 7

Letter from the Ministerof Finance to FinancialInstitutions RegardingRegistered RetirementIncome Funds / 9

Practice Management:Continuum of Care / 12

TFSAs: PlanningOpportunities & Pitfalls

By Ted Ballantyne, BBA, LLM, CMA, TEPDirector, Advanced Tax Policy, CALU

The 2008 budget proposals regarding thenew Tax-Free Savings Account (TFSA)were outlined in the February 2008CALU Special Budget Report. TheDepartment of Finance releasedsubsequent proposals in July 2008. Thisarticle reviews some of the financialplanning opportunities and pitfalls thatresult from the implementation of thisplanning vehicle, which will come intoeffect on Jan. 1, 2009.

To summarize the main TFSA concepts:

• Canadian residents age 18 and overwill start to accumulate contributionroom in 2009, which may be carriedforward indefinitely.

• Maximum annual contribution is$5,000, which will be indexed inincrements to the nearest $500, fromtime to time.

• TFSA contribution room will bere-established on a dollar-for-dollarbasis if funds are withdrawn from theTFSA.

• There is no maximum age requirementto commence withdrawals.

• Attribution rules are generally notapplicable.

• Investments allowed are generally thesame as for RRSPs/RRIFs, with theexception that life insurance policies(other than annuities, includingsegregated fund contracts) cannot beregistered as a TFSA.

• Interest on funds borrowed forcontributions is not tax deductible.

• A TFSA may be assigned as collateralfor a loan.

• Transfers are allowed between formerspouse’s TFSAs on marriage/relationship breakdown.

• At the death of a TFSA plan holderwhere there is no “successor holder,”income earned in the deceased’sTFSA will become taxable at the endof the year following the year of death.

• No spousal TFSAs are allowed (buteach spouse may open a TFSA usingfunds gifted from the other spouse).

• If a Canadian resident becomes non-resident, the TFSA maintains its tax-free status for Canadian tax purposes,but further contributions are subject toa penalty tax.

• TFSAs are not creditor protected,with the exception of those issued by

2 © Conference for Advanced Life Underwriting, December 2008

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licensed annuity issuers withappropriate beneficiarydesignations.

In addition, there are a number ofadministrative issues, which issuersand the Canada Revenue Agencyare in the process of resolving.These will not be reviewed in thisarticle.

Planning OpportunitiesThe introduction of TFSAs asanother tax-preference investmentvehicle opens a number of planningopportunities. In the 2008 budgetspeech the Minister of Finance gavethe impression, through theexamples used, that TFSAs may beused for short-term savings goals,such as a vacation or purchasing acar. While that is true, there are anumber of other long-term planningopportunities, which lend them-selves to this concept. These arediscussed below.

Maxed out RRSP contributionsIn 2009 the maximum RRSPcontribution is limited to 18% ofearned income or $21,000. In 2010this increases to $22,000, and in2011 and thereafter the maximumcontribution is scheduled to beindexed. The TFSA provides aplanning opportunity for those whoare already contributing themaximum to an RRSP, or acombination of RRSP and RPP. Ata 46% combined federal andprovincial tax rate, a $5,000 after-tax contribution to a TFSA equatesto about a $9,260 pre-taxcontribution to an RRSP. As aresult, the combination of the TFSAand maximum RRSP/RPPcontributions means that tax-sheltered savings contributions arethe equivalent of a gross RRSPcontribution of over $30,000.

The contributions are equivalentsince when a withdrawal from theRRSP is made, the amount istaxable, and assuming no change inmarginal tax rate, the annuitantwould have $5,000 after tax; whichis the same as the $5,000 after-taxcontribution to a TFSA.

While the TFSA contribution is nottax deductible, the income earnedin, and withdrawals from, the plan isnon-taxable; further, it is not takeninto account for determining incomefor social benefit repaymentpurposes.

Income splittingThe TFSA legislation does notspecifically allow spousal TFSAs,but it does not prohibit each spouse(including common-law partner)from opening their own TFSA. Inother words, all Canadian residentsage 18 or older start accumulatingTFSA contribution room, regard-less of marital status or income.

As a result, it is possible for eachspouse to open a TFSA and havethe higher income individual gift$5,000 to the which the spouse mayuse to make contributions to theirspouse’s TFSA, in addition tocontributing to his or her ownTFSA.

The only caution regarding potentialattribution to the contributingspouse is if the spouse for whomthe contributing spouse is makingTFSA contributions starts to makesystematic withdrawals from theirTFSA. Consider the followingexample:

• In year 1, spouse A makes a$5,000 contribution to the TFSAof spouse B.

• In year 2, spouse B withdrawsthe $5,000. This re-establishedcontribution room so at the endof year 2 spouse B now has$10,000 in contribution room.

• In year 3, spouse A nowcontributes $15,000 to spouseB’s plan, ($10,000 + $5,000 foryear 3).

• In year 4, spouse B withdrawsthe $15,000.

• The pattern continues to repeatand the amount grows over timeand in effect spouse B candouble up the amount investedbetween the TFSA and non-registered investments.

CRA may attempt to apply GAARor the attribution rules to the interestearned in spouse B’s taxableinvestment account to spouse A.Whether they would be successfulis problematic and will not becomean issue for a number of years. But,it is something advisors should beaware of.

