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Guaranteed Income Plan
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From Canadians seeking higher income and lower taxes in a guaranteed investment,
the most common question asked is why they had never heard of this before.
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answer is that banks and trust companies can't provide it, stock brokers have never
favoured insurance products, and while insurance companies could, they felt it was
less profitable and so never promoted it in any way. But Strategic Edge doesn't
work for any of the above; we work for our clients, and we're pleased to explain
how and why it works. It's called a Guaranteed Income Plan (GIP).
If an investor were to buy traditional GICs or other fixed instruments, they would
normally take the growth for income and leave the capital, partly to ensure the
income was always there and partly to leave it to future generations. If they were
to buy an annuity with these non-registered funds, they would surrender the cash
for an income stream for life, or for the lives of both spouses in the event of
a joint program. Since the income is partly interest, partly return of capital,
the tax treatment is different from a GIC. Additionally, they can elect for a Prescribed
Annuity, which amortizes the tax burden over the rest of their lives. (For more
detail on this, see "Taxation of a Prescribed Annuity".)
The annuity provides higher income than a GIC, and the prescribing of the annuity
causes the tax to be lower, but the capital is no longer available. But by insuring
the capital from the excess after-tax income, it can all be returned to the estate
tax free, and resulting net income is remarkable.
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Example of a couple, aged 65, non smokers, $1 million, 50% marginal tax bracket: |
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6% GIC |
GIP |
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Gross Income |
$5, 000 |
$6, 275 |
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Taxable Income |
5, 000 |
2, 758 |
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Income Tax Payable |
2, 500 |
1, 379 |
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Net Income |
2, 500 |
4, 896 |
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Capital Replacement |
0 |
1, 079 |
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Disposable Income |
$2, 500 |
3, 817 |
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Pre-Tax Rate of Return |
6% |
9.2% |
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With the GIC, the capital is tied up for the length of the investment, usually five
to ten years, while with the annuity it is for the balance of life, so sufficient
capital for large expenditures should be maintained. Alternatively, the GIC usually
does not provide a stream of monthly income starting immediately, as the GIP does.
If structured properly, there is no part of the program that is not fully guaranteed.
If you wished to encroach on capital or bequest some or all of the capital to charity,
there are additional considerations and opportunities. Clients are often surprised
by the flexibility this program can have to meet their overall long-term plans.
Why not ask one of our advisors for a quote today? You might be pleasantly surprised!
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Sample Tools
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