QUICK! Do THIS With Your Rental Real Estate Portfolio!

The insurance contract is not an investment and the cash value cannot go backward. It is contractually guaranteed to grow daily and it cannot go backward. Whereas what you're highlighting with the investment, when we really think about that, as you mentioned, you've got to earn that rate every year uninterrupted. And we're presuming that the investment has no volatility, that it's only growing. And so your solution to the problem is the premium for the policy and the insurance companies paying that tax bill, not the estate. What an amazing tool. We're here to demystify the immediate financing arrangement, otherwise known as ifa. So Frank's going to share a real example. And if we just describe an immediate financing arrangement, really for the right individual or the right corporation, an immediate financing arrangement provides the benefits of dividend paying participating whole life insurance at a fraction of the cost without reducing cash available. And so we're going to detail how that works. Immediate financing arrangements are not related in any way to the process of becoming your own banker. The infinite banking concept. The only common denominator is the tool. And that tool is dividend paying participating whole life insurance or a system of dividend paying whole life insurance policies. And so without further ado, it gives me great pleasure to introduce to you Mr. Frank Abate.

Thank you very much. What we're going to share today is a real life example. I think the best way for people to get a grasp of what this is all about is to see how it works in a real situation. So this disclaimer, usually I fly through disclaimers. What we're looking at today is from the perspective of a Canadian taxpayer. So if you are a U.S. taxpayer, a U.S. citizen, or a citizen of any other country, then of course we're going to have to get advice from a professional that understands tax in your jurisdiction. So this is simply a Canadian taxpayer. The rules that would apply to Canadian taxpayers. So right into it, these are the facts again, real life case. Julie, she successfully employed managing the family's real estate business. Julie draws an annual salary of approximately $100,000. She also receives her share of the net rental income from the rental portfolio. Julie is in the top marginal tax bracket. Julie is married to John and they have two kids aged 17 and 14. John, her husband, is employed as a consultant and I call him a T4 salaried employee. Nothing to do with the family business. He has nothing to do with the real estate business that is part of Julie's siblings. Julie's family and her parents basically run that Side of the business. Julie is a partial owner in the real estate portfolio in the real estate properties with her family. And currently they own roughly eight investment properties With a combined fair market value of about $18 million. Julie's portion of the $18 million is approximately $7 million. So if I took her ratio of what she owns of that family real estate portfolio, it's roughly about $7 million. The total cost of the eight properties is approximately $7 million. And her share of that cost is roughly about $2.7 million. Julie's long term plans are that on her passing, her rental properties will transition to her children. Julie's long term plans are that on her passing, her rental properties will transition to her children. Julie recently became aware that this transaction, the transaction being transitioning her properties to her children on her passing, well, that transaction is going to create a capital gain and a tax liability. Because as a tax person, it amazes me how many people are unaware of the fact that when they die and they leave assets to their children, that that is going to create a taxable transaction. Well, Julie does not have any permanent life insurance. Okay, so where do we come up with the cash now to pay the liability on that transition?

We're going to review how the addition of a participating whole life policy can be a tax efficient addition to her overall plan. On the passing of Julie, the transfer of the real estate assets to her children will create a tax liability. Since we are all deemed to dispose of our assets on our passing, an exception to this is when we leave assets to a spouse, the assets roll over at cost base. Basically, we're just deferring the tax until that secondary spouse dies. So the tax liability on the transition of Julie's rental properties is as follows. Her fair market value as of today is $7 million. Her related adjusted cost base is $2.7 million. So simple math tells me that her capital gain is $4.3 million. So her tax is 27% of $4.3 million. Julie's estate is going to have a whopping tax bill of $1.2 million. They've received a portion of the portfolio.

And now they have to come up with $1.2 million.