Low-income individualsWhile the author appreciates CALUmembers generally do not haveclients at the lower end of theincome spectrum, it is important tonote that TFSAs provide a uniqueplanning opportunity for lower-income individuals – say thoseearning less than $30,000 withoutthe prospect of higher earnings laterin their careers. According toStatistics Canada data for the 2004tax year, over 1.6 million Canadiansearning less than $30,000 madecontributions to an RRSP (includ-ing the pension adjustment). Theaverage contribution rangedbetween $1,313 for those withincome of under $10,000 to $2,370for those earning between $20,000and $29,900.

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○© Conference for Advanced Life Underwriting, December 2008 3

The RRSP income when receivedmay well impact the ability of theselower-income Canadians to accessgovernment social benefits, such asthe Old Age Security (OAS), ormore probably, the GuaranteedIncome Supplement (GIS). In fact,it is probable that a combination ofCPP, OAS and GIS benefits willreplace the majority of theseindividuals’ pre-retirement income.The use of a TFSA in place of anRRSP for lower-income individualswould ensure that access togovernment social benefits was notimpaired and would allow theseindividuals to enhance theirretirement lifestyle, because theTFSA income is not taken intoaccount in determining eligibility forgovernment benefits.

The issue, of course, is where theseindividuals are going to obtain therequisite financial planning advice toproperly maximize their post-retirement income?

Transfer ofexcess pension amountsWhere an individual leavesemployment and is entitled toreceive the commuted value fromhis or her defined benefit pensionplan, it is likely that there will be anexcess amount above what isallowed to be transferred to alocked-in RRSP or LIRA. The

INFOexchange is intendedas a forum to allow CALUmembers to exchangeideas and information. Doyou have items that will beof interest to other CALUmembers? You are invitedto submit such items toVal Osborne, CALU’sAdministrator, by e-mail atmembership@calu.com.

excess can be tax-sheltered to theextent that the person has RRSProom. If the individual has sufficientcontribution room in their TFSA (orin a spouse’s TFSA) the excesscould be transferred into the TFSA.While the excess amount receivedfrom the pension plan is taxable tothe extent it is not transferred to theRRSP, the income earned in theTFSA is tax free. Further, both theregistered account and the TFSAreceiving the excess transfer valuecould use the same investmentstrategy as compared to transferringthe excess amount into a taxableinvestment account where thediffering tax treatments of thevarious income types (dividends,capital gains/losses, interest) wouldneed to be taken into account.

Provided sufficient notice isavailable and the amounts to bereceived from the pension areknown in advance, it would bepossible to withdraw funds fromthe TFSA in the previous year inorder to re-establish contributionroom for the year in which thepension funds are to be received.

While withdrawing funds from aTFSA to create contribution roommeans that those withdrawn fundswill have to be held in a taxableaccount, the advantage is that theinvestment strategy for the excessfunds received from the pensionplan could be coordinated with theregistered account. Whether this isof benefit in a particular situationwould need to be determined on acase-by-case basis.

Post-retirement incomeIn undertaking post-retirementincome planning, the obviousobjective is maximizing familyincome while minimizing adversetax consequences and the claw

back of income tested governmentbenefits, such as OAS. Animportant planning consideration isthat income from a TFSA – whetheran income stream, such as monthlywithdrawals, or lump-sum with-drawals – will not be taken intoconsideration in determiningeligibility for income-tested benefits.

In 2008, the income threshold tostart repaying OAS benefits was$64,718 for an individual. Thisamount is indexed. Throughappropriate income tax planning –such as the use of pension splitting,spousal RRSPs, and TFSAs – itwould be possible for a couple toreceive over $129,000 in incomebefore being subject to the clawback of OAS benefits.

This means that post-retirementincome planning needs tocommence during the accumulationstage to make appropriate use ofthe various planning opportunities,including inter-spousal loans.

Tax planningFrom a tax-planning perspective,TFSAs may be used to hold theleast tax-effective investments. Forexample, dividends from foreignstocks do not qualify for thedividend tax credit and could beheld in a TFSA, along with stripbonds, where accrual reporting isrequired by the investor, but there isno income reporting on the part ofthe issuer for the increase in valueand no cash received. Similarly,interest income is less tax effectivethan either dividends from Canadiancorporations or investments thatgive rise to capital gains/losses.

The appropriate mix of tax-effectiveinvestment strategies will bedependent on each client’s situa-tion, but the appropriate use of a

4 © Conference for Advanced Life Underwriting, December 2008

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TFSA to shelter the least tax-effective income from future taxa-tion should be included in any plan-ning discussions.

TFSA versus Principal ResidenceMany individuals use their principalresidence as a potential source offuture retirement income, especiallyif they are in a large family homeand intend to downsize later in life.A TFSA may offer an alternative,especially if the ownership horizonfor the home is not long. This mayapply, in particular, to executiveswhose employment requires them tomove regularly, or to those whocome to Canada from othercountries for limited periods oftime.

As neither mortgage interestpayments nor TFSA contributionsare tax deducible, depending on thelength of time the home is intendedto be owned, there is a potentialtradeoff between increased homesize (given the associated costs,such as real estate commissions andlegal fees) and putting the amountof the mortgage payment into aTFSA.

