Proposed changes to prescribed annuity taxation: the truth is in the numbers…

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Proposed changes to prescribed annuity taxation are hidden in the proposals for changes in the exemption test of life policies. The proposal in regards to annuity taxation would modify Subsection 300(2) of the Income Tax Regulations. Under current regulations, the taxable income portion of a prescribed annuity is determined using the 1971 Individual Mortality table. After December 2015, the new regulations would require that insurers use the Annuity 2000 Basic Mortality table.

What does this mean?

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  1. Brian Shumak
    President Brian Shumak Financial Services


    There is no doubt that the burying of such a change is not impressive, but I would counter argue the following:
    1) If someone is hitting the RRIF Wall you speak of, then the money is registered in which case the tax liability will be exactly the same as it has been all along – 100% of the income generated whether it comes from a RRIF or an Annuity. Conclusion, plan accordingly.
    2) In the event that the funds are non-registered then the numbers you speak to are accurate and there is a greater degree of taxation that one would be subjected to. That being said, if the person was to invest the principal on their own, in order to provide to their average life expectancy it would require a greater growth rate and as such a greater tax liability so why would it not make sense to apply the greater tax liability across the board which is what this is attempting to do. Moreover, the tables are still 14 years old and mortality has continued to rise since that time so in the end people still come out ahead.

    Just my thoughts

  2. Richard Proteau
    CEO and Founder Financial Services Consumer Alliance
    Top Contributor

    Brian first let me state this is a great comment and a wonderful way to start the discussion and debate. Traditionally I think you are right but times are changing fast and I believe that TFSA will change the picture of retirement by putting unregistered funds back into the game. If there is one thing that the federal government has done right is the introduction of TFSA knowing that there is an inherent flaw with registered funds. My hope is that the funds accumulated by Canadians within TFSA are used at retirement to create a guaranteed income and I believe that annuities are the tool for this. Listen the Canadian taxpayer has already invested heavily in TFSA. You don’t change strategy mid game. We should provide incentives for Canadians to include guaranteed income in their retirement considering that less and less Canadians will have pension income. So no I don’t believe it’s the right time to increase taxation on annuities. However what really makes me mad is how this change was introduced through a back door. This should be debated. Canadians have a right to be heard on this issue.

  3. Brian Shumak
    President Brian Shumak Financial Services


    I agree 100% with the back door comments but I think that the taxation is not that out of line. Moreover the income stream will still be far greater than a simple GIC. That being said, I would also imagine that the government will introduce an equivalent to an RRIF and Annuity for the income stream out of a TFSA. So for me, this is not as pressing an issue as you make it out to be, again IMHO.

  4. JP Bell
    Director-Advisor at Arbutus Ridge Financial Services Ltd.

    Case in point that LinkedIn is a valuable and essential vehicle for the dissemination and discussion of critical concepts that impact both the practitioners and their respective client /annuitants. Richard and Brian’s impactive and timely thoughts reflect the ongoing need for this essential and constructive informational platform, well done gentlemen.

  5. Richard Proteau
    CEO and Founder Financial Services Consumer Alliance
    Top Contributor

    yes it is indeed a good debate. The retirement crisis results from many conditions. It results from poorly thought product such as RRIF which are designed truly to provide income to age 85 because of the minimum withdrawals. It did not help that the advisor community did not understood the relationship of volatility and withdrawals and most RRIF planning was done with the same investment allocation than the RRSP… It is Manulife with the introduction of the Income Plus who financed a university study on this which surprised the industry. We could talk about half the population who have no access to pension products because they don’t live in cities with big corporate presence. What about these Canadians who worked for employers for example such as Call Centers for minimum wage in a very stressful environment who can’t afford RRSP. There should be a law forcing employers with X number of employees to fund partly and provide some sort of retirement plan to their employees. Also there should be a law stating that the federal/provincial government will not provide payroll rebate (worth million of dollars for each employer) to employers who do not provide pension to their employees..
    To resolve this crisis there will be a need for out the box thinking. This is why changes to annuity taxation have to be viewed while looking at the big picture. I will introduce some ideas I have and I hope there will be a lot of constructive discussion around it.