The last point I'm going to make is that I kept this very simple. Those of you that are already involved with real estate Realize that there's something called capital cost allowance. Capital cost allowance is basically our depreciation of a building. We love taking capital cost allowance While we're paying taxes in the income earning years. Because capital cost allowance is a deduction and it lowers our taxable income in the year that we take capital cost allowance. But what happens when we die or when we sell a property that has a capital cost allowance amount and the fair market value was a lot higher. We didn't actually experience depreciation on our building. Where in Canada over the last number of years have we had a depreciable real estate? Hasn't been happening. So what happens is if we have taken depreciation or capital cost allowance in prior years, that all gets brought back into income as well. I didn't include that here just to keep the example simple. But keep in mind that there's a lot more than just the capital gain that we could be adding to the, to the tax liability on this. We call it recapture, recapture of CCA if they had taken depreciation on this property. So my second last point here, if that amount of cash, if the $1.2 million of cash is not available, they may need to dispose of one of the properties. So I always like to tell people that you have options. Life insurance is not the only option. The kids could actually sell the properties. So liquidity, I'm always about liquidity. Cash at death. And where does it come from? Cash at death? It comes from a life insurance policy. Cash at death makes our life very easy. The first thing that we're going to do is we're going to look at putting a permanent life insurance policy on Julie's life. So Julie would be a single life insured and she'd pay for her annual premiums from some of the rental revenue that she's receiving. Her portion of the rental properties is 7 million. So you can imagine she's getting substantial rental revenue from the properties that she owns. She'll designate the beneficiary of the insurance policy to be her children. We're going to look at a single life participating life insurance policy on Julie and the policy is going to be a wealth type of a product with early cash value. We want rich cash values immediately for Julie. Julie's children will be the beneficiaries of the policy. And remember, Julie's children are still not of age of majority. So part of our consultation will be that we'll have or we'll create a trust to receive the proceeds on Julie's children's behalf. Julie is 48 years of age, she's a non smoker. The policy considered is a wealth whole life policy on a life pay basis. If Julie chooses to stop paying after year 10, then we're going to Have a policy that will be offset, meaning that the premiums will be supported internally within the policy. After year 10, Julie doesn't have to worry about putting more premiums in. However, Julie will have the option to continue putting premiums if she'd like to. And of course that will just propel the numbers to increase the death benefit. And that's a good thing because remember, $7 million or the $1.2 million of tax liability is basically based on a $7 million current fair market value. But we know that that fair market value will continue to grow. So if we continue to put premiums past year 10, we'll have higher death benefits to cover that. Annual premiums on this policy will be $70,000 per year, and those are comprised of roughly 29,000 of what we call base premium and 40,000 of extra deposit. The extra deposit creates buffer so that we have enough cash at year 10, if we so choose to stop paying premiums. There's enough cash in that policy to support itself for life. And finally, the last point, annual dividends on this policy, we're going to leave them in the policy and they're going to be used to buy extra paid up additions so that our death benefit continues to grow annually and the cash surrender value will continue to grow annually. What's going to happen to Julie on death? Well, when Julie dies, she's not leaving anything to John. It's going straight to the children. Julie's ownership in the real estate will transfer over to the children. The children or trust will receive the death benefit. And that death benefit will satisfy the liability that arises because of this transaction, because of the transition from Julie to her children. And you can see that the movement of assets have moved over to children and they don't have to sell the assets because they have the cash from the insurance policy to pay the taxes. So what I like to do is I like to say to people, well, you have an option of doing insurance and quickly. I'm going to go through this slide extremely quickly. But what I show people is if you were to do that $70,000 a year, Julie, up until year 10, so you pay it from age 49 to 58. We've put in 10 premiums of $70,000. And this is the result of death benefit. This is the life insurance solution. But what if instead, Julie, you say, you know what, I'm not doing that. I'm going to create a sinking fund. This is a little bit fictitious, but I like to show it as an apples to apples comparison. A sinking fund. Just says, I'm going to self insure myself and I'm going to find a safe investment out there as safe as life insurance. That's going to give me a rate of return of 7%. I think that's a pretty handsome rate of return. That's a pretty decent rate of return. If Julie were to die in year one, well, we know that it's a no brainer to have bought life insurance because she would have put in $70,000 and gotten back $1,340,000. I'm rounding up. Of course, if instead she chose to try to build up a value that would cover the tax liability herself, $70,000 deposited in year one, she'd make roughly $4,900 of investment income. She'd pay tax on that investment income because it's interest income and her kids would have 72,000. How would it look at year 10? Well, at year 10, when Julie's 58, if she died there, we've got 2,660,000 versus 840,000. Again, creating a sinking fund, putting $70,000 per year in an account. I'll call it a bank account or a GIC, paying 7%. Okay, again, no brainer. Insurance is much better than the taxable investment or the sinking fund. Well, let's go right to the column where I label Le Life Expectancy. @ life expectancy, the insurance would have grown to $3,000,000. 3,013,000. You can see my highlight at year 37. If I scroll over to the right, my self insure fund will have built up to only $2 million. And remember, I'm using a rate of return here of 7%. What would we have to earn in order to replicate the insurance? We'd have to earn roughly 9.7% every year without a negative year. 9.7% over 37 years, every year, 9.7%. So when she dies at year 37, her children will have cash and liquidity of $3 million.

To allow them to hold that real estate without having any issues regarding where is the money going to come from to pay the cra. Death benefit is paid, CRA gets its chunk of change, they're going to have their handout, and of course the children are going to have the cash and liquidity to pay.