For instance, if the cost of upsizinga home is $70,000, the incrementalmonthly payment, based on a25-year amortization, would beabout $427 per month, assuming a5.5% interest rate. If that amountwas instead contributed to a TFSAeach year for the 25-year period, at3% interest, a total accumulation ofover $182,000 could be achieved.While this is a simplistic illustration,it indicates the type of evaluationthat could be undertaken, althoughobviously the circumstances in eachcase will have to be taken intoconsideration.

TFSA versus HBP or LLPThe TFSA offers a viable option tothe use of the Home-Buyers Plan(HBP) or Lifelong Learning Plan(LLP) options under an RRSP.While contributions to the RRSPare tax deductible, if a withdrawal ismade under the HBP or LLP, thewithdrawal has to be repaid over aspecified time period or be takeninto income over the same period.In the case of the HBP, theserepayments are in addition tomortgage payments, providing anextra financial burden. (From apractical perspective, we under-stand that many taxpayers fail tomake the appropriate repayments,and thus have an income inclusionfor the required repayment that hasnot been made.)

Although there is no immediate taxbenefit to a TFSA contribution, if itis withdrawn to be used for a homepurchase or for educationalreasons, TFSA contribution roomis re-established and no repaymentsare required. In addition, if thetaxpayer does not have sufficientfunds in a year to make both anRRSP and TFSA contribution, itmay be better for that person tomake a TFSA contribution andcarryforward the unused RRSPcontribution room.

As a generalization, peoplesaving for their first home are at alower tax rate than later in life.Consequently, the tax benefit ofRRSP contributions early in life isless tax advantageous than if madelater in life. Thus the individualmay get a greater tax benefit inaccumulating RRSP contributionroom and making a catch-upcontribution when they are at ahigher marginal tax bracket.

The TFSA can also be usedwhen an individual is in a low taxbracket to accumulate funds. If ahome is not purchased or theydo not pursue additionaleducation, the funds may bewithdrawn and used as a catchup RRSP contribution, when theindividual is in a higher taxbracket and will get a better taxeffect on the contribution.

TFSA versus RESPWhile the maximum contributionto a Registered EducationSavings Plan (RESP) is now$50,000, the maximum annualCanada Educations SavingsGrant (CESG) is limited to 20%of contributions up to $2,500(total annual grant of $500).Where the RESP beneficiarydoes not go on to a qualifiededucational program, up to$50,000 may be transferred tothe contributor or spouse’sRRSP, but only if sufficientunused RRSP contribution roomis available. Otherwise anyaccumulated income and grantsthat are withdrawn from theRESP are subject to a penaltytax of 20% federally (12% inQuebec) in addition to regularincome tax payable.

The TFSA provides additionalplanning opportunities forparents and grandparents. Whilea TFSA cannot be establishedfor a child under the age of 18, itmay be more appropriate to limitcontributions to the RESP to$2,500 per beneficiary, tomaximize the CESG, andcontribute additional funds to thecontributor’s TFSA with theintention these funds be used tohelp the child with post-secondary education. Once thechild is 18 or older, the child

© Conference for Advanced Life Underwriting, December 2008 5

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starts to accumulate TFSAcontribution room. The RESPholder(s) could then withdrawfunds from his or her TFSA andgift these amounts to the childwhich the child could in turncontribute to their TFSA. Thesefunds would then be available tosupplement education costs and atthe same time re-establish TFSAcontribution room for the planholder.

As the TFSA withdrawals are nottaxable, this strategy would ensurethat the child can maximize anytax benefits available, such aseducation, GST and property taxcredits, if available.

Employer-sponsored TFSAsAn employer may also establish aTFSA on a group or grouped basisfor employees, similar to a groupRRSP. (If the employer made thecontribution, the contribution wouldbe a taxable benefit, as wouldemployer-paid fees.) This wouldensure that where employees havelittle RRSP contribution roomanother tax-effective savings vehicleis available to them. While spousalplans cannot be established under agroup plan (because no spousalTFSAs are contemplated), thiswould allow employees to accumu-late further tax-sheltered funds asopposed to taxable savings avail-able through payroll deduction,such as Canada Savings Bonds.The investments allowed under anemployer-sponsored TFSA couldbe the same as for the group RRSPor defined contribution RPP,thereby allowing the employee acoordinated investment strategy.

The CRA has recently confirmedthat a non-employee spouse canparticipate in a group TFSA,however the non-employee spouse

would have to make thecontribution personally; theemployer or employee cannot makethe contribution on behalf of thenon-employee spouse.

Intergenerational wealth transferA major advantage of the TFSAconcept is that it is automaticallyavailable to all Canadian residentswho are 18 years of age and older.Unused contribution room can becarried forward indefinitely. Overthe next decade or so there will be asignificant wealth transfer to thebaby boomers from their parents.Even if TFSA contribution cannotbe used today, it may be used in thefuture to tax shelter the income onan inheritance or a part thereof.This is a fact that should not beoverlooked in financial planningwith clients, especially those whomay expect to receive a largeinheritance.

Planning PitfallsAs with all financial products,where there are opportunities, thereare also pitfalls. Two in particularcome to mind.