  6. Harley Lockhart, CLU,CH.F.C.
    Independent Financial Advisor and Past-Chair of Advocis

    Very few changes in tax law are given widespread publicity and debate before introduction. It emphasizes the importance of the ongoing work done by CALU. Not only is there continuous contact with Finance and CRA, CALU has gained the respect from these government agencies to the degree they are often approached as a resource. I know CALU is aware of the pending changes to annuities. In fact, the changes could have been more damaging without their involvement. Canadians have no idea the debt they owe to these knowledgeable, hardworking financial experts.

  7. Teresa Black Hughes
    Financial Planner & Investment Advisor

    I appreciate the comments on this topic and echo Harley’s words about CALU’s work with Finance and CRA.

  8. Richard Proteau
    CEO and Founder Financial Services Consumer Alliance
    Top Contributor

    I agree that CALU does great work but CALU represents the industry and not the public interest. A lot of changes to taxation in the financial industry will have little impact on the public at large. As a result, the issue can be dealt between CALU, CRA and Dept of Finance for the moment that taxpayer money is not at stake. Such a change is the change to the Exempt Test. I don’t have family, friends, or even member of my community who maximize UL deposits and would be impacted by the change to the exempt test. However to find in the proposal in regard to the exempt test a change to guaranteed income taxation that would impact a lot of people that I know of makes this a public domain issue and a matter that must be publicly addressed (not behind closed doors between CALU, CRA and Dept of Finance). In this matter, CALU does not represent the public. If CALU wanted to represent public interest then there is a whole issue of transparency and CALU would be subject to public scrutiny. Sadly I have one negative comment on CALU. 15 years ago I could go on CALU site and access a lot of documents about CALU positions from their site. Now there is nothing on their web site. CALU has become a lot more secretive and elitist; that’s my opinion…A few people laugh when I stated that what is discussed at CALU stays at CALU… but I believe CALU should make an effort to share information outside its membership… i would indeed love to know what the representations CALU made in regards to changes to annuity taxation to CRA and Dept of Fin. Anyone want to share?

  9. Harley Lockhart, CLU,CH.F.C.
    Independent Financial Advisor and Past-Chair of Advocis

    As you rightly state, CALU represents the Financial Services industry, in particular issues pertaining to Life Insurance taxation. The funding for all CALU efforts comes from its members which entitles them to details about CALU activities. If you want access to their current activities, membership is currently open to qualified individuals.

    To suggest that just because you and people you know are not impacted by the change to the exempt test leads me to believe you don’t understand it and the scope of its influence. It applies to much more than maximum funded universal life.

    Although CALU is not as transparent as you would like does not mean they do not represent the best interests of the Canadian Public. Their discussions with CRA and Finance are technical, analytic and void of emotional baggage, seeking the middle road between government thirst for tax revenue and consumer desire to keep it all.

    Transparency is so overused as to have become useless. Unless one has an actuarial or tax specialty background, most of the CALU discussions are, no matter how transparent, likely to be misunderstood. To suggest this lack of information dumping is secretive and elitist makes sense only if you consider the volume of information more important than what it all means.

    Instead of trying to understand the details of how the system works, we would all be better served to focus on the results we want. At that point, wide public consultation becomes relevant. I don’t know much about how my car engine works, but it produces enough power to propel my car to my satisfaction. What would I gain by micro-managing my mechanic?

    What is the Financial Services Consumer alliance hoping to achieve? Have you communicated your desired outcomes to CALU and Advocis to help them stay on track with the details of how to get there? (I mention CALU and Advocis because from my experience, as an insider, I KNOW both organizations recognize the best interest of Canadian Consumers is inextricable from the best interests of their members.) I know they are both open to dialogue.

