Leveraged Supplementary Retirement Account - Standard Life

Protection Solutions 

Your guide to the 

Leveraged 

Supplementary 

Retirement Account 

with Standard Life 

For insurance representatives only.

Leveraged Supplementary Retirement Account 

One of the challenges faced by individuals who earn a 

higher income is finding tax efficient ways to save for 

retirement. In order to maintain the same standard of living 

after retirement as they enjoyed prior to retirement, experts 

most often suggest that 70% of pre-retirement income is 

required. Government plans and registered plans provide 

sources of retirement income but income tax rules cap the 

amount that can be contributed to (or in the case of defined 

benefit arrangements, received from) employer-sponsored 

pension plans (RPPs) and individual Registered Retirement 

Savings Plans (RRSPs). In fact, once “earned income” exceeds 

a specific amount, potential RRSP contributions for the next 

taxation year will be capped. 1 

This guide will discuss a strategy for dealing with the 

retirement income “gap” mentioned above. The option 

combines two financial vehicles, an exempt universal life 

insurance policy and a loan arrangement. This option will 

be referred to as the Leveraged Supplementary Retirement 

Account (LSRA). 

1 RRSP contributions take into account the earned income for the previous 

year. RRSP contributions for 2008 will be maximized once earned income 

reaches $111,111. 

Standard Life 1


Table of contents 

Table of contents 

Sources of retirement income 4 

Three ways to access investment accounts in retirement 5 

The LSRA concept – Collateralization 6 

How much will the financial institution lend against the policy? 7 

Who should consider the LSRA strategy? 7 

Benefits of the LSRA option 8 

Factors and risks to consider 8 

Using a corporation to own and leverage the life insurance policy 10 

Deductibility for tax purposes 11 

General Anti-Avoidance Rule (GAAR) 11 

Conclusion 11 

Appendix A 12 

This guide has been prepared for information purposes only and 

should not be relied on to replace professional advice. 



Sources of retirement income 

Sources of Retirement Income 

1. Registered Plans 

There are a number of retirement savings 

vehicles that are regulated by tax and pension 

rules. There are tax-assisted programs to which 

individuals and/or their employers might 

contribute to help accumulate a retirement nest 

egg. These would include: 

• 

• 

Registered Pension Plans (RPPs), 

Deferred Profit Sharing Plans (DPSPs), and 

• Registered Retirement Savings Plans (RRSPs) 

The Income Tax Act (“ITA”) places limits on 

the “tax assistance” for registered plans. “Tax 

assistance” means the tax advantages that an 

employer and/or employee will receive because 

contributions are tax deductible and the 

income/growth is not taxed until withdrawal 

from the plan. 

2. Government Programs 

There are also government-administered 

programs that provide retirement income based 

on employment and/or residence in Canada. 

These programs include: 

• Old Age Security (OAS) and, on a needs basis, 

Guaranteed Income Supplement (GIS) 

• Programs established by the provinces 

(e.g., Ontario’s Guaranteed Annual Income 

System (GAINS)) 

• Canada Pension Plan (CPP) and Quebec 

Pension Plan (QPP) 

4 Standard Life 

3. Non-Registered Plans 

Once contributions to (or benefits received from) 

tax-assisted plans are maximized, those who want 

to ensure additional sources of funds are available 

in retirement must find alternate vehicles. 

Non tax-assisted programs that an individual or 

their employer might establish which would be a 

source of retirement income include: 

• 

• 

Various stock plans 

Various profit sharing plans 

• Personal savings vehicles/investment portfolios 

These non-registered savings mechanisms often 

produce income that is taxable annually. A tax 

deferral is available for investment in stocks that 

are held for the long term rather than being 

traded from time to time. As long as no gain is 

realized, no income tax is due. However, since 

most people use mutual funds (or segregated 

funds) as their vehicle for investing in stocks, and 

since the underlying assets are generally actively 

traded, gains are realized each year, triggering 

taxation. Regardless of which approach is used, 

there will come a time when the underlying stocks 

must be liquidated, either to produce an income 

or on the death of the owner or spouse, thus 

realizing the gains and triggering taxation.


Sources of retirement income 

Three ways to access investment accounts in retirement 

4. Using a Leveraged Supplementary 

Retirement Account (LSRA) to fund 

retirement 

This strategy involves purchasing a universal 

life (UL) insurance policy generally a minimum 

of 10 years prior to retirement. Policies that 

qualify as “exempt” under the ITA (most UL 

policies issued in Canada qualify), allow funds 

to accumulate within an investment account 

inside the policy on a tax-sheltered basis by 

virtue of sections 148 and 12.2 of the ITA. 

