What is an Immediate Financing Arrangement

So, you have a successful and profitable business. You are saving retained earnings into your holding company every year.

The kids are good. You bought that house. And everything seems to be going fine.

But you know what they say “More Money More Problems”

Now it’s how do I grow my retained earning savings without it being subject to the highest tax bracket, how do I make sure I have liquidity for my business or for other Investments that come up along the way?

How do I pay for retirement without paying a massive amount in taxes?

And at the end of it all how do I transfer all of this to my family and loved ones to create that Legacy without sending more than half of my money to Ottawa to blow?

If these are the problems you’re facing as a business owner in Canada, you’re in the right place.

Let me introduce you to a very specific financial concept called the Immediate Financing Arrangement or IFA.

Who is this for?

We tell everyone that they shouldn’t set this up unless they want and need life insurance.

If you have someone you want to leave your wealth behind for then you have a need right there.

Because, if you didn’t know, when you die there is a final income tax on your goods and your next of kin will have to pay that, whether that’s your wife, your husband or your children.

You want to make sure they are left in a position to cover that and to make up for any lost wages to the household.

This all gets passed down tax-free and privately to the beneficiaries of your choice.

Who is this not for?

Your children are often the greatest legacy you’ll leave behind and you can set them up with an Infinite Banking policy that you pay into.

There are all the same benefits of a normal Infinite Banking strategy for yourself, with the bonus of it opens the door for you to educate your child on finances and allow them to learn more complex ideas and get ahead in life.

By instituting a policy for your child, you can establish a lasting financial legacy that will benefit the many generations to come. The death benefit from the policy can be utilized to offer financial assistance to your child’s family or to contribute to a trust or even a charity.

Something important to note – there are 3 parties to every life insurance contract.

You have the policy owner – this is the person that pays the premiums and has all the control over the policy. Only they can make any changes, withdrawals, take loans etc.

Then there is the life insured – in this case it would be your child.  This is the person that if something happens to them, the life insurance pays out.

Then you have the beneficiaries – this is if the life insured person passes away, the life insurance would be paid out to the beneficiaries.

Why do I make this distinction of the 3 parties to the contract – well, you as the parent or grandparent and the policy owner have complete control of the policy.

Your child doesn’t have any control of the policy and can’t take loans, withdrawals or make any changes no matter how old they are.  A lot of people like having this control.

Over time when your child is older and more financially responsible, you can transfer ownership of the policy to them in a tax-free way which is like giving them a gift of whatever the cash values amount is.  This can be at any age.

You can also set them up as a “contingent owner” so they will automatically receive the policy if you pass away before transferring it to them.

Kid policies are great. I have them on my kids. Many of my family members have these policies on their kids.

My business partner at Safe Pacific, Robert has them on his kids.

We do this ourselves; we don’t just make videos on the internet telling you to do something we don’t do ourselves.

What is an Immediate Financing Arrangement (IFA)?

With this being the last blog of our comprehensive series on the Infinite Banking Concept, thank you for watching all the way through and if you haven’t then we recommend watching the rest as this may have been a little confusing without having any prior knowledge on the topic.

Why haven’t most people heard about it?

I hear this all the time – this sounds great Laurent, why haven’t I ever heard of this before?

Well, that’s simple, only very few people in Canada should ever be doing something like this.

Stats Canada says there are 1.2 million businesses in Canada. If each one is owned by 1 person (they’re not) then about 3% of Canadians are business owners.

Of these 3%, Stats Can says that 68% will survive the first 5 years so we can assume there’s some sort of profitability there and the ones that are gone are not profitable.

So, what I’m saying is that on a broad basis, only about 2% of Canadians would even be able to start considering this. Now add to that these business owners should also probably have kids, have some sort of large capital gain on death, have an affinity for life insurance and be comfortable with debt and alternative financial strategies.

Basically, I’m saying there’s not lots of advertising for strategies that could only potentially be suitable for 1% or less of the population.

It’s much more profitable for companies to advertise more mainstream strategies that are applicable to many more people.  Only dummies like me take our whole company and focus it on a super niche and complex financial strategy that’s only relevant for less than 1% of the population.

This is also why when you see other videos telling you not to use leveraged life insurance strategies, they are probably right. Most people shouldn’t do something like this.

