Advisors should review options but take no immediate action regarding budget proposals, recommends CALU

By Donna Glasgow | April 18 2013 02:53PM

Following the recent budget proposals to eliminate tax benefits linked to 10/8 and leveraged insured annuity (LIA) strategies, Kevin Wark, president of The Conference for Advanced Life Underwriting (CALU) suggests that advisors contact affected clients and carry out a review of their potential options. However, he recommends avoiding making any immediate changes to these arrangements, since new options may become available.


“We believe it is important for clients and their advisors to not take any immediate action with respect to the policies and there be a careful review of the various options.”

Like other industry stakeholders, CALU is planning to assist industry efforts to identify unintended effects or special circumstances that may not have been considered in the drafting of the proposals, and bring those situations to the attention of the Department of Finance, says Mr. Wark. “Also, we need to ensure that Finance understands that underlying the 10-8 structure is the purchase of a life insurance policy designed to meet the long term needs of the client, and the transitional rules should reflect this fact.”

Mr. Wark says the industry wants to ensure that “the proposals are not overly broad so as to adversely impact planning that would otherwise be considered to be appropriate, does not create planning uncertainty for insurance advisors and their clients, and does not treat unfairly arrangements that have been put in place prior to the budget.” CALU is still gathering input from its members, but “there is the obvious concern that grandfathering has not been extended to 10/8 programs, as is the case for LIAs.”

Frank Swedlove, president of the Canadian Life and Health Insurance Associaton (CLHIA), also said his organization will be approaching the Finance Department about the proposals on behalf of its insurance company members. “We’ll certainly be getting in touch with Finance and hopefully they are open to a discussion on it…We would like the opportunity to consult and get a clearer understanding of what the issues are for (Finance) and try to determine how best to deal with it and what scope should be applied to them.”

He said it was a surprise to the CLHIA to see these insurance strategies included in the budget proposals. He added that while the association was aware that the government had concerns about these strategies, the association expected these issues to be resolved through a consultative approach in which stakeholders would work together to find solutions.

Mr. Wark said that at their annual meeting, CALU members had been advised that Finance was planning to review the tax rules relating to LIAs, so it was not a real surprise that they were addressed in the budget. “However, the manner in which Finance proposes to deal with new LIA structures appears at first blush to be onerous in relation to comparable arrangements and we plan to do further analysis to determine if this impression is correct or not.”

On the other hand, CALU members were surprised that there were proposals in the budget relating to 10-8 programs, he added. “We were of course aware that the Canada Revenue Agency was reviewing these programs and had concerns in particular with the reasonableness of the interest rate. We were also aware that the CRA had raised these concerns with the Department of Finance. However, we did not think that Finance had finalized its position and was planning to shut down these types of arrangements instead of looking at other legislative options.”

Peter Everett, vice-president, Planning and Business Development at PPI, a national insurance marketing organization, and a tax lawyer, says PPI will also be involved in discussions with their advisors, partners in the industry and with the Department of Finance about the budget proposals. PPI advisors have been at the leading edge of providing a broad range of sophisticated tax and estate planning solutions and these strategies sometimes include leveraging using life insurance, such as 10/8 plans, he says. Typically the 10/8 strategy is used by high net worth individuals and their corporations and businesses and involve the use of buying a life insurance policy for the primary purpose of estate and corporate planning purposes, Mr. Everett explains.

Proposals are disruptive

He adds that the general reaction from PPI’s advisors is that the budget proposals are disruptive. “Canadians have acquired these policies for valid planning purposes. While the proposals are disruptive, our (advisor) associates are letting us know that their main focus will continue to be the interests of their clients, consumers and the vitally important role that insurance plays in their planning needs.”

He says PPI’s immediate focus will be helping to ensure that the government has the best possible information available when it finalizes its proposals. PPI also would like to underline that as a matter of good tax policy, consumers should be able to rely on current tax law when making decisions.

“Here’s the real crux of it. Our advisors and clients tell us that when they entered into the (10/8) arrangements, they did so in good faith at a time when tax law permitted such arrangements, and there’s no question that tax law did permit it. So they are hopeful and would expect that any discussions we’d have with Finance would include some kind of grandfathering arrangement with regard to what were – at the time they acquired it – tax compliant arrangements.”

What would be the impact on affected clients if the budget proposals go through as they now stand? Mr. Wark says that for LIAs, there is grandfathering for borrowing arrangements in place (before the budget), and so for the most part these arrangements can continue as was the case before the budget. “However, the rules will effectively eliminate the tax benefits of implementing new LIAs on or after the budget date. For new situations, advisors will have to look at each situation and review alternative options to help achieve the retirement and estate planning goals of their clients.”

However, as there is no grandfathering for ‘in-force’ 10-8 programs after 2013, “We would expect current participants in 10-8 programs to restructure the loan to avoid the application of the new rules,” says Mr. Wark.

This may be done by repaying the loan using other liquid assets or withdrawing cash from their policy. Important to note is that if this policy withdrawal is completed before the end of the year, there is a special rule that will generally provide a deduction against any gain arising from that policy withdrawal, he adds.

The new rules also do not prevent the policyholder from continuing to borrow against the policy provided the loan structure avoids the conditions specified for 10-8 arrangements. “We anticipate that in the vast majority of cases the policyholder will want to retain the insurance policy to cover off their estate planning needs. Owners of certain UL policies in particular will want to retain those policies as they cannot be replaced without a significant increase in premium.”

Mr. Wark anticipates that it would likely be a time consuming process for advisors and clients to withdraw from 10/8 arrangements. “Insurance is often a key component of a comprehensive estate plan with many different planning elements, and with many different advisors needing to be involved in the process. So another concern is whether the 2013 deadline for preferential tax treatment of policy withdrawals really offers enough time for policyholders to finalize their arrangements.”

Given this concern, Mr. Wark underlines that it is important for advisors to start the process now by getting the client and other advisors engaged in a review and identifying the best options. “However, as noted, we don’t think any immediate action should be taken as new options might become available.”
How long should advisors wait?

How long should advisors wait to take action? Mr. Wark suggests that advisors begin the exploration of current options relatively quickly. “Is the insurance coverage appropriate given any changes in circumstances? Is there anything else in the planning that needs to be updated or contemplated where the insurance can add value? Do I have outside resources to pay off the loan if that is the best route? etc.”

Such a review could take a number of months depending on the complexity of the client’s situation and number of advisors involved, he adds. Advisors will, therefore, want to move this review along even before draft legislation. However, even if the review is completed quickly, Mr. Wark suggests it would be prudent to wait until at least mid-year before taking action.

“By then we would have seen the draft legislation, what has resulted from industry discussions with Finance and whether the insurance companies are planning to offer other options.”