Touting a triple back-to-back arrangement: Life insurance, annuities and investments combined into one complete package

Life insurance, annuities and investments are the three parts you need for a Triple Back-to-Back. So what is a triple back-to-back? It’s an arrangement that involves the purchase of two totally separate contracts: a life annuity and a life insurance policy.

A triple back-to-back is an arrangement which utilizes a corporate-owned insured annuity along with a loan. The expected
benefits would be improved corporate cash flows with enhanced tax benefits. Triple back-to-back arrangements can be structured in different ways. The life insurance policy and the life annuity may be owned by a single corporation that uses the contracts as security for a loan, or the life insurance policy may be owned by one corporation, and the life annuity may be owned by a related corporation or individual.

Let’s say we have a corporation that has $200,000 of cash from operations to use to purchase a life annuity and a life insurance
policy. The life insurance contract is owned by Life Insurance Co., and the annuity contract is held by Annuity Co. (They are either the same corporation or two corporations with a relationship).

The life insured for the life insurance policy and the life annuity is the same person, usually a shareholder of the corporation
or corporations. The beneficiary of the life insurance policy is Life Insurance Co. Annuity Co. is the recipient of the regular
payments from the annuity. Life Insurance Co. borrows a capital sum from a bank to invest in the operations of the company, used to purchase the annuity. The life insurance policy and the annuity are pledged as collateral for the loan. The loan is
typically a term loan with a fixed interest rate and a requirement to service the interest costs during the term of the loan.
During the life of the shareholder, the annuity provides a stream of payments which is used to fund the life insurance premiums,
pay the interest charges, and provide cash flow to the corporation. This must be structured properly so all requirements of the Income Tax Act are met, Life Insurance Co. may be able to deduct the interest on the loan and all or a portion of the life insurance costs for income tax purposes.

At death, the annuity payments cease (depending on the terms and conditions of the annuity contract), and the portion of the
life insurance death benefit is paid to the bank under the terms of the collateral assignment paying off the Life Insurance Co.
indebtedness to the bank.

Any excess proceeds are paid to Life Insurance Co. as a tax-free death benefit. Life Insurance Co. receives a capital dividend
account (CDA) credit equal to the total death benefit proceeds minus the adjusted cost basis (ACB) of the life insurance policy.
As you can see using this type of structure preserves the capital in the corporation(s) by using a loan to replenish the capital used for the annuity contract.

The desired effect of the structure is to generate much improved after-tax cash flow to the corporation during the life, and
create a CDA at death which can be used to distribute tax-free capital dividends, and hopefully reduce the capital gains tax on
shares of the corporation at death.

Know Your Options


This arrangement utilizes a life annuity which provides a payment stream until the death of the annuitant. The annuity may or may not have a guarantee period. When an annuity is owned by a corporation it must, by definition, be a non-prescribed annuity which means that the annuity is subject to accrual taxation on an annual basis. In general, even though the annuity payments remain fixed, the taxable income from a non-prescribed annuity will vary from year to year, and normally decreases each year as the “capital” component of each payment increases.

Life insurance policy

The purpose of purchasing life insurance in this arrangement is to ensure that when the Shareholder dies, funds are available to repay the loan. The premiums on the life insurance policy are funded by the annuity payment stream, therefore the life insured must also be the life insured for the annuity so that the cash flows match. The life insurance policy must be permanent
insurance since the insurance need is for life. Usually a term-to-100 or minimum funded universal life (UL) insurance policy is used because it has the lowest cost of insurance.

The loan characteristics

The terms of the loan are negotiated with the “bank”. Typically a term loan with a fixed interest rate is the best to reduce interest rate fluctuations. It is essential to ensure that the loan term does not exceed 10 years and that the interest is paid on an annual base to avoid the arrangement being categorized as a tax shelter.