  10. Brian Shumak
    President Brian Shumak Financial Services

    I applaud all organizations that are involved in consultations with the government and the respective bodies. The following is not a comment on the utility of CALU nor Advocis but I would not, however, suggest that either speaks on behalf of the industry and the advisors.

    CALU is open to those who qualify. What is required to qualify requires a level of income that many do not ever achieve. This affords CALU the ability to discuss advanced topics with the governing bodies without getting mired in minutia but it is not representative of the general advisor.

    Advocis, although desiring to be considered the voice of reason for the advisor does not come close to representing the advisor. There are more insurance advisors practicing that are not members than those who are and this does not address the other segments of the financial world where membership is very thin.

    At the end of the day, Harley you make two salient points (IMHO). First, that there is a need to mitigate between the government thirst for tax revenue and the desire for the consumer to keep it all and second, that micro-managing is not beneficial.

    At the end of the day, someone/body/thing has to determine the path of greatest acceptance to all those who have their hands in the pot. Given the longer life expectancy, there is nothing that I see as wrong with taxing accordingly. So as I said above, I am not sure that I agree with the concerns regarding the increased taxation. For me there are far greater issues. For example, the potential clawback of compensation to advisors which, IMHO, will have a far more devastating impact on the public than the taxation of annuity income. And I have not seen either CALU nor Advocis speak loudly enough about this. And when I brought this to the attention of those who are in positions to respond, the response was sad to say the least.

  11. Jason Watt CD CLU RHU
    CFP and CLU Instructor

    Richard, I don’t think this has been a secret. The September 2013 CALU report included this information. I don’t have my copy at home with me, but I’m pretty sure it is also covered in the 7th ed. of Florence Marino’s Canadian Taxation of Life Insurance.

    I do think the change is quite justified. The only reason that PAC taxation is so incredibly favourable under the current contracts is that the mortality calculation is way off. It’s supposed to be a proportional taxation contract, not a reduced taxation contract. By using such out of date mortality figures, it is essentially transformed into a reduced taxation contract.

    And let’s not forget that, when the income splitting provisions were introduced in 2006, the interest portion of annuity income was included in the list of income that can be split.

  12. Ian R. Whiting, CD, CFP®, CLU®, CHFC, FLMI(FS)
    Accomplished speaker and performance-oriented financial services manager and entrepreneur.

    I agree Jason – not news but no doubt many advisors missed it. As for the change – long overdue but that is what happens when things are left for so many decades – the catchup is surprisingly large. However, it is the right thing to do!

  13. Jason Watt CD CLU RHU
    CFP and CLU Instructor

    I 100% agree that most advisors did miss this. Just like people are only now crying foul about CRM 2, people will wait until these changes take effect to do their complaining. So Richard’s message is welcome and educational in that regard.

  14. Richard Proteau
    CEO and Founder Financial Services Consumer Alliance

    Jason you haven’t heard the saying “What is discussed at CALU stays at CALU”. In other words CALU does not disseminate its information freely and is only mostly available to its membership only which represents a very small segment of the advisor population. Also you would not find a member of the public that knows about this as I can’t find no newspaper who has written anything on the topic. I hope you agree it will impact a lot of Canadians in the future. Whether we want it or not, there has to be major decisions regarding retirement policies. For example, RRIF minimum withdrawals have to be addressed but it’s not an easy issue to address as those who can afford to take less withdrawals out of their RRIF are not those whose retirement is at risk.
    Finally Ian I would be interested to know why you believe it is the right thing to do.From my perspective and experience the average annuity amount is low. The rich uses other type of investments where they benefit from many tax advantages. This was a tax advantage that benefits the older population segment who usually needs all the income they can get to survive.

  15. Jason Watt CD CLU RHU
    CFP and CLU Instructor

    lol. That comment aboud CALU is good for a laugh. And you are right, but I think, by and large, most advisors willingly keep their heads in the sand. You will never see a room full of advisors shut off as quickly as you say, “Now we are going to talk about the taxation of life insurance.”