The other component of the policy is the life 

insurance component. It is separate from the 

investment, but both form part of the same life 

insurance policy. 

What makes universal life insurance attractive 

is premium flexibility. A client can deposit more 

or less into the plan, as long as there is enough 

to cover the premiums for the life insurance 

component. Excess contributions (up to a 

maximum limit calculated with reference to ITA 

rules) form part of the investment account in the 

policy that can grow on a tax-sheltered basis. 

Upon the death of the insured, the total death 

benefit is paid out tax-free to the beneficiary(ies). 

Tax may be payable if the policy is disposed of 

and the investment funds withdrawn, in whole 

or in part, before the death of the life insured. 

Three ways to access the 

investment accounts in 

retirement: 

1. Withdrawals from the policy 

2. Policy loans from the insurance company 

3. Collateralization with a financial institution 

Withdrawal from the policy 

Withdrawals can be made directly from the life 

insurance policy’s cash surrender value. When 

a partial withdrawal is made, the adjusted cost 

basis (ACB) may have an impact on the net 

amount withdrawn as the difference between the 

amount withdrawn and the ACB is taxable. The 

amount of the ACB is proportional to the total 

amount withdrawn. 

Policy loans 

Funds can also be accessed as a policy loan. 

In essence, these are not typical loans, but 

rather advance payments of the policyholder’s 

entitlement under the policy. The advances do 

not have to be repaid to the insurer. A policy loan 

constitutes a disposition for tax purposes and 

will attract taxation when the total loan amount 

exceeds the adjusted cost basis of the policy. 

The insurance company will charge interest on 

any outstanding balance of policy loan. Any 

outstanding loan balance will be deducted 

from the policy proceeds at death with the net 

amount then being paid to the beneficiary(ies). 

For additional information on this topic, please 

refer to the Taxing Issues document entitled 

“Policy Loans” (PC 6140). 

Collateralization with a financial 

institution 

Another way to access the account value of the 

life insurance policy is by pledging the policy 

as collateral for a loan or series of loans from a 

financial institution. At retirement, the policy may 

be used as collateral security, and the financial 

institution will grant yearly loans or a lump sum, 

which can provide an additional source of yearly 

income to meet needs in retirement. Based on 

current tax rules (as at November, 2007) the loan 

proceeds are not taxable. 



The LSRA concept – Collateralization 

The LSRA concept – 

Collateralization 

The LSRA concept uses the collateralization 

method to access the account value in the policy 

and operates as follows: 

• The individual purchases universal life policy 

on his/her own life (or jointly with spouse). 

• The individual makes deposits (subject 

to certain limits under the ITA) into the 

investment accounts, in excess of the 

minimum premium required for the 

life insurance. 

• Income accumulating in the account(s) is 

tax-sheltered unless it is withdrawn from the 

policy or exceeds maximum allowable limit 

under the ITA. 

• When the individual retires and desires 

additional funds, the life insurance policy can 

be used as collateral to obtain a loan, or a 

series of loans, from a financial institution. 

• The financial institution will lend up to a 

specified percentage of the cash surrender 

value of the policy. This percentage varies 

depending on the type of investment account. 

• Loan amounts can be received as periodic 

payments or as a lump sum. Based on current 

legislation, loan proceeds are tax-free. 

• The loan is repaid when death proceeds 

are payable from the policy, unless loan 

repayment is demanded earlier. The residual 

balance of the death benefit, if any, goes to the 

deceased’s other beneficiaries. 


There are two ways in which the 

loan arrangement can generate 

cash for the retiree: 

1. Borrow a lump sum and purchase 

an annuity 

The maximum amount allowable based on the 

policy cash value is borrowed as a lump sum and 

used to purchase an annuity. This is not the most 

effective method. While the loan itself is tax-free, 

a part of the annuity income is subject to income 

tax every year. 

In addition to the income tax due, the loan 

interest owing must be addressed. There are two 

options: the interest can be paid each year if the 

borrower so chooses or, the interest on the loan 

could be capitalized each year. If the interest is 

capitalized, the financial institution will advance 

an amount equal to the interest due and use 

this amount to pay the interest. The net effect is 

that the loan increases each year by the interest 

amount. The initial loan amount will be set 

lower, so that the projected loan plus capitalized 

interest over the life expectancy of the borrower 

will not exceed the financial institution’s 

maximum lending ratio based on the projected 

cash value of the policy over the same period.

2. Receive a series of loans 


The LSRA concept – Collateralization 

How much will the financial institution lend against the policy? 