But for the few people that fit this profile of profitable business owner with a family and a life insurance need, this strategy becomes a no-brainer and one of the only things they can do to grow, use and pass on the money inside their holding company without a tremendous amount of it being sent to Ottawa in taxes.

How does it work?

If you’re still here, congratulations on being in the 1% of profitable business owners in the country. We are a rather small bunch.

Here’s the quick rundown of how one of these IFA systems works

First you set up a participating whole life insurance policy with one of the few Canadian insurance companies who offer the right types of policies. This is where we can help you.

How much do you set up depends on a few things. First, we want to make sure you have the right amount of insurance based on your company and family needs.

Then we want to look at the annual retained earnings you flow to your holding company each year. We will use these 2 numbers to determine the amount of life insurance you need and the amount of cash values you’ll want to put into the policy.

We’ll have a couple of meetings to make sure we dial this is right, and then the next step is to apply for the insurance.  Just because you want to set up a strategy like this doesn’t mean you can – you must apply for the insurance and be approved.

While the insurance application is being underwritten, we simultaneously talk to the bank about setting up the lending against the proposed insurance.

Bank lending is very specialized lending and only a very few people inside the bank do this and know how to set it up.  You can’t just walk into the branch and talk to the teller and get this set up – they’ll have no idea what you’re talking about. We’re generally working with either a private banker or a commercial banker to set up the IFA lending.

While we’re doing all of this we are also in communication with your accountant and your lawyer to make sure everybody’ is on board with the strategy and can provide the underwriting documents and the ongoing maintenance requirements every year.

How long does it take to set this up? Well that depends but it’s going to be at least months and sometimes could be years depending on how organized your paperwork is, if your taxes are up to date and your health assessments that may involve your doctor.

I just finished setting up another one of these for myself personally and it took about a year to get everything done – and this is my job, I do this all day everyday.

Once the insurance is set up and the bank credit is approved, everything goes much more quickly.  The loan is generally a line of credit that you can access when you want.

When you borrow the money from the bank there’s obviously interest due, and the rates are favorable – usually around prime or prime minus or prime plus depending on your credit situation and the banks risk assessment of you. Generally, our clients are making interest-only payments on the loan, but you can do more if you want.

In very simple terms – this is asset-based lending using a life insurance policy as the asset. It is very similar to if you used real estate or a stock portfolio as collateral for lending, just minus a lot of the market risk of your stocks and management work and time of your real estate.

You must know that if the borrower defaults on the loan, the lender may collapse the life insurance policy to recover the loan amount – but banks generally don’t want to do this – they will try and find a way to work with you.

We deal with most of the major banks in Canada on this strategy and the ones I’ve asked about this say collapsing the policy to recover the loan proceeds is in the single digits – it’s not something they want to do.

Major advantages of IFAs

First you need the insurance anyway for your life and your business.

This gets the large amount of insurance you need while not tying up your money in big premiums.

It’s a way to grow the money in your holding company without being subject to high taxes.

Because life insurance is tax-exempt, your money growing in the policy also doesn’t contribute to the new passive income rules that came into effect in 2018.

Through the loans set up at the bank you get to keep liquidity for your company to use the funds for whatever you want – this is usually investing back into your company, the market, real estate or whatever you want. We have clients doing all sorts of things with their IFA structure.

The life insurance death benefit will grow over time and will be there for you on-death when you probably will have a huge capital gains bill due.

The life insurance pays out tax free to your corporation and creates what’s called a Capital Dividend Account or CDA.

The CDA is a tax account that tracks tax-free surpluses in a corporation, often created by the receipt of capital dividends or life insurance proceeds.

The CDA can then pay out to your beneficiaries tax free. So, the insurance pays to the corp. tax free, increases the CDA and then flows to your beneficiaries tax free.

Major risks to look out for

Now everything I’ve talked about is all happy but there are also some major risks with setting up a strategy like this.

The first risk is that you are setting up a large annual premium commitment to fund the life insurance policy so you shouldn’t get into something like this without the certainty of having those annual premium deposits each year or a large lump sum now that we use to fund the policy.

There’s also commitment risk – we are using a whole life insurance policy in this case to build up your cash value and as the asset that will secure your lending. As the name says, the insurance is for your whole life so this could be a strategy you are setting up for 30 or 40 or 50 years. This is not a short-term strategy that you set up and cancel. You are literally setting this up for the rest of your life. Some people like me really like this and some people don’t.  If you don’t like this type of long-term commitment, then this strategy is probably not for you.