    I think Ian is right about this being the correct decision. I think you have a similar approach to permanent life insurance, where you say that it should be sold on its own merits, not for its tax benefits. (Pardon me if I am putting words in your mouth, but I gathered this to be at least part of the focus of some of your earlier blog posts.) If annuities don’t work without extremely favourable tax treatment, then maybe we shouldn’t be relying on them.

  16. Richard Proteau
    CEO and Founder Financial Services Consumer Alliance

    Sadly Jason, i don’t know an investment that would work without a favorable tax treatment. Without capital gain favorable taxation, there would a lot less people willing to invest into the market. There would be no RRSP without favorable tax treatment. This is they way the tax system works…

  17. Jason Watt CD CLU RHU
    CFP and CLU Instructor

    Richard, this is the quote from your blog post on the 10/8 to which I had taken such exception previously:

    “There is a culture of cheaters who can’t sell the need for insurance and therefore resort to cheating and lying to sell insurance products either as an investment or a tax shelter.” This is from your March 24th blog post concerning 10/8.

    What if we alter the quote slightly:

    “There is a culture of cheaters who can’t sell the need for [annuities] and therefor resort to cheating and lying to sell insurance products either as an investment or a tax shelter.”

    How are these two positions different?

  18. Richard Proteau
    CEO and Founder Financial Services Consumer Alliance

    Jason come on here. You have to see the difference. Using 1971 mortality tables is based on current laws. This is how annuities are currently taxed. There is no cheating involve when you respect the law. 10/8 was a tax avoidance concept where insurers cheated on the credited rate of the policy at 8% and cheated on the loan rate of 10%. The 8% was not real. The 10% was not real. The cheat here was to create a spread which would be tax advantageous. This was the only purpose of the transaction and this meet the definition of tax avoidance. 50% of capital gains are not taxable. It is not cheating to take advantage of this for the same reason it is not cheating to sell annuities.There is a big difference between being tax efficient a right confirmed by the Supreme Court and tax avoidance.

  19. Jason Watt CD CLU RHU
    CFP and CLU Instructor

    The 10/8, up until the changes that were made to the Income Tax Act in April of this year, was compliant with the Act. That is why:
    1. There was never a successful challenge of a conventional 10/8 arrangement; and
    2. The Income Tax Act had to be changed.

    I don’t see deliberately using an outdated mortality table as being any different from deliberately stringing together a number of concepts that support the deductibility of interest under the ITA. And to prevent either of those things, the only recourse the Government has is to change the legislation.

  20. Richard Proteau
    CEO and Founder Financial Services Consumer Alliance

    Jason, i believe that the 10/8 was never challenged so you can’t say there was never a successful challenge. It’s like saying that because Revenue Canada did not prosecute those who put their money offshore in order not to pay tax makes it right. In 2011, Revenue Canada went on a fishing expedition and they lost in Courts with the Courts commenting on the incompetence and ineptitude of Revenue Canada and Dept of Finance on this issue. They did so many mistakes that they destroyed their chances to proceed forward… From a taxpayer perspective 10/8 is a slap in my face. It is a concept used to avoid paying taxes probably used by the same people who put their money offshore. This concept based on compounding tax deductions if left unchecked had the potential to bankrupt the tax system.With the annuity there are no manipulations. The annuity rate or premium is not changed to take advantage of its taxation unlike the 10/8. I am sorry there is quite a difference and i am in fact sad to see that the industry is unable to see right from wrong. Tax fairness and prosecution of those who are involved in tax avoidance is an important issue for me so much that I am considering running in the best federal elections on this issue.

  21. Dan Anders CFP, TEP
    Independent Associate-Director at LegalShield Official

    Personally, I’m with Richard here. In fact, I have considered writing some discourse of a contrarian view of Flaherty’s legacy. This government and Flaherty in particular assaulted the financial services industry with impunity, hurting both pensioners (income trusts, TBTB’s though they were grandfathered) and more. He assaulted HNW investors, and while it is hard to feel empathy therein, the investments made by this market creates employment for many Canadians, so he indirectly hurt middle-income Canadians yet again.