There are a number of significant tax and financial risks associated with triple back-to back arrangements. Each of the following
should be looked at closely as they can be considered as risks:

1. Commercial and economic risks
2. Interest deductibility
3. Collateral life insurance deduction
4. Impact of proposed legislation
5. Fair market value of company at death
6. Tax shelter rules
7. General Anti-Avoidance Rule (GAAR)
8. Life Insurance/Annuity as one contract

The previous points focus on the tax treatment of triple back-to-backs. Another factor which may be important to understand is how a triple back-to-back will be handled on the financial statements of a corporation which enters into one of these arrangements.

When a company purchases an annuity, the company would record an asset on the balance sheet equal to the capital invested
in the annuity. Each year the annuity payments received from the contract would be recorded partially as income and partially as
a reduction of the asset. The allocation between income and capital would be determined based on generally accepted accounting principles taking into account the interest rate and life expectancy of the individual at the time the contract was entered into.

Regarding the annuity payments as they are received the annuity balance will decline. The company which owns the insurance
policy would expense the insurance premiums each year as they are paid. The debt and the newly purchased investment will be
recorded as a liability and asset respectively. At death, any balance from the annuity remaining on the balance sheet would be
written off as the contract terminates at death, and the proceeds from the life insurance would be recognized as income to the

Let’s assume the life insurance proceeds are used to repay the debt, only the investment purchased with the borrowed funds will remain on the books of the corporation.

Hypothetical Situation “A”

A corporation (HoldCo) borrows some funds to invest in shares of a sister corporation (SubsidCo). HoldCo purchases a life insurance policy with coverage equal to the amount borrowed and assigns the policy as collateral security for the loan. SubsidCo uses the capital received from HoldCo to purchase the annuity. The annuity income flows back to HoldCo through tax-free inter-corporate dividends to fund the insurance premiums. At death the insurance proceeds are used to repay the loan. The purpose of structuring the arrangement in this manner is to secure interest deductibility by using the loan to invest in the shares.

Hypothetical Situation “B”

An individual purchases an annuity using their own funds, or funds obtained from their corporation through a shareholder loan. The corporation borrows funds equal to the capital invested in the annuity. The corporation also purchases a life insurance policy with coverage equal to the amount borrowed and assigns the policy as collateral security for the loan. The shareholder
flows the annuity payments received to the corporation as a shareholder loan or capital injection. The advantage of this structure is the annuity can be a prescribed annuity as it is personally owned, and therefore receive preferential tax treatment.

Some other food for thought for your planning, instead of a life insurance policy and an annuity based on a single life, the
insurance policy and the annuity can be based on joint lives. A joint first-to-die insurance policy and a joint annuity with the payment ending on first death. This can be used to provide the capital dividend account (CDA) credit at first death.

A joint second-to-die insurance policy and a joint second-to-die annuity may be used to improve the cash flows. This is not my favorite as, the triple back-to-back arrangement will likely be in place for a longer period of time when joint last-to-die products are used.

This can extend the length of time the loan will be outstanding. And, at the same time, it also extends the time one can utilize the CDA credit, etc.

Avoiding Additional Taxes

In selecting any structure, please remember it is important that, in order to claim the collateral insurance deduction, the taxpayer borrowing and claiming the interest deduction must also own the insurance policy. Careful thought should be given to where the capital comes from to purchase the annuity, and how the cash flows between parties so no additional taxes are generated.

In conclusion each person’s financial situation is as unique as their finger prints and no one insurance product suits them all.
Triple back-to-backs are complex structures with risks and rewards. There are many issues that must be carefully considered before implementing such structures.

The main benefits of these are increased cash flow at the corporate level, and the great potential of increasing the Capital
Dividend Account (CDA) credit in the corporation. There are many tax issues which must be considered in using these structures. As a result, anyone considering implementing a triple back-to-back should seek advice from professional who are familiar with the characteristics.

Please remember that I am not a lawyer or an accountant. As there may be legal and taxation issues involved, it is recommended that you seek professional advice first. It’s important that you work closely with an experienced advisor to ensure the proper
products are used for the desired outcome.

Posted by Robyn Latchman