There is interest risk because to use the liquidity you are borrowing from a bank and there is interest payable – and as you borrow more each year, the loan gets bigger, and your interest payments grow.

Because you are borrowing, changing interest rates will also affect this strategy – we know what interest rates are today, but we don’t know what they are going to be tomorrow or next year. What we do know is that interest rates are going to change over time.

There are potential tax implications: While the loan itself is not taxable, there may be tax consequences if you cancel or lapse the life insurance policy which we don’t suggest you do.

There is also annual maintenance that you need to do on the actual life insurance policy, on your taxes and on your banking – so you need to work with someone who knows how to do this and can be there to facilitate this every year for you.

Like I said before – this strategy is probably only good for about 1% of Canadians – in that same vein, only about 1% of financial advisors should be talking about and implementing this strategy for you. It’s very very important that you work with someone who knows what they are doing when it comes to IFA and someone who has the capacity to service you and your business for many years to come and you use this strategy in your life.  Don’t work with someone who doesn’t do IFAs all the time because there are a lot of moving parts and a lot of things that can go wrong if you don’t do it right.

Legacy and estate planning benefits

One of the biggest reasons our clients set up these insurance policies and use the IFA structure is for estate planning. Most of our clients have growing businesses, other investments and probably have real estate holdings that are expected to grow over the course of their life – what does this mean? It means they are going to have very large tax aka capital gains bills when they die.

Let’s say you’ve got a company worth $3 million today and your house is worth $2 million today and you have $1 million in other investment assets. For very simple math let’s say the whole thing grows at 5% per year until you pass away in 30 years – this grows your total net worth at about $21 million dollars and your estate would have capital gains payable on about $8 million of that. If that happened right now your estate would pay about 50% tax on that so $4 million in taxes would be due in the tax year that you die.

Do your kids have an extra $4 million kicking around to pay that tax?  Yes, this is a very simplistic example and the accountants watching this have all sorts of planning things they can do to save tax and protect wealth, but this is just to illustrate a point of how quickly and how much tax can become payable during your lifetime. How are your kids or your estate going to come up with that $4 million to pay your taxes in the year.

This IFA strategy gives you a large life insurance payout within a couple of weeks of death to pay this giant tax that’s due.

This IFA strategy and its creation of a Capital Dividend Account, which we’ll talk about in a minute, also lets you leave a large inheritance to your heirs after all the taxes are paid.

Really when you set up this kind of strategy for yourself, your business and your family, you are guaranteeing a legacy to your family.

Impact on the Capital Dividend Account (CDA)

I just talked about the Capital dividend Account or CDA a minute ago – what is it?

The CDA is a tax account that tracks tax-free surpluses in a corporation, generally created by the receipt of capital dividends or life insurance.

Money in the CDA can flow to the beneficiaries of the company tax-free.

So, when your life insurance that we’re using in this IFA strategy pays out – it pays out to your corporation tax free and creates the CDA Then the proceeds are used to pay off any loans to the bank and the remainder can be paid out to your company shareholders or beneficiaries tax free. We would suggest the beneficiaries are your family or children.


To wrap up because this is getting to be a long video

We talked about the problems that successful business owners in Canada face in terms of growing their money and using their money without being subject to high tax.

We talked about who should and who should not do this strategy – and really how few people in Canada this makes sense for.

I gave you a quick run down of what an IFA is and how it work and also talked about why you’ve probably never heard of this strategy before.

Then we talked about the major advantages and risks of setting up a strategy like this for yourself and your company and what type of advisor you should look for when setting up something like this for yourself.

Lastly, we talked about the major legacy and estate planning benefits of setting up a strategy like this for your family and about how life insurance that pays out to a corporation creates a capital dividend account that can be used to pay out to your beneficiaries in a tax-free way.

And I’m going to emphasize here that you only really want to work with a trusted professional that knows that they are doing and is in it for the long term if you’re looking at setting up an Immediate Financing Arrangement for yourself.

Contact & More Info

If this is something you want to set up for yourself or your business please reach out. We’ve been doing this all day every day for the last 12 years and have 100s of clients all across Canada. We’re happy to chat and see if we can be a good fit to work with you. Fill out the table below and we will get back to you in 24 hours on business days.

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