    As a lifelong Conservative, the next federal election will be the first time in my life that I will vote for a party other than the Cons, as few of their financial policies mirror that of a Conservative, business-friendly administration, and when you add in the effect of their omnibus bills that assaulted the environment on plural levels, one starts to see why they can’t be trusted in a majority position in federal politics, at least not under Harper’s leadership…..

  22. Richard Proteau
    Richard Proteau
    CEO and Founder Financial Services Consumer Alliance

    Jason, you may refresh yourself with the definition of tax avoidance. When you engage in tax avoidance, you do not violate any regulations or provisions of the income tax act. However there is a difference between tax planning and tax avoidance. Revenue Canada states:”Effective tax planning occurs when the results of these arrangements are consistent with the intent of the law. When tax planning reduces taxes in a way that is inconsistent with the overall spirit of the law, the arrangements are referred to as tax avoidance. ” It is consistent with the spirit of the law to seek to provide yourself with a source of guaranteed income for your retirement or any other reason. It is also consistent with the spirit of the law to seek the best product which will return you the maximum guaranteed after-tax income and select the product on this basis. This is called effective tax planning. It is however inconsistent with the law to enter into a transaction that provides no benefit other than a tax deduction. 10/8 don’t provide insurance. 10/8 don’t provide retirement income. The only purpose of the transaction is to create taxable deduction and the only reason the client accept to pay the 10% loan is to create that deduction and the only reason the company accepts to pay 8% return is that you are taking the 10% loan. it is wrong at so many levels and it is clearly tax avoidance. It violates the spirit of the law. Because of the people who have violated the spirit of the law with the 10/8 and the incompetence of Revenue Canada (no being able to do their job), the rest of us had to pay for this and now legitimate transactions which resulted in legitimate deductions are not available anymore. Because of this the federal government had to step in and modify the law.

  23. Jason Watt CD CLU RHU
    CFP and CLU Instructor

    So there are thousands of 10/8s out there, right?
    And there are about 2000 avoidance transactions identified by CRA each year?
    And 10/8 has been around for about 15 years?
    And CRA has never challenged a single 10/8 transaction as being an avoidance transaction?
    Doesn’t this make it hard to argue that there is an avoidance transaction?

    As for the ‘purpose’ of 10/8, I know some are sold as pure tax reduction. But most of the people I know selling 10/8 start with an established insurance need. They show the price of buying a policy (net cash outlay) using term insurance, using permanent insurance, and then using the 10/8 arrangement. The 10/8 arrangement can work where everything is happening at the highest marginal tax rate, risk tolerance is appropriate, and the client understands the costs, including items such as YRT pricing. The pricing works out better because the income tax provisions support it. As with the favourable capital gains treatment you previously pointed to, the deductibility of interest for investment purposes is a fundamental feature of our tax system.

    The Singleton (2001) and Ludmer (2002) cases, both SCC cases, both reinforce the validity of the principles at work in a 10/8. Interest does not have have to be ‘reasonable’ and, as long as the proper steps are taken, the SCC reinforced the right of a taxpayer to rearrange her affairs in a tax-efficient manner.

    So you might personally find the 10/8 distasteful, but to call the entire industry into question because of your personal dislike of a concept flies in the face of no less an authority than the Supreme Court of Canada.

    Do I agree that some 10/8s are done inappropriately? Absolutely. I have seen clients with $80,000 of annual income employing leverage to acquire a 10/8 at the expense of registered savings. That, to me, is inappropriate, and should not be allowed. Is the potential for abuse higher with 10/8 than it is with annuities? It would be foolish to argue otherwise. Should some things be changed with respect to 10/8? Yes, and some things have with the 2014 tax changes. Has our industry let people sell 10/8s where they shouldn’t? I have seen it with my own two eyes. Is it right to say that everybody who sells 10/8 is a “cheater?” No. I can show you a legitimate insurance need addressed by 10/8 at a manageable level of risk for the client.