Them. And I think one of the things that I would add, Frank, to what you just described in the alternative, where somebody might say, you know what, I want to create an investment that's going to produce enough accumulation to take care of the problem, which is the tax Bill, some of the key distinctions here is that the insurance contract is not an investment and the cash value cannot go backward. It is contractually guaranteed to grow daily and it cannot go backward. Whereas what you're highlighting with the investment, when we really think about that, as you mentioned, you've got to earn that rate every year uninterrupted. And we're presuming that the investment has no volatility, that it's only, only growing. And so your solution to the problem is the premium for the policy and the insurance company's paying that tax bill, not the estate. What an amazing.

Tool. Absolutely. I can't put it any better, Jason, and what we just ran through is really plain vanilla insurance planning. I don't think that I gave you anything that's rocket science. But I think I put it in a way that you're able to grasp and understand. And what I'm going to say in my next slide is no brainer. Of course, Frank, it's a no brainer for Julie to spend $70,000, and I say that very sarcastically, it's a no brainer. As a tax person, I think that the solution makes a lot of sense. If Julie can afford it, if she can afford the 70,000 times 10 years, why wouldn't she do it? I'm sure the whole ascendant team could agree that we hear this often. So common reasons that Julie would say, thank you very much. I really appreciate the information, just not for me. Number one, I'm great at investing in real estate or the stock market or private mortgages or whatever, whatever, whatever. And I can do much better than the life insurance payout. So to Jason's point, 9.7% I think is very good. But I have been challenged before where people have said 9.7% does not excite me, Frank. Okay, that's fine. I have a solution for that. Or number two, I love this one. I'm leaving the kids so much they can figure out how to pay the taxes. I don't think that's true. I've worked with so many clients that have made it, that have done well, and when you talk about what the next important thing is in their life, it's making sure that they transition as efficiently as possible. Do I get some of these people that truly don't really care, that truly their kids will figure it out? Yes, I do get a few of them. But for the most part, high net worth individuals, successful individuals, create a very nice estate and they want to make sure that they transition it as efficiently as Possible. So how do we move forward? So if we have number one or number two, number two we might not be able to deal with, but number one, absolutely. I could deal with Julie. What if we can place that much needed life insurance policy on your life without interrupting your use of the $70,000 per year? So I agree. Julie, you're fantastic at buying real estate. You're fantastic at buying the winners in the stock market. You structure private mortgages so that you're getting 12, 13, 14%. I can't debate whether or not you're good at that. Why does investing in a life insurance policy mean that you have to part with that cash that you've put into premium? Here's where we introduce an ifa, an immediate financing agreement. Buy the life insurance solution that will make the transition to your children as clean as possible. Because life insurance means cash and liquidity at death have access to the annual premium that you deposited to the policy. So what if Julie wants to use that 70,000 annual premium for other real estate opportunities or to continue paying down existing mortgages? Why not pay the premium first, then borrow back from the cash render value and then use that cash to pay down existing mortgages or buy new opportunities? The policy has a cash render value short term CSV, which can be accessed at any time by the policy owner via a policy loan or as an asset to secure a bank loan. So an ifa, Typically we're looking at a bank loan at a third party loan. Upon initial deposit to the policy, bankers will lend up to 100% of the cash surrender value back to Julie, in this case back to Julie because Julie is the owner of the policy. Each year Julie pays the premium and the bank will lend up to cash surrender value on a scale of current dividend scale minus 1%. Step one, ownership of the policy. Julie is paying for the premiums from her rental revenue. Children are going to be the beneficiaries of the policy.

Step two, well, here's where things change. Step two in the process is that Julie will post that insurance policy as security to the bank. You see that? I have a picture of a bank. The four pillars there. So we post that policy as security to the bank and we borrow back $70,000 per year. It's actually going to be slightly less in the first few years and you'll see the numbers in a second. But essentially on a year by year basis, we're going to get back the money that we put into premium. We're going to get it back in the form of a bank loan. What does Julie do with that 70,000? Well, the only reason that she's going to take 70,000 in the form of a bank loan is because she's got an investment purpose for it. That investment purpose could be either buying new real estate or it's continuing to pay down the real estate or the mortgage on existing real estate rental properties. I tell people, please do not borrow that money if you don't have a purpose for it. Borrow the money if you're going to use it to continue to invest, to continue to do good things with it. Because when we borrow to invest, what happens to the interest on that borrowing? Well, the interest on the borrowing becomes tax deductible. So Julie's interest cost is not what she's paying, but it's what she's paying less. The tax deductions she's getting for that interest death benefit to the kids after repaying the bank loan on an annual basis, we're going to pay interest. Julie's going to pay interest on the loan outstanding. So what has resulted? Julie is using $70,000 annually for 10 years from her rental revenue to make deposits to her policy. Banks will lend to the owner, Julie, 100% of cash surrender value in the form of a line of credit. The policy that we're using focuses on high short term cash render values. The amount borrowed will then be used either to invest in new real estate or pay down amounts outstanding. Keep paying down the mortgages on current real estate that is owned on an annual basis. Julie will pay the interest expense on the line of credit. The interest is tax deductible along with a portion of the life insurance premium. Since the policy was used to secure an investment loan, Julie will have a death benefit. So all of this results in Julie having a death benefit that did not cost $70,000 per year, but rather it cost her the interest on the line of credit net of tax deductions. And of course, the death benefit is always going to be substantially higher than the loan outstanding. Why? The loan outstanding will simply be the premiums. Well, generally speaking, death benefits will always be much higher than the premiums paid in. So essentially by us implementing this, we've created wealth to our family equal to that death benefit over and above the premiums. And we did not forego access to those premiums because we took the premiums right back and employed them into our investment.

