Justin Ezekiel

Your corporate clients may not know that Sun Life Guaranteed Investment Funds (GIFs) contracts owned at the corporate level offer several attractive benefits for business owners. GIFs are also known as segregated fund contracts.

Canadians want guarantees

  • 87% of Canadians aged 55 and over want investments with guarantees on the principal and growth opportunities.
  • 60% don’t know this option exists with GIFs, available from insurance companies.1

A GIF is a life insurance contract that contains investments similar to those mutual funds offer. But, unlike mutual funds, GIFs offer guarantees [tweet this]. These guarantees can protect the value of a corporation’s investments at maturity or death. Consider GIFs when selecting the appropriate portfolio investment vehicle as you work with corporate clients.

Sun GIF Solutions is part of Sun Life Financial’s industry-leading suite that provides the growth potential of investment funds with the benefits of an insurance contract. Sun GIF Solutions is one product, but it’s suitable for many needs, combining three different series in one flexible contract. Corporations also have the flexibility to access money at any time.2

With Sun GIF Solutions, corporations can:

  • Move some or all of the investments between series3 and
  • Access the remaining capital whenever the corporation may need it.3

Guarantees

Many business owners hold portfolio investments at the corporate level for various reasons. Whether the funds are for retirement planning or for bridging potential downturns in the business, it’s critical that business owners are able to invest as they want, while ensuring that the bulk of the business’ funds are available as needed.

Sun GIF Solutions – Estate Series features:

  • A maturity guarantee of 75% of all deposits.
  • A death benefit guarantee of 100% of all deposits (guarantees are reduced proportionately for withdrawals).
  • The death benefit guarantee is eligible for an automatic reset each year until age 80; if the market value of the contract is higher than the current guarantee amount, the death benefit guarantee will automatically increase to equal the market value.

Tax treatment

All income that each segregated fund earns during the year (except unrealized capital gains) is taxed in the year earned, regardless of whether clients take systematic withdrawals, and regardless of the amounts withdrawn. [tweet this] Note that there will be two potential sources of taxation:

  • The GIFs must allocate all the income to policyholders each year.
  • There will be tax consequences that result if there are withdrawals by clients.

About the tax treatment

  • Interest, dividends and foreign income are fully taxed.
  • Only half of the fund’s realized capital gains are taxed. Unrealized capital gains are not taxed until realized.
  • A Canadian-controlled private corporation’s (CCPC’s) refundable tax rates vary depending on the type of income it receives. For instance, all the “Part IV tax” that a CCPC pays on taxable dividend income forms part of the refundable tax on Refundable Dividend Tax On Hand (RDTOH) that the corporation can ultimately recover, so long as the CCPC pays sufficient dividends through to its shareholder(s). Dividends received by the shareholder(s) can, in turn, benefit from the personal dividend tax credit.
  • Only a portion of the tax that a CCPC pays on non-dividend property income gets added to its refundable tax account; in other words, lower refundable tax rates will apply to interest and capital gains income allocated from the fund to the CCPC. Again, the CCPC’s refundable taxes (in its RDTOH account) are recoverable when sufficient dividends are paid through to the CCPC’s shareholder(s).

After an income item becomes taxable, the GIF treats it as part of clients’ after-tax money, effectively the same as the premiums clients use to purchase the GIF, and it isn’t taxed again when withdrawn. If clients take withdrawals from their fund (systematic or otherwise), part of each withdrawal will be treated as having been taken from the funds’ unrealized capital gains, if there are any, and part from the funds’ after-tax money. Once an unrealized capital gain is withdrawn, it’s treated as realized, and half the gain will have to be included in clients’ income for the year of the withdrawal.

For corporate clients, half of the capital gains (the untaxed portion) will create a credit to the corporation’s Capital Dividend Account (CDA). Amounts posted to the CDA can then be paid to the shareholder(s) as tax-free capital dividends. CDA tax treatment is available only for private corporations that Canadian residents control. It’s not available for public corporations or for private corporations that non-residents control.

Capital loss advantage

Unlike mutual funds, GIFs can flow net capital losses through to the owner of the contract. The corporate owner can apply these losses against other capital gains in the same year or carry back those losses up to three years. This unique feature creates additional tax planning opportunities. The advantage ties in with the notion of investing in a greater proportion of equity-based funds due to consumer confidence in the underlying guarantees.