  24. Jason Watt CD CLU RHU
    CFP and CLU Instructor

    Dan, I don’t want to risk getting all political here, but I think the heart of your argument lies at the distinction between Reform policies (which I think is where much of this government’s fiscal agenda came from) and Conservative policies (which I think true-blue Conservatives recognize this government did away with when they changed things like the dividend tax credit for small business, and the baby-with-the-bathwater approach to income trust taxation).

    I think, regardless of politics, it is contrary to common sense to argue that there is a good reason to support the ongoing use of a mortality table that will be 45 years old, and substantially out-of-date, by time these changes take effect.

  25. Dan Anders CFP, TEP
    Independent Associate-Director at LegalShield Official

    Jason, your commentary is dangerous, in that endorses a governmental agenda to strip benefits and viable tax efficiencies from many who need it and require it, as well as many who would be encouraged by the use of such inside a penalties tax regime.

    I’m all for progress, but the problem with the policies discussed herein is that they are all TAKE and no GIVE.

    If the Cons and Finance are continuously supported in this agenda, in short order our business (the insurance biz specifically) will be reduced to vanilla choices offered by all and clients who are not motivated to buy anything because we offer nothing but pure risk management policies. Without the tax advantages our industry can provide, it will spell the death of us as entrepreneurs.

    In other words, this plays directly into the hands of the charters banks who will one day control the insurance pillar as well. Why can’t you see that this is what is really what’s at stake here?

  26. Jason Watt CD CLU RHU
    CFP and CLU Instructor

    Dan, I did not endorse any particular agenda. I don’t know why you think that I did. The only opinion that I actually expressed concerning tax policy is that the continued use of a badly outdated mortality table is not appropriate.

  27. Dan Anders CFP, TEP
    Independent Associate-Director at LegalShield Official

    Agreed, but the approach that Finance is taking plays right into the hands of the banks.

    Another great failing is the non-appearance of life co presidents when grandfathering was stripped from the 10/8 policies. In and of itself I had no concern with the loss of 10/8’s, but the loss of grandfathering was unprecedented and a harbinger of much more bad legislation to follow.

  28. Jason Watt CD CLU RHU
    CFP and CLU Instructor

    Dan, I don’t think the insurers mind the approach that Finance is taking. I think the bigger insurers would rather be treated more like the banks, and see any further breakdown of the bank/insurance wall as steps towards bigger and more profitable institutions. I think it’s only life insurance agents, for the most part, who care so much about this wall. See what is currently happening with ISPs and Cable Companies in the US right now for an example of what corporations dream of as being possible as far as control over consumers and the right to monopolize profits.

    I will argue that the loss of grandfathering was not unprecedented. Consider Income Trust taxation as an example, where limited grandfathering was applied, but all favourable Income Trust taxation is gone as of 2011.

    I am not making any argument about right or wrong here, or supporting one position or the other. I am simply stating what I believe to be happening today.

    And I know this is sacrilegious in a discussion amongst insurance agents, but we constantly cite the vast numbers of uninsured and underinsured Canadians. The insurance industry was allowed to operate pretty much as it wanted to from its inception in the mid 1800s to about 2000, excepting insurance companies’ capital reserve requirements. What would had to have changed to make the statistics about life insurance in force to be closer to the ideal?

  29. Dan Anders CFP, TEP
    Independent Associate-Director at LegalShield Official

    At the end of the day, like all financial products when used PROPERLY, the strategies provide legitimate benefits for those who can take advantage of them while not avoiding taxes but rather planning effectively to reduce taxes. 10/8’s were an example of sound planning but as usual many practitioners in our business pushed the envelope until bite-back had to occur.

    What I state is that this government and Finance are assaulting our industry, and the lifeco presidents are spineless in their lack of response and lacking in vision especially when it comes to issues such as grandfathering.

    What Jason and Richard both state are true, but the real problem herein is that as Richard says, the removal of certain prescribed tax treatment is penaltive when opportunities for equivalent tax planning are not included with proposed changes. Therein lies the problem we need to be aware of, I believe. The tide has shifted against our industry for too long now…..