Strategy. Text the word schedule to 780-809-4599. Again, that's. Text the word schedule to 780-80945. 9. 9. And when you do that, you can create a time that's convenient for you. You'll meet with one of our advisors. If the situation is appropriate, we'll invite Frank to then become a part of the conversation to develop an understanding of whether this strategy would be applicable for.

You. What this is is my over spreadsheet that summarizes the ifa. Now, the one thing I'm going to highlight is that unfortunately on the right hand side, my loan interest rate, thanks to the aggressive increases in interest rates, that loan interest rate is outdated. A 5% loan interest rate is not a fair rate for me. To be running these at prime right now is somewhere around six. And that's the rate that normally the banks are offering the IFAs at. Now, every situation is different. So I'm not going to say that every IFA will happen at prime, but typically I'm seeing prime being the offered rate for these. Year one, $70,000. And I'm on the first column under annual deposit. So Julie puts her $70,000 in cash surrender value is $54,000 in the policy. What does that mean? Well, that means that once approved, and by the way, part of our process is that when we submit your life insurance application, we also start the bank underwriting to make sure that we get a bank approval before we place the policy. So in year one, you're going to have a shortfall. How much is the shortfall? The shortfall will be the 70 in versus the cash surrender value. Cash render value in year one is very rich, but it's not equal to premium. So we've got a shortfall of roughly about $16,000. $16,000 is your first year shortfall. Well, year two happens, you put in your next 70,000 and the cash render value has gone from 54,000 all the way up to 120,000. 120,790. Well, that's a difference of roughly 66,000. So now my shortfall in year two is 70 minus 66. It's only $4,000 of shortfall, remember, of course, on top of the cash in and out via premium and loan advance, I have that interest that I'm financing. Year three, I put in $70,000. What's my annual loan advance? Well, if you go a few columns, right, you can see that for the 70,000 that I put in year three, I'm actually able to get 78,000 back because again, the banker is measuring against the cash render value. And the cash render value from year two to year three went from 120 to 199.

So the banker saying, absolutely, you could take back more than what you've put in in year three. And I'm doing this to catch up for the shortfalls I had in year one and year two. I do this all the way through to year 10. At year 10, look at the highlight. So everyone look at that highlighted year 10. If I look at the annual deposits I've put in 10 years times 70,000, if I look at my anticipated cash surrender value, and I anticipate my cash surrender value to be 821. So I've actually built up equity in this policy and my total death benefit is roughly 2,659,000. My ending loan balance is $700,000. And now that loan balance will remain for life if I want it to, as long as. And you can see on an annual basis every year that loan balance is 700,000. Why is it 700,000? Because I'm assuming that the individual will finance the interest, will pay the interest. Quick high level summary is that the policy was supposed to cost 70,000 a year times 10 years, but instead it's costing roughly 16 to 17,000 after year 10. Where's that $35,000 coming from? Well, think about it. We're taking cash out of this policy to reinvest. So I'm going to use my private mortgage clients as an example. I actually had a gentleman last time, say, Frank, where's your column that shows what I'm earning with my $700,000 that I pulled back out? He says to me, frank, I could make 10% to 12%. And I said, fantastic, great, go make 10 to 12% in your mortgages. If you're going to make 10 to 12% in mortgage income or interest income from your private mortgages and you have to pay the banker 6% in prime interest rate, you have arbitrage of the difference. And why did you do this? You did this because of that total death benefit that you just created for your family. You've created liquidity and cash and we didn't take away that ability for you to go out and do the private.

Mortgages. In addition to that, Frank, what's very important is that you've solved the problem utilizing a tool that can only grow in value every single day. It cannot go backward. And then you've also created a solution to an opportunity. If an opportunity of high caliber presents itself, the policy owner can take advantage of of that high caliber opportunity without interrupting any of the daily growth that's occurring inside the.

Policy. First things first. Total death benefit at year 37. Remember earlier I was showing that year 37 death benefit before we introduced the IFA, we had established that the death benefit would be roughly $3 million. Fantastic. Well, the first payer or the first recipient of the $3 million will be the banker. The bank will get their $700,000 loan repayments. That's fine. And you can see my big green X canceling out the bank. So We've repaid our $700,000 loan because we've taken it all back. That was all the premium that we've taken back. What's the remainder of the death benefit? $2.3 million. $2.3 million.