Foreign citizensresident in CanadaA TFSA is available to all residentsof Canada for Canadian taxpurposes. Therefore Canadianresident foreign nationals may utilizethem. However, foreign nationalsmay also be subject to tax in theircountry of citizenship (such is thecase for U.S. citizens). It is there-fore important for foreign nationalsto determine if they may be subjectto tax in another jurisdiction onincome accruing in the TFSA, eventhough there is no tax reporting bythe Canadian issuer.

It is questionable whether the TFSAis recognized or contemplated

Book your accommodation online nowat the host hotel – Westin Ottawa – at

http://www.starwoodmeeting.com/StarGroupsWeb/res?id=0808274780&key=3E864

CALU has also made arrangements for a block of rooms at theFairmont Chateau Laurier. You can book a room online there online at

https://resweb.passkey.com/go/calu09

Registration materials will be sent in early January toall CALU members in good standing as of December 31, 2008.

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○ 6 © Conference for Advanced Life Underwriting, December 2008

under the various bilateral taxtreaties currently in force betweenCanada and other countries, andthus there is the question as to thetaxation of any income or with-drawals from the TFSA by theforeign nationals if they return totheir home country.

This is an issue where it would beimportant for a foreign national toseek appropriate tax advice if he orshe is considering opening a TFSAwhile resident in Canada.

Canadian emigrantsTFSA plan holders who departCanada can maintain their plan andthere is no tax reporting on eitheremigration or on surrender of theTFSA. But, similar to the issue withforeign citizens opening a TFSA

while resident in Canada, there isthe issue as to how the incomeearned in the TFSA may be taxed inthe foreign jurisdiction. Again,appropriate tax advice should besought by individuals who aregiving up Canadian residency, eitherfor employment elsewhere or, morelikely, for retirement.

If contributions are made while theindividual is a non-resident, theywill be subject to a special tax of1% per month on the excesscontribution. This tax can beavoided if the plan holder with-draws this contribution and makesthe appropriate designation.

The penalty tax provision outlinedin the preceding paragraph will alsoapply to foreign nationals whoopened a TFSA while resident in

CALU NewsWith this issue, we bid a fond farewell to Ted Ballantyne, at least in termsof his role as Editor of INFOexchange. As many of you know, Ted is in theprocess of a phased reduction to his involvement with CALU. As part ofthat process, Ted will, effective this issue, no longer be looking after thispublication, but will, thankfully, continue to contribute specific articles andcommentaries. That means Val Osborne and I will be working to completethis publication with interesting and informative articles, and definitelylooking for your help in that department.

On that note, I am mindful of the purpose of this particular 'communicationvehicle' and the rationale for its creation, all those years ago, when wewere first developing CALU programming and communications.INFOexchange was created to offer an opportunity for all members tocontribute articles and items of interest, in a format that did not require thetechnical dimension and rigour of, say, a CALU Report. Over the years, wehave done our fair share of working with Active Members to create articles,discuss story ideas, and then help 'put pen to paper' as we used to say,turning ideas and commentaries into article form. So, if you have an idea,please feel free to share that with us. Probably best to do so through Val atmembership@calu.com.

We will continue the practice of publishing four issues per year, witheditorial deadlines of February 1, May 1, August 1 and November 1. Wewould like to have a healthy mix of taxation and legislation updates, salesideas, product applications, public policy and political issues, as well asitems related to CALU as an organization.

This is definitely an area where your help, involvement and support,will be most welcomed and appreciated.

Paul McKay, CAE

Canada, and subsequently makecontributions to it after becoming anon-resident of Canada for taxpurposes.

ConclusionsTFSAs will provide anotherproduct to help financial advisorsmeet Canadians savings andinvestment needs on a tax-effectivebasis. While such plans may beuseful for short- to medium-termsavings goals, the better use ofthese plans is for long-terminvestment strategies to supplementretirement income with a view tomaximizing government socialbenefits. Given the fact that there isno arbitrary age to commenceincome from these plans, they canbe held to provide equity growthinto an individual’s later years,whereas an RRSP must beannuitized by the end of the year inwhich the individual turns age 71.From a tax-planning perspective,TFSAs allow an individual tomaximize the tax efficiency of anoverall investment portfolio byholding the least tax-efficientinvestments in the TFSA and moretax-efficient investments in a taxableportfolio.

While it will undoubtedly take timefor a market to develop it maybeworthwhile to familiarize clients orprospects with the concept and toreview integrated medium- to long-term investment strategies in orderto provide the most tax-effectiveretirement income possible.

The CRA has published detailedquestions and answers regardingTFSAs for issuers. This may befound at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/tfsa-celi/qstns-eng.html#partxiii for those whowish more detailed information ofspecific CRA positions.

© Conference for Advanced Life Underwriting, December 2008 7

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by Florence Marino, LLBManulife Financial

It has long been CRA’s administra-tive policy that a private corpora-

tion is not entitled to a credit to itscapital dividend account (CDA)when debt is repaid out of pro-ceeds from “creditor insurance.”That long-standing position wassuccessfully challenged in the caseof Canadian Movitel Inc. v. TheQueen (Docket # 2006-3071(IT)G,dated March 18, 2008. Under theterms of an unreported consentjudgment, the Crown agreed that notax should be payable by the tax-payer under Part III of the Act.