  30. Richard Proteau
    CEO and Founder Financial Services Consumer Alliance

    Jason again I am trying to be clear as you are taking me out of context.

    1. Answering your comments regarding changes to annuity taxation: I did not say that I was against changes and updating regulations in regards to annuity taxation. I said that I believe these changes should not be hidden from the public and they should be debated as this change includes social implications. Maybe the public believe that as a social policy it would be a bad idea to increase taxation on seniors above age 75 who are looking for guaranteed income. As a result, maybe the public would demand that changes to annuity taxation should be revenue neutral with a corresponding increase in the Pension credit…

    2. Answering your comments to 10/8:

    a) Many life insurance companies such as Manulife (as you quoted Florence Marino) refused to market 10/8 arrangements because they believe this arrangement violated the spirit of the law.

    b) The fact that Revenue Canada did not do its job does not make 10/8 right and should be the subject of a Commission of Inquiry since the 10/8 arrangement put the whole tax system at risk. If I was an MP, believe me I would be fighting for such a Commission.

    c) Tax avoidance is a case by case basis. 10/8 arrangement are a sub group of the Zero Cost Arrangement. I have structured and participated in the design of many Zero Cost. For these Zero Cost, we started from a real insurance need for the business. If this need was not taken under the Zero Cost, this need would have been insured as Term insurance. The Zero Cost was therefore all about tax effectiveness where the premiums was leveraged to the maximum because the business needed the maximum cash flow available in the early year of the arrangement. The tax deduction which we maximized was a result of the arrangement. It was not the main reason for the arrangement. The interest rates also fluctuated and it was a risk kept by the client. These arrangements were not tax avoidance strategies. My personal experience differs from yours. All the 10/arrangement I have seen there was no need for insurance; no need at all. The only reason for these arrangements were the tax deduction. Again I am certain there are valid 10/8 arrangements but it is because the concept was abused by certain people in the industry, well everyone pays for it…

    d) My major difference of opinion with you is that you would compare a person buying an annuity at age 80 with a guarantee of 0 years because they need the maximum after tax income and a person doing a 10/8. There is no potential abuse of the law on the annuity. Who would buy an annuity guarantee 0 to take advantage of the income tax act? If you find such a person, tell them they are insane unless they have a good palm reader who has guaranteed them an extremely long life. And again here is a big difference. With the annuity 0 guarantee, the owner takes a risk in losing his capital if the annuitant dies. With the 10/8 there is no risk, everything is fixed. Where is the abuse? But then when you add a life insurance to the annuity, then you are faced with possible tax avoidance as per the 10/8 but to a lesser degree of risk. Again the back to back has to be structured properly..

  31. Jason Watt CD CLU RHU
    CFP and CLU Instructor

    Dan – what interest to the CEOs and Presidents of LifeCos have in preserving grandfathering? Who do the Presidents and CEOs represent?

  32. Dan Anders CFP, TEP
    Independent Associate-Director at LegalShield Official

    They represent the shareholders….therein lies the problem. If they represented the policyholders, we’d see a lot more protective actions taken.

    If you think insurance agents have done a poor job of representing Canadians and their need for insurance, wait until the banks are doing the lion’s share of that work and see where it goes. The results, I predict, won’t be good at all. Would you prefer to buy your insurance from your local banker and their robot army of Financial Planners, or have access to a niche entrepreneur who has fewer clients who each mean more to that entrepreneur than any one individual will ever mean to a bank?

  33. Jason Watt CD CLU RHU
    CFP and CLU Instructor

    Addressing each of your points:
    1. I agree that public debate on our retirement planning as a whole is appropriate, and is not happening in any organized or meaningful fashion. I believe I did take you out of context, as I read into your comments that you were opposed to this change. I think it might have been fairer for me to say that you are opposed to these changes absent some broader policy debate.