Goes to the children and they have that value. They're not children anymore. 37 years later, they're in their 50s. But these adult children now have $2.3 million of cash and liquidity to help them pay the taxes. If you look at Julie, right underneath her, I have two arrows. Total amount paid in was 700,000. Total amount that came back to her in the form of borrowings was 700,000. So from a premium perspective, she's net zero. She didn't pay any premiums. Well, it didn't cost her zero because on the left hand side, the after tax interest cost over 37 years is $460,000. So think about that. Her outlay was $460,000 instead of 700,000 over 10 years, 460,000 over 37 years. Time value of money. If you ask me as an accountant, would I rather pay $700,000 in 10 years or $460,000 over 37 years? I'll definitely take the second one because it's less. But I also take it because it's spread out over a longer period of time and we can't negate the fact that that $700,000 that she borrowed was placed into an income earning asset. When people ask me, I'll tell you, often people ask me, frank, what do I do with the borrowings? Again, I say to them, an IFA is not for you. There's a lot of people that will engage in this and not borrow immediately. So I don't want you to think that you have to borrow from year one. I have several individuals that say, frank, I might start borrowing at year five because I want there to be a substantial amount. And at year five there's $350,000 there. And that may be a down payment on a new rental property. Fantastic. There's nothing saying that we have to take the schedule as per what we've listed out here. This is what's possible. But we could defer when we start to borrow the money. And by the way, we could repay this loan. There's nothing saying that this line of credit has to remain outstanding forever. So let's assume that the asset that you purchased with the borrowings gets sold and you have cash flow coming in and you want to repay this loan. Absolutely. The bank's not going to stop you from repaying the.

Loan. The one thing that we express is that we cannot guarantee the time, but we can guarantee the money. And so what I mean by that is we cannot guarantee that Julie is going to have all the time to set out to achieve everything that she wants to get done. Because we don't know when Julie's going to die, but we do know that that day will come. And what the insurance contract guarantees from the moment of inception is that enough money is going to show up to solve the problem. And so while we cannot guarantee the any one time, we can absolutely guarantee the money. And that really resonates at this particular point in what you're illustrating because the money is going to be there. And you talk about time value of money, My goodness, there's a lot of time here and there's a ton of value and for less money. So it's a no.

Brainer. Absolutely. This last picture really encapsulates why we're doing this. Ifa. What is it all about? So I've numbered the steps here and I think that this is going to help bring everything to light. First thing we do is that Julie, remember she had that rental portfolio, she receives rent, so her rental properties pay rent to her. So number one shows Julie collecting rental revenue. Number two says that that rental revenue is used to pay premiums.

That policy, I then have a black dotted line saying we're going to take that policy to the bank. So the third thing that happens is that the policy is used to borrow.

Julie then uses that borrowed money. Number four, she uses that borrowed money to make new purchases or I could have put down to continue paying down mortgages on existing purchases.