This case involved what iscommonly referred to as creditorinsurance. The taxpayer had anumber of business loans outstand-ing. The shareholders of thetaxpayer were insured under agroup insurance policy issued bySun Life, with Royal Bank as theplan sponsor and the beneficiary.The purpose of the insurance wasbusiness loan protection. In thiscase, one of the shareholders diedand the insurance death benefitof nearly $440,000 repaid thetaxpayer’s outstanding businessloans. Sun Life paid the Royal Bankdirectly as beneficiary under thepolicy.

The taxpayer added the netproceeds (i.e., insurance proceedsless premiums paid) of the lifeinsurance death benefit to its CDAand paid the surviving shareholder adividend of $426,000, electing this

taxpayer argued that the corporationhad constructively received theproceeds and, therefore, should beentitled to a CDA credit.

The Crown conceded the point,allowing the appeal of theassessment of tax liability underPart III, thus permitting the CDAcredit. While a consent judgmenthas no precedential value, it canhave great practical significanceparticularly if taxpayers advance thesame arguments in similarcircumstances. It would be veryhard for the CRA to take a differentposition in the future. But this isexactly what has happened.

At the annual conference ofL’Association de planificationfiscale et financiere (APFF) held onOct. 10, 2008, the CRA was askedto comment on the impact of theMovitel case on its existingpractice. The CRA stated that itscurrent position remains as stated inIT-430R3. In order for a CDAcredit to arise in respect of businessloan insurance coverage, the debtorcompany must be the beneficiary orpolicyholder under the policy whichhas been collaterally assigned to thelender.

The wording of subparagraph (d)(ii)of the definition of CDA insubsection 89(1) is as follows: “allamounts each of which is theproceeds of a life insurance policyof which the corporation was not abeneficiary on or before June 28,1982 received by the corporation inthe period after May 23, 1985 in

Creditor Insuranceand the Capital Dividend Account

dividend to be a capital dividend.The taxpayer was reassessed fortax payable of nearly $320,000under Part III for an excessive CDAelection.

The CRA’s traditional position hasbeen that a CDA credit is availablein the case of collateral insurance(where the debtor was the owner orbeneficiary of the policy and thecreditor was a collateral assignee).However, creditor insurance wouldnot give rise to a credit to the CDAof the debtor corporation becausethe creditor, not the debtor, was theowner and beneficiary of the policy.This position is currently expressedin paragraph 6 of InterpretationBulletin IT-430R3 “Life InsuranceProceeds Received by a PrivateCorporation or Partnership as aConsequence of Death” datedJan. 7, 2003.

In this case, the taxpayer appears tohave successfully argued that it wasentitled to an increase in its CDAfor life insurance proceeds paiddirectly to a creditor to repay thetaxpayer’s business loans under aninsurance policy owned by thecreditor and under which thecreditor was the beneficiary. Thetaxpayer argued that the definitionof the term “capital dividendaccount” does not require thedebtor corporation to be abeneficiary of the policy. Rather, itargued the only requirement is thatthe corporation receive theproceeds and that the receipt couldinclude constructive receipt. Sincethe insurance proceeds were usedto extinguish a corporate debt, the

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○ 8 © Conference for Advanced Life Underwriting, December 2008

consequence of the death of anyperson.”

The CRA position is that a CDAcredit is possible in respect of a lifeinsurance policy that has beencollaterally assigned to a lenderunder which a corporation is namedas beneficiary or is the policyholder.The CRA has gone back and forthon this issue but eventually arrivedat the current position in the mostcurrent version of IT-430R3 atparagraph 6 which states: “This isso because, in such cases, theproceeds of the life insurancepolicy would be constructivelyreceived by the debtor in itscapacity as beneficiary or policy-holder, even though paid directly tothe creditor in accordance with theassignment or hypothec.”

The CRA’s response at the APFFconference went into a lot of thedetail behind the position thatenables a CDA credit in respect of alife insurance policy which has beencollaterally assigned or subject to ahypothec in Quebec and not inrespect of creditor insurance. Anunofficial translation of the CRA’sanalysis is as follows:

In fact, such a situation where alife insurance policy is pledgedas security by a debtor – regard-less of whether it is under amovable hypothec (Quebec) or acollateral assignment (commonlaw provinces) – implies twodistinct legal relationships: 1) acreditor/debtor relationshipbetween the debtor/beneficiary orpolicyholder and the insurer; and2) a creditor/debtor relationshipbetween the creditor requestingthe security and the debtor/beneficiary or policyholder. In acase such as this, the insurerremains liable to the debtor/

under which the creditor is ownerand beneficiary of the policy andstated that the settlement arrived atin the Movitel case was case specific.

In addition to the eligibility for acredit to the debtor corporation’sCDA, advisors recommendingcollateral insurance for businessloan protection as compared tocreditor insurance will often cite thefollowing benefits:

• eligibility for the collateralinsurance deduction;

• the amount of individualinsurance policy purchased forcollateral insurance purposeswould not fluctuate in relation tothe loan balance, allowing for anyexcess insurance proceeds to bepaid to the debtor corporation;

• should the debt be repaid,individual insurance would notdisappear and could be used forother purposes – key personprotection, business successionplanning etc.;

• the individual policy can beassigned to another lendinginstitution if the business loan isswitched to a different lender.