    2. a. I have never seen Manulife present a case that they felt the 10/8 was unethical. If such a case is out there, I would love to read it.

    b. You have not addressed the rulings by the SCC in 2001 and 2002. Those are at the heart of my argument concerning both legality and morality of these arrangements. CRA’s lack of challenge of these arrangements likely (though it is hard to know) also traces back to its losses on these key interest deductibility cases.

    c. What investment would you normally use to support a Zero Cost Arrangement?

    d. I have previously addressed the issue of Risk vs Deductibility when I cited the two SCC cases, above. And I continue to maintain that the primary benefit of the Prescribed Annuity Contract lies its tax advantage; a tax advantage that is artificial owing to the use of an outdated mortality table. I would be all for some policy decision that allows for some favourable taxation of annuities, but, as you say, there is no broad policy discussion about retirement income. I think Dan would agree that this is simply another in a long line of incremental tax changes that continues to chip away at the tax benefits that we are accustomed to.

    I continue to take exception, as I did when I first read your blog post, to the characterization of insurance agents who sold the 10/8 based on a need for insurance (the way I have always taught it; and I don’t teach it at the LLQP level) as ‘cheaters.’

  34. Jason Watt CD CLU RHU
    CFP and CLU Instructor

    Dan, I think I agree with all of your comments. I wish that corporate law, in general, made some allowances for the rights of employees and consumers. I don’t think this is a unique problem to the insurance industry.

    As for your second point, I would much rather deal with a licensed professional. I am a constant source of referrals (not being in the business of selling life insurance products myself) to various life insurance agents. But the insurance industry’s continued citation of underinsurance statistics, I think, does more to support bringing the banks into the insurance discussion than it does to keep the banks out.

  35. Dan Anders CFP, TEP
    Independent Associate-Director at LegalShield Official

    I know, it’s a chicken and egg situation. The market tells us we are doing a bad job of insuring individuals, and when we attempt to develop new business, especially in the mid-market, we are met with the complacency of one’s group insurance (a great start but usually incomplete in terms of risk management), and so many Canadian’s reliance on dominant competitors like the banks.

    If one cherishes independence, by building oneself as an effective niche competitor and not even trying to compete with the dominant competition that are the banks in Canada, one can carve out a specialized nice practice still, but it is getting more difficult with each passing year. I don’t know if I’d even pursue this as a career if I were young and idealistic today, the playing field is very crowded.

  36. Jason Watt CD CLU RHU
    CFP and CLU Instructor

    Dan, I see young people succeed all the time, but it can be tough. I also see lots of young people enter the industry and leave for any number of reasons. I think the greatest impediments to success are a lack of career-oriented training programs and a lack of working mentorship programs. I do not think there is any reason to have a defeatist attitude (not that I’m saying you do; I think you are being contemplative) about the possibility of a career in this business.

  37. Daniel Kahan
    Executive Director at ISLSP

    Richard, thanks for bringing this into the public domain where I think it belongs and hopefully other more well-connected bodies like CALU will wake up and look into the implications.
    As an actuary I would say that Finance is just keeping up with the times and the fact is that people on average are living longer, but whether they should be taxed more is as you quite rightly state is really a public policy where the voters who elect the federal government should be allowed some input and I would think CARP would also want to hear from you.
    What I think would be helpful for seniors who live past 100 would be to allow their T100 maturity birthday present to be tax-free rather than treated as a CSV disposition and once you make that change the feds should allow the same for Term to 95 policies.
    This would encourage the creation of a secondary market for Canadian seniors as a lender would now have a maximum in-built repayment date for their “reverse mortgage” loan, which would constitute an in-built hedge.

  38. Richard Proteau
    CEO and Founder Financial Services Consumer Alliance

    thanks it is a public domain issue. In fact I would not be surprised that most federal MPs are unaware of this proposed change. I will contact them individually to ensure that they are knowledgeable on this issue.

  39. […] 3. Taxation of life expectancies: In our article, we reviewed changes to the taxation of prescribed annuities which will have a tremendous impact on old seniors who will be on guaranteed income. The article:… […]

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