Adjusted Cost Base (ACB) tracking

Ultimately, it’s not the responsibility of the brokerage to report capital gains and losses for mutual funds; it is that of the investor. Certain transactions that contribute to an increase in ACB may be overlooked, so non-registered investors, including corporations, can end up paying additional capital gains taxes unnecessarily. With Sun Life GIFs, the insurance company keeps track of each unit holder’s ACB. When units are redeemed, Sun Life Financial calculates the realized gain or loss and reports this on the investor’s T3 form. As such, there is typically no need to spend time tracking ACB or contracting an accountant to do so.

Additional considerations & structure flexibility

Although Sun Life GIFs are an insurance contract, they generally won’t create a material credit to a corporation’s CDA when the annuitant/insured person dies, unlike the case with a corporately owned life insurance policy. However, the contract structure ensures that proceeds flow to the desired beneficiary at the appropriate time. For example:

  • A corporation is a beneficiary for a portion of a Sun Life GIFs contract. The death benefit proceeds received by the corporation in turn funds a buy/sell agreement (upon death) in the case of an uninsurable shareholder.
  • For a corporately owned Sun Life GIFs contract, if the beneficiary is an individual, the death benefit would create an unintended, fully taxable benefit at that time. As such, an appropriate corporate entity needs to be chosen as the beneficiary.

Series switching

Sun GIF Solutions offers three solutions to meet a corporation’s evolving needs:

Investment Series

Grow savings – while enjoying the benefits of protection the contract can provide.

Investment flexibility

Customize the portfolio with a level of risk that the corporate client is comfortable with.

Focus on growth

If corporations want growth-oriented investments, they can allocate up to 100% of their investment to equity funds, leaving the day-to-day investment decisions to leading global portfolio managers who work hard to build investment values.

Insurance protection

Low-cost insurance carries a 75% maturity and death benefit guarantee.

Estate Series

Protection – and the efficiency of payments to your business – may be critical in succession planning.

100% death benefit guarantee

The death benefit paid will be the greater of the death benefit guarantee or the current market value.

Annual reset

The death benefit has nowhere to go but up. Up to age 80, the death benefit is reset annually if the market value is higher than the previous guaranteed amount.

Diverse, leading fund companies

Corporate clients can choose from approximately 55 funds and benefit from the investment expertise of leading global portfolio managers, with no restriction on their allocation to equity investments.

Income Series

Guaranteed lifetime income – with the flexibility to address all corporate planning needs.

Income planning flexibility

Corporate clients can begin to take lifetime guaranteed income based on the annuitant’s age, commencing as early as age 50, or defer payment until a later age to grow the guaranteed income amount.

Series flexibility

To meet other investment or estate needs, corporate clients can hold assets in the other series within Sun GIF Solutions at the same time and within the same contract.

A diverse, income-oriented investment

The investment fund for the Income Series is Sun GIF Solutions Strategic Income, a conservative fixed income investment that provides access to public and private fixed income solutions and investment strategies typically available only to institutional investors.

The corporation has the flexibility to move from one series to another as the corporation’s needs evolve. In certain instances, business owners can make the series switch without incurring a taxable disposition.4

Clients can also create a guaranteed, market-based pension plan inside the corporation with another Sun Life GIFs contract, Sun Lifetime Advantage GIF. This contract offers the ability to defer guaranteed income for life until desired.

Contact a member of your Sun Life wealth sales support team to learn more about retirement, estate, tax and financial planning. 


1 Results from Ipsos poll conducted in November 2016.

2 Note that withdrawals will affect guarantees.

3 Some restrictions apply.

4 Moving from one series to another series will affect lifetime guaranteed income.


Justin is Director of Advanced Planning, Wealth Distribution, Sun Life Financial. He provides advisors with tax, estate and retirement planning information to help them deliver the most effective solutions for clients. Justin has many years’ experience with Canadian corporate and personal taxation, and has held management positions at various organizations. Before joining Sun Life Financial, he was also a consultant at his own firm where he provided planning and consulting services directly to advisors. His experience encompasses both the insurance and investments industries.

Justin is a Chartered Professional Accountant (CPA, CA) and holds the Trust and Estate Practitioner (TEP) designation. He has a Bachelor of Commerce (co-operative) degree from the Memorial University of Newfoundland and has completed the Canadian Institute of Chartered Accountants (CICA) In-Depth Tax Course, Levels 1 and 2.