Number five is that the rental revenue from these new purchases or existing purchases will provide cash to pay the interest on the borrowed money. And number six is that Julie still owns real estate, property and rental properties as she had anticipated to do so. But now she's got another asset called life insurance, death benefit proceeds that will help her family transition these assets and take care of that pesky cra. I'm all about showing the positives. I'm all about the benefit of doing an ifa. But of course I'm not going to hide from what we need to consider and what you should consider in your decision making criteria. So first of all, interest rates. I can honestly tell you that in maybe two or three years ago, I was running IFAs at roughly 3% and that was a conservative number. Well, with interest rates the way they've gone, I have to run IFAs at 6%. So that's a true cost. So it changes the nature of your interest financing costs. So please consider that loan terms, the loan terms are pretty good. These are demand type loans. However, in any of my dealings with the bankers, I'm always asking, I'm always asking, when do you pull the trigger on these things? And I say, Frank, if we're happy with the borrower, if we're happy with our relationship, we have no purpose in pulling the plug on these because we're lending against GICs. Essentially it's not a GIC, it's cash render value, but it's lending against cash. So we're secured oversecured by doing these types of arrangements. So the loan terms are very favorable. Loan repayment, we either repay it when we die because of course the bank has assignment, they're the first to be repaid or repay it when we want to. There's nothing saying that we can't repay when we want to repay deductions. Well, there's no sense in me creating a large deduction. Remember in my example I'm going to jump around here, but in my example, I get to a loan amount of 700,000 and I pay interest of roughly if I use a 6% rate of interest, I'm paying interest of $42,000. Let's make sure that I can use that deduction of $42,000. Could Julie use it? Absolutely. She's in the top margin tax bracket, so she's making over 250,000 and she could utilize that deduction and take advantage of it. Tax rates, does this look very good for someone that is in a 40 to $50,000 tax bracket? It doesn't look as great as it does for that person in the top marginal tax bracket. We have to review how it looks at different tax rates. Policy performance. Well, we know that we've had periods of declining dividend scales, but with interest rates rising, we know that the policy should start to pick up in terms of our dividend scales. And I'm confident that policy performance should pick up an Investment in business performance. This is very, very important. I and the ascendant team members are showing you a way of accessing your money. Now, if you take that money and put it into a failure of a business, and I'm not suggesting that anyone would do that, but that's part of what you have to assess. Think about the individual that invests in personal mortgages. In his scenario, he knows that he's going to get 10 to 12% to 14%, and he's okay with paying 6% interest because again, I'm going to use the word arbitrage. So from his perspective, there's no risk from an investment performance. Business performance. Frank will not challenge what you're doing with that money. I can't challenge people's business decisions because I don't have control over that. You have to ensure that when you're borrowing to do something with that money that it's going to reap you a good rate of return. I can't guarantee that. So I just want everyone to realize that, you know, I'm outlining the risks. The first part was all of the benefits. You have to take these risks into your own consideration. Summary of all of this. Banks understand the way participating life insurance products work and they're going to offer 100% leverage against the cash render value of the contract. Insurance carriers have created products that have high early cash render values. Why have they created this? Well, they've created this because they know that people want access to their money. They don't want their money tied up in an insurance policy that only benefits their kids. I always say that an insurance policy benefits yourself because you have access to the cash render value and it benefits your beneficiary because of the death benefit. This combination allows individuals like Julie to purchase life insurance while not having their capital tied up in the life insurance product. Given the tax deduction afforded to the interest and a portion of the premium, the net cash flow is minimal relative to how much the premium would have been. When I consider the rate of return for the net death benefit produced after the loan repayments, the IRR is significant. It's 16.8%. Now. 16.8% is the rate of return that I've produced by doing an ifa, clearly this strategy should be considered to produce a large capital payment to the kids. And this strategy creates liquidity for the estate to address any tax liabilities which will arise on death. I like to end on that because at the end of the day, I sell solutions. I don't sell IFAs I sell solutions to a problem that I know you're going to have through and through. I'm a tax practitioner. I want to sell a solution so that your state has the ability to address the issues that are going to arise on your passing. The IFA just helps facilitate that solution. I'm going to start by saying when we get into corporate ownership of real estate, when we get into corporate ownership of assets, there's a few tax issues that we have to consider. The main thing that I want to put across is that tax liability at death does not go away. And it actually could be a little bit worse if you don't have the right advisors. Before my career coming into the estate planning industry as a tax practitioner, all I did was advise on these types of structures and really the task to get extremely nasty when you have assets owned by a corporation. I don't want to scare you, I just want to tell you that you need the right advice when it comes to this type of stuff. I always ask, how did you capitalize this corporation? And what I mean by that is how did we get the existing or the seed money into the corporation? So if it's a one off corporation, and this happens a lot with our clients, where they basically say, I actually am a T4 employee and I strictly set up a corporation to own my real estate assets. Fantastic. Well, you needed money in that real estate corporation to get the ball rolling. So you can see that my picture shows I inject 500,000. So I have that green dollar sign showing 500k. I inject it in with my after tax money. Maybe I took a HELOC on my principal residence to inject money into my real estate corp. Whatever it is, however you did it, it's your after tax money personally that you put into the corporation. What do you get in exchange for injecting cash into your corporation? You get a shareholder loan. Right? So basically you're lending money to the corporation. And here's my accounting coming out. If I book the transaction in the real estate corporation's balance sheet, it'll show 500,000 of cash. But I have a liability of 500,000 owing to Tony and Tina.