The Movitel case has cast doubt onwhether or not collateral insurancecould be distinguished fromcreditor insurance in relation to theability to generate a credit to thedebtor corporation’s CDA.Notwithstanding the CRA’sposition, taxpayers may still seek touse the arguments the taxpayermade in the Movitel case andperhaps get to the Tax Court toresolve the issue. However, onething is clear – the CRA does see adistinction between collateralinsurance and creditor insurance onthis issue. This may be enough totip the balance in favour of

beneficiary or policyholder withregard to its obligations under thepolicy. The creditor’s rights withregard to the insurer are limitedto receiving the policy proceeds.The creditor therefore receivesthe insurance policy proceeds inits capacity as the debtor’srepresentative. In other words, insuch a situation, the creditorreceives the insurance policyproceeds in lieu and in place ofthe debtor because, under theterms of the security and therules applicable thereto, thecreditor exercises the right tocollect the policy proceeds fromthe insurer. This exercise iscarried out nonetheless under thecollateral rights that the creditorholds with respect to the rightsof the debtor/beneficiary or thepolicyholder. In situations suchas these, the creditor is in fact thelegal representative of the debtor,beneficiary or policyholder, forthe purposes of collecting theinsurance policy proceeds fromthe insurer.

The CRA deems that, in such asituation, the life insurance policyproceeds are constructivelyreceived by the debtor in itscapacity as beneficiary of policy-holder, even though the proceedsare paid directly to the creditorunder the terms of the security.

This reasoning does not apply ina situation where the debtorproceeds with an absoluteassignment of the insurancepolicy, nor in cases where it isthe creditor who purchases thelife insurance policy, as thedebtor is neither the policyholdernor the beneficiary.

As a result, the CRA is not willingto extend the argument of construc-tive receipt to creditor insurance

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○© Conference for Advanced Life Underwriting, December 2008 9

purchasing collateral insurance asopposed to creditor insurance inmany cases.

Endnote1 For a full chronicle of theconflicting positions taken on thisquestion by the CRA see theoriginal Interpretation Bulletin,IT-430R2 dated May 18, 1991;revisions contained in IT-430R3 to

replace IT-430R2 dated Feb. 10,1997; reversal of revision forcommon law provinces in technicalinterpretation # 970718 datedApril 18, 1997, and Income TaxTechnical News Number 10 datedJuly 11, 1997; the issue respectingthe Quebec Civil Code exposed intechnical interpretation # 9833605Fdated March 17, 1999; the CivilCode issue resolved in technicalinterpretation # 2002-0122944F

dated July 8, 2002; ultimatelyclarified by the language of thecurrent paragraph 6 of IT-430R3released Jan. 7, 2003.

* * * * * *

About the AuthorCALU member Florence Marino iswith Manulife Financial in Kitchener,Ont. She may be reached by e-mailat florence_marino@manulife.com.

On Nov. 20, 2008, the Minister ofFinance wrote an open letter to allfinancial institutions regarding theminimum withdrawal requirementsfrom RRIFs.

The Minister’s letter noted that“[Many] seniors are understandablyconcerned about the impact of therecent deterioration in market condi-tions on their financial security and Ibelieve it is important to ensure thatthey do not face undue obstacles inmanaging their assets in these chal-lenging times.”

The letter went on to state that “[A]common misconception is thatseniors must sell assets to satisfyRRIF with-drawal requirements,something many may not want todo at this time given the recentdecline in value of many assets. Theincome tax rules permit ‘in-kind’asset transfers to meet the minimumwithdrawal requirements – they donot require the sale of assets.”

The Minister asked all financialinstitutions to accommodate in-kind

transfers – at no cost to clients – oroffer another solution that achievesthe same result. He asked thatfinancial institutions respond to hisrequest by Nov. 28, 2008.

This request raises a number ofinteresting issues for financial insti-tutions that offer RRIF products.For instance, where a policyholderhas a life insurer’s segregated fundcontract registered as a RRIF, theclient has no claim or ownershipinterest in the under-lying segre-gated fund assets – these assets areowned by the insurer. How a trans-fer in kind would be facilitated isunclear. Further, how would theexisting guarantees related to theregistered segregated fund behandled on the transferred funds? Atransfer to a non-registered segre-gated fund contract, “in kind” orotherwise, would usually result in aneffective restart of the guaranteeperiod, as there is a new contract.

Where a trusteed RRIF holdsmutual funds, there may be an issue

as to whether a transfer in kind ispermitted. Typically mutual fundunits or shares can be subscribedfor or redeemed but not transferredto other holders, although transfersmay be permitted in special circum-stances. It may prove easier toredeem the mutual funds units heldin the RRIF, receive cash out of theRRIF and reacquire the same unitsin a non-registered account or TFSA.In light of the Minister’s request that“in-kind” transfers be accommodatedat no cost to the client, back-endload fees may need to be waived ornew units effectively grandfathered.

Finally, assuming that in-kindtransfers can be accommodated, itmust be remembered that theamount withdrawn is fully taxable,and therefore if tax has to be paid,the annuitant will have to look tohis or her other financial resourcesor a partial liquidation of thetransferred asset.