Who should consider the LSRA strategy? 

A more effective method is to arrange a series 

of annual loans. The interest on the first loan 

will be capitalized (if the borrower wishes). The 

second loan will be added to the first, including 

capitalized interest and so on. The total loan 

at any time will be the sum of the annual loan 

amounts to date plus all of the capitalized 

interest. The annual loan amount will be set such 

that at the life expectancy of the borrower, the 

sum of all of the annual loans plus capitalized 

interest will not exceed the financial institution’s 

lending ratio based on projected cash value and 

the type of investment account. The attraction 

of the second approach is that no income tax 

will be payable, since all monies are received 

in the form of loans which are not subject to 

income tax. 

How much will the financial 

institution lend against the policy? 

The loan is secured by the policy cash value. 

If the funds within the policy are invested in 

guaranteed fixed income accounts, the financial 

institution will generally allow loans plus 

capitalized interest (if this has been elected) to 

accumulate to 85% to 90% of the cash value in 

the policy. If the funds are invested in variable 

accounts, such as managed accounts, the 

financial institution may only lend up to 50% to 

60% of their value. 

Who should consider the 

LSRA strategy? 

This strategy is most suited to the 

following individuals: 

1. An individual who has maximized 

contributions to (or pension benefits 

receivable from) employer-sponsored pension 

plans and RRSPs and has excess cash to invest 

for retirement. 

2. An individual who will need higher income 

in retirement than can be provided through 

a combination of government and private 

tax-assisted pension and RRSP plans. 

3. An individual who has a minimum of 10 years 

to accumulate additional funds before he/she 

will need to access the funds. 

4. An individual who is comfortable with 

borrowing strategies and understands the 

risks associated with them. 

5. Younger people who take a long-term 

planning perspective and can make deposits 

over and above the RRSP or Pension (RPP) 

maximums can take advantage of: 

• Owning a permanent, exempt policy rather 

than a temporary policy. 

• Accumulating assets in excess of the 

RRSP/RPP limits in an exempt policy rather 

than in a non-registered vehicle. 



Benefits of the LSRA option 

Factors and risks to consider 

Benefits of the LSRA option 

1. Since the funds inside the policy grow on a 

tax-sheltered basis, it is possible to outperform 

traditional non-registered savings vehicles that 

are subject to annual taxation and therefore 

provide a larger after-tax source of cash flow 

(with the policy structured for investment 

purposes it is possible to minimize the face 

amount of the insurance thereby minimizing 

and ultimately eliminating its cost). 

2. The loan proceeds are tax-free under current 

legislation. Since the loan proceeds are 

not deemed to be income, no clawback of 

government benefits would be triggered by 

the transaction. 

3. The portion of the life insurance proceeds 

remaining after the loan balance is repaid is 

available for beneficiaries. 

4. The individual can control how much to 

borrow against the policy based on his/her 

needs. Neither the registered nor the nonregistered 

plans can take advantage of the 

loan approach. In the case of registered plans, 

ITA and pension rules dictate the manner and 

timing of withdrawals from the plan. Once 

withdrawn, the income is taxable. 


Beneficiary designations 

In the Common Law provinces, if the policy 

owner has designated a preferred beneficiary 

(spouse, child, grandchild, parent of the insured) 

or an irrevocable beneficiary, the policy is 

generally creditor protected. In Quebec, the 

rule is different. The policy is generally creditor 

protected if the policy owner has designated 

a preferred beneficiary (his spouse, his 


descendants, his ascendants) or an irrevocable 

beneficiary. However, we should note that 

when a beneficiary has been designated to be 

irrevocable*, the owner’s freedom is limited 

with regards to the policy. Any change that 

could materially affect the benefit must have 

the consent of an irrevocable beneficiary. Thus, 

any pledge of the policy as security for a loan 

will need the signature of that beneficiary. In 

situations where the insured and beneficiary 

are estranged, an agreement may not 

be forthcoming. 

Reduction of death benefit 

The LSRA arrangement reduces the death benefit 

available to heirs. Taking a loan against the 

policy may deprive a beneficiary of needed cash 

after the death of the insured because part of the 

death benefit must be used to pay off the loan. 

Even if additional funds are required during the 

insured’s lifetime, the impact of a reduced death 

benefit should be factored into the decision to 

proceed with leveraging. 

In situations where a single life, zero guarantee 

annuity has been recommended as another 

component of retirement income planning, the 

life insurance death benefit is expected to be 

there to provide an income for the surviving 

spouse. If part of the death benefit is needed to 

pay off a loan, only a portion will remain, which 

may not be sufficient. 

*In the