So net value in the corporation right now is zero. I took in 500,000 of cash. I owe my shareholder 500,000. Now the real estate corp goes out and buys its first rental property. Purchase price is $1 million. We put a down payment of 500,000 and we get financing for 500,000 for this property. What's the corporation worth now? Still worth nothing because we have $1 million purchase price, 500,000 of the cash that we injected was used up and 500,000 mortgage taken. So $1 million purchase price on the liability side, I have an amount owing to my shareholders of 500,000. And I have an amount owing to the bank of 500,000. So the value of this corporation, you can see 100% of the common shares have a value of zero. I know that people are saying how could that be? How could it be worth zero? It's worth zero. Tony and Tina have $500,000 coming to them. They have an asset personally because they have a shareholder loan outstanding. But the company is worth zero right now. What's another common way that we capitalize a corporation? Well, the traditional way that we capitalize a corporation is because we do well with an operating company. So an operating company operates, sells desks. OPCO sells desks. It does fantastic. It pays tax at the OPCO level. We pay our tax, we have retained earnings. We do intercorporate dividends up to our Holdco. I've labeled this as real estate company. That dividend up from OPCO to Holdco is tax free. And then real estate Corp. Goes and buys the same piece of property. Purchase price is a million dollars, down payment is 500,000, mortgage is 500,000. Now what's the corporation worth? Well now the corporation is worth at least 500,000. Why? Well, because I didn't inject cash in. The cash that seeded that first purchase came from my operating company. You see the difference? I generated profits in the operating company, they were retained in the corporation. And that 500,000 is value in my shares. So the purchase price is a million. Down payment is 500,000 that I took from an intra corporate dividend from Opco Mortgage of 500,000. My common shares, I'm saying are at least worth 500,000. And then of course there's some value in Opco. So those common shares of Holdco Real Estate Company are probably worth a lot more than 500,000. So the real estate portfolio grows and you can see that I keep multiplying this fantastic real estate property, fair market value. Years go by fair market value. I keep multiplying, I keep buying more properties. Fair market value of the properties in my portfolio is now $10 million. Mortgage is outstanding, $2 million. The net fair market value of the real estate portfolio is 8 million. What are the shares worth? The shares are worth $7.5 million. Why? Because on that $8 million, I still have a shareholder loan outstanding of 500,000. So the shares are worth $7.5M. Here's where it gets really important. Tony and Tina die. Both of them die. So if Tony died first, he left his shares to Tina. Tina dies, she leaves it to her kids, it's the estate and bang, we have a capital gain. Well, what is the capital gain calculated on? Is it calculated on the actual properties? No, because Tony and Tina don't own properties. The corporation owns properties. So the capital gain is calculated on the shares of Real Estate Corp. So you can see my calculation. It shows that fair market value is 7.5 million. What's the adjusted cost base of the shares? As tax practitioners, we say zero, but usually it's $100. We incorporate with $100 to take back 100 common shares. Capital gain is $7.5 million. Half of it is taxable. Right? The 50% rule and the tax that I owe on this is approximately $2 million. So when Tony and Tina die and they leave their children the shares of Real Estate Corp, the children have to come up with $2 million so that they can pay the tax bill. Now you can see that we've put $2 million of insurance in place, CDA, which is short for capital dividend account. The insurance payout of $2 million of cash goes to corp. And it creates something called a capital dividend account because it means that we can extract $2 million out of the corporation tax free.

So what I'm going to do now is I'm going to look at this right hand side and say, okay, they've solved my problem. Frank, Jason and team have put an insurance policy in place and for now I'm ignoring cost because I want to get a point across here. They have $2 million that they're going to pull out of the corporation tax free and it's going to go to the tax man, the cra. Well, my last point there says this is the nugget I'm going to leave everyone with. It says $2 million of life insurance to pay tax and tax payable at death will actually be lower because of the CDA account. It basically says that that $2 million doesn't only create cash, it creates a capital dividend account that will actually reduce that tax bill on.

Death. We have never talked to anybody who has said, I really don't think that I'm taxed enough. So can you put some planning in place that's going to increase my tax.

Liability? It just doesn't.

Happen. But everybody loves tax free as much as we do. So remember, if you Text the word schedule to 780-809-4599 because you find yourself thinking, wow, what Frank shared sounds really interesting. I want to explore whether or not this is a strategy that would be suitable for me. Text the word schedule to 780-809-4599. So with Julie, she made a hundred thousand per year and now $70,000 has gone to premium. I can see how it makes sense to borrow back the money to invest. Where does the money come from to cover her living expenses now that she's down 70k? Well, it's the rental income that's paying the.

Premium. Her 100,000 in the form of salary. But she also collected rental income from her portion of the rental portfolio. Remember, they have an $18 million fair market value portfolio. So she's in top marginal tax bracket in Ontario. You need well over $250,000 of income to be able to be in the top marginal tax bracket. So she was collecting substantial rents and her husband also is earning a high salary to cover living expenses. She doesn't have to pay 70 because 70 is coming right back in the form of a loan. She's paying the interest expense. So interest expense on potentially $700,000 of outstanding loan. 700 times 6% prime rate of interest. We're at $42,000. Still. $42,000 is a high amount on $100,000 of income. But that wasn't her income. Her income was north of.

$250,000. If you are getting the loan in the form of a HELOC from the bank when taking money from the policy, will this show up on our credit report? If we took out a loan from the life insurance company instead, would that show up on the credit report? When you access a policy loan from the life insurance company that is a private loan, it is not reported to TransUnion, it is not reported to Equifax. That is a private.

Loan. Interestingly enough, one of our partners is Manu Bank. I've asked that of Manu bank and they've given me assurance that it does not come up on the credit report. So I'm giving you that information based on what I've been told by Manu Bank. Other banks that I've asked have said yes, absolutely. So traditional banks, like the large banks, when we get into larger deals, we might shop it around and basically try to get you the best rate. The traditional banks will show up, but Manu bank has reassured me that it does not come up on the credit.