Ted Ballantyne, CALU, and JillianWelch, Wilson & Partners LLB

Letter from the Minister of Financeto Financial Institutions RegardingRegistered Retirement Income Funds

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○ 10 © Conference for Advanced Life Underwriting, December 2008

provide an increase in the maximumavailable monthly income benefitwhen compared with standardemployee long-term disability plans.While some GSI programs havepre-existing condition exclusions(like other group plans), this is anitem that can be negotiated with thecarrier. The size of the group,demographics, occupationalcategory and industry all play a rolein determining what contracts areavailable to an employer and at whatprice and under what conditions.

Inclusion of more finely tuneddisability contracts in a programprovides the incentive for anemployee to continue theircontribution to the profitability of acompany while suffering from apartial or progressive disability orduring a period of return to workfollowing a disability and allows forstronger team building andcontinuation opportunities. This islikely to help retain key employeesand to reduce the stress inemployees. Definitions of disabilityare important. GSI contacts areindividual contracts with guaranteednon-cancellable definitions,payment provisions and premiums.Unlike traditional group LTD plans,the definitions cannot be changedby the insurer. Defined partial orresidual provisions help to offsetthe loss of income for a disabledemployee and allow the employersome financial relief.

Integrated ClaimsThe strongest disability plansprovide short-term incomeprotection leading to a long-terminsurance benefit, with closeintegration of the contract language

between benefit plans. Programsthat provide an integration of short-and long-term benefits for total orpartial disability (without therequirement that the employee betotally disabled before any benefitsare payable) are superior to plansthat require consecutive days oftotal disability during the eliminationperiod. The vast majority of claimsare progressive and oftenintermittent in nature.

Disability plans providing partialdisability benefits are more valuableto the employer, as they help tomitigate financial loss earlier. Thesecontracts commit the insurancecarrier to partial benefit paymentsbased on the employee’s loss ofincome due to lost time and/orinability to perform material duties.The employer continues to pay theemployee partial income for part-time work and the employee has anincentive to continue contributing tothe team at work. The employerdoes not lose the intellectualcapacity contributed by theemployee suffering from thepartially disabling condition and theremaining healthy team members areappreciative of the employer’sconsideration and the employeescontinued efforts. Return to workfollowing recovery is muchsmoother for all. Clients/customers,suppliers and various otherstakeholders are encouraged to seethe continuation of projects andcontinuity of service.

Employees need to understand howtheir LTD program works.Education is especially vital inimplementing a program thatincludes any combination of agroup disability contract with GSIindividual policies and/or fullyunderwritten individual policies.Employees must understand thelimitations inherent in the various

contracts. The followinginformation should be explained tothe employee:

1. the definition of disability;

2. the amount of benefit they maybe entitled to and the formulaused to determine the benefit;

3. the definition of a pre-existingcondition and how theapplication of this contractprovision could impact a claim(only as they relate to group orpossibly GSI contracts);

4. when and how to submit a claim;

5. the level of coverage availablewithout providing medicalevidence, the level of coverageavailable when satisfactoryhealth evidence is provided andif increases in coverage areavailable at all;

6. the payment term;

7. offsets, reductions andexclusions;

8. return to work benefits;

9. an explanation of how benefitsare payable for total, residualand partial disabilities;

10. whether the contract includesany cost-of-living benefitprovisions;

11. access to an employeeassistance program (EAP);

12. how to satisfy a benefit waitingperiod;

13. how the recurrence clauseapplies;

14. conversion options available onthe individual contracts; and

15. portability of individualcontracts (versus the lack of, orlimited portability of, coveragein group contracts).

Practice Management(continued from back page)

© Conference for Advanced Life Underwriting, December 2008 11

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The design of the group and indi-vidual plans must be coordinatedto provide maximum benefits. Ifthe individual contract provides adisability benefit payment forqualified partial disabilities (with-out the requirement that theemployee first be totally disabled)and the group plan requiresconsecutive days of total disabil-ity, the claims process will behindered by conflicting defini-tions. Similarly, conflicting occu-pational definitions can causeadditional grief at claim time.

While a comprehensive integratedlong-term disability program willprovide income protection for adisabled employee there are otherproblems that require solutions.

Critical IllnessWhether or not an employee hasan insured short-term disabilityplan, critical illness benefits canhelp to reduce the financial impactof a disability to the employee.The benefits can be used toprovide emergency cash duringthe waiting period for long-termdisability benefits qualificationand these funds can be used inany way that the claimant wishes.

An individual’s cost of living andgeneral expenses may increasesubstantially during a disabilityand/or critical illness, yet themonthly disability benefit payableis most frequently reduced to85% of net prior average earnedincome. Extra expenses ofteninclude increased travel to medicalfacilities and appointments,purchasing medical supplies andmedications not covered underprovincial or extended health careplans, increased child careexpenses. There is also frequentlyan additional reduction in house-

hold income if a spouse takes timeoff work to provide care andcompanionship. A tax-free criticalillness benefit can help fund theseadditional costs and may also helpfund additional costs for secondopinions or out-of-country care.

Individual contracts or true groupcritical illness plans (in which amaster contract is owned by theemployer with the employeesconsidered certificate holders)are both gaining popularity andproving to be an integral part ofan employer’s well-designed,comprehensive living benefits plan.

Long-Term CareAs our population ages, many of ourclients are concerned about whetherthey will have the financial resourcesto fund the cost of long-term care (athome or in a facility) if they requiresuch care because of a healthconcern. Long-term care insuranceis in its infancy in Canada. Peopleare starting to recognize that it is aneffective tool in providing andconserving financial assets later inlife. Like the critical illness contractsnoted earlier, long-term care insur-ance is currently available through“grouped” individual contracts(on a GSI basis or individuallyunderwritten). The contractsavailable may not have guaranteedpremiums or contractual obligationsand should be examined fully.

At the time this article was written,at least one insurance company inCanada is currently offering aconversion feature that allows thecontract holder to convert theirindividual disability coverage to along-term care insurance contract.If an employer implemented a planthat included these types ofcontracts, it could prove to be animportant recruitment incentive. As

our demographics continue to shift,our working population ages and thelack of skilled labour increases, weexpect these benefits to gain inpopularity.

Effective communication andeducation is the key to thesuccessful implementation andmaintenance of any catastrophicliving benefits program, providinga continuum of care. In ourexperience, once employers andemployees are educated they canunderstand how a comprehensiveliving benefits program providesgreater long-term financial protectionfor everyone.

As insurance advisors, it is vital forus to help our clients understandwhat kinds of catastrophic benefitsare available and why providingemployees or individuals with accessto benefits providing a continuum ofcare is important. While livingbenefits may not be immediatelyappreciated, education about thecosts associated with illness anddisability during an individual’sworking years and then through theirretirement illuminates the value ofintegrated living benefit solutions.At the very least, with educationemployees and employers can under-stand their exposures and makeinformed decisions to limit risk.

* * * * * *

About the AuthorsBoth the authors are CALUmembers and Susan St. Amand isthe Chair of CALU’s Issue Groupfor Life Insurance and LivingBenefits. The authors would like tothank CALU members LawrenceGeller, CLU; and Terry Zavitz,B.Mus.A, CFP, CLU, RHU, GBA,for their very helpful review andcomments during the preparation ofthis article.

INFOexchange is a quarterly pub-lication of the Conference forAdvanced Life Underwriting. Theinformation presented in this news-letter is intended solely as anexchange of ideas and commentaryfor CALU members. CALU does notnecessarily endorse the conceptsor viewpoints expressed in thisnews-letter nor confirm the techni-cal accuracy of the informationpresented. No action should be ini-tiated without prior consultationwith professional advisors.

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By Lynn Wintraub, LL.B, CFP;and Susan St. Amand,

CFP, CLU, CH.F.C, TEP

Living BenefitsTrends in health care andemployment are continuallyevolving. As our population ages,we are experiencing longer lifeexpectancies with more individualssurviving illnesses that leave themwith long-term residual healthconsiderations. Our legislation haschanged and now provides foremployees working past age 65.Many employers and employees arelooking for an evolution in theemployer/employee benefits area.More people are concerned aboutthe cost of health care and theavailability of benefits and insuranceto help defray these costs(especially as they age) and protecttheir long-term financial assets.

There are many reasons for anemployer to provide a comprehen-sive benefits package to theiremployees. An employer mayconsider an employee benefitspackage a tool to improve employeerecruitment, retention and incentivestrategies. If the strategy is to attractemployees you may find that anemployer offers plans with anemphasis on what employees want(e.g., comparatively rich dentalbenefits, comprehensive access toheavily funded health care spendingaccounts and vision care) and notnecessarily plans that are focusedon long-term value.

The intent of this article is todiscuss the evolution of individual

living benefit solutions and theirintegration with employee benefitprograms. Employers who arefocused on providing genuine cata-strophic insurance coverage tend toprovide more comprehensive livingbenefits packages that include:short- and long-term disability,critical illness insurance, unlimiteddrug coverage, out-of-countrymedical coverage and possiblyaccess to long-term care plans. Ourcomments will focus on pooled andindividual living benefits.

A strong living benefits plan beginswith disability insurance. Employershave a legal obligation to accommo-date a disabled employee “to thepoint of undue hardship” asrequired by provincial legislation.This legal duty is an obligationwhether there is an in-forcecomprehensive living benefits groupplan or not. Designing a compre-hensive, integrated plan thatincludes individual guaranteedcontracts can help to mitigate futurecost increases and can limitpotential shareholder liability.

By including individual disabilitycontracts (issued on a standardguaranteed basis or individuallyunderwritten) as part of the grouplong-term disability program, bothemployers and employees benefit.Employers are concerned about therising costs associated with theiremployee benefits program.Individual disability contracts haveguaranteed contractual terms andpremiums, and this providesemployers with the opportunity tomanage their costs more effectively.

While individual contracts areinitially more costly, employersdo not face the concern of risingpremiums with these contracts andbecause they are provided on agrouped basis, the insurers pricethem with a discount. Disabilityclaims (on individual policies) willnot impact the claims experience ofthe group and this will reduce theimpact of traditional escalating long-term disability benefit expenses.This provides long-term premiumand plan stability to the employer.As in any group program, individualcontracts can be offered toemployees on a class basis whichenables the employer to implementthem where they create most value.

When an employer has a long-termdisability program that includesguaranteed standard issue (GSI)individual contracts employees whoare otherwise uninsurable haveaccess to more comprehensivecoverage at preferential premiumrates. Usually these programs

Practice Management:

Continuum of Care

(continued on page 10)

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○ 12 © Conference for Advanced Life Underwriting, December 2008