Report. If you don't Use a bank loan, but just a policy loan. Is the interest still deductible.

Yet? Policy loan interest is deductible. If you're paying that interest, which is my preferred method of doing it, then I have absolutely no problem with the policy loan. But yes, the policy loan interest is deductible, similar to the interest on a bank.

Loan. Yeah. I think that one of the distinctions there to expand on as well is that if you pay the policy loan interest and you deduct it, that's going to also reduce the adjusted cost basis of the policy. Whereas when you're using the bank's money, there's no impact on the adjusted cost basis of that policy. It follows its, its engineered pattern. Whereas if you're doing what we just described here and using policy loans and you're paying that interest, if you claim it as a legitimate deduction, and it's only legitimate if it's paid, then claiming it will reduce the adjusted cost basis of the.

Policy. And it's important that we distinguish at this point that the policy loan is fantastic. Ease of administration, there's just so many fantastic things about it. But on a long term basis, remember, if I'm buying an asset that has a long term nature, there's benefits in doing the collateral loan because I don't have to worry about any tax issues that might be related to a long outstanding policy loan. Right. When I'm, when I'm doing temporary loans that I'm repaying policy loan all the way. But if I'm intending to keep a loan outstanding for a long period of time, from a tax perspective, I'm in a better position to take that bank.

Loan. If Julia uses the rental income to pay the insurance premium or the interest expense, how does she cover the monthly property expense and.

Mortgage? Well, the rental income is substantial enough that it is producing more than the insurance premium required. So again, if you are producing whatever it is, even if it's only producing 70,000, well, the 70,000 that is being produced goes into the premium, but then it's coming back out in the form of a loan. So her net on a premium basis is zero. Then she has to worry about servicing the interest. And if she's collecting rental income, that rental income is servicing the interest. No different than her servicing the mortgage on the properties. Right. The 70,000 that she's taken right back out is going towards her mortgages that she already has her existing mortgages. So now she's got interest expense on the new line of credit. She's really just refinanced is what she's done. She's moved the mortgage from her traditional mortgage over to the line against the.

Policies. Can this IFA strategy be implemented in conjunction with the Smith Maneuver? Can I use the Smith Maneuver money to purchase a whole life or is it treated like a tfsa? Can IFA be implemented with the Smith Maneuver and with ibc? So I would say, Frank, if it's okay that that's a personalized conversation to say just in general, whether or not that can be utilized in coordination with another strategy, I don't think it would be prudent for us to comment on that. As a general response, please create a time or just get connected with the right person on my team. We will explore that with you to get to an answer that's suitable for your structure and how you're put together and what you have in terms of objectives. But isn't the policy loan return of excess premium which moves it away from the tax regime? No. When you request a policy loan, you're borrowing against the accumulating cash surrender value in the policy. That is not a return of excess premium. That is a loan. You are borrowing money from the life insurance company without interrupting any of your total cash value, which continues Accumulating return of excess premium is found inside of the dividends that are paid. A portion of that dividend that you receive is a return of capital. And so I think that's where you might be confusing that. And when you take dividends and you chunk those right back into the policy to purchase paid up additions, you are not triggering a taxable event. Is it better to take a policy loan from Equitable or use a Bank loan at 100% of the cash value of my IBC policy? So again, just for clarity, the immediate financing arrangement, the IFA strategy is not becoming your own banker, the infinite banking concept. They are two completely different processes and strategies that are not connected in any way, shape or form. The only common denominator is the tool, the insurance contract that we're describing, which is a dividend paying participating whole life insurance contract. It's not that one is better than the other. They're just not related in any way, shape or form. How can I claim interest paid as a.

Deduction? Well, if we look at the Income Tax act, when we borrow to invest, the interest on that borrowing is deductible. We have to think about the process here. We deposit into the policy and then we borrow from the policy to invest. We're not borrowing to deposit into the policy. First of all, we can't do that because the bank won't allow.

It.

Right. The bank lends you after you've made your deposit. So I want people to be clear on that. We're not creating cash first by borrowing and then putting into the policy. We need the cash available to us to put into the policy. Once the policy has the cash, then we're borrowing and we're borrowing to put into an.

Investment.

Right. Quite simply, I always go back to that private mortgages example because that's the easiest one. If I borrowed at 6% and I invested out at 12%, well, my net earnings on that is 12% income minus the 6% expense. My net income is 6% annually on that borrowed.

Money. Thank you, sincerely. And please ensure that if there's any lingering insights or any lingering questions, you need to text the word schedule to 780-809-4599. Again, that's 780-809-4599. We want to make sure that all of your questions get answered, so take advantage of the opportunity to connect with the right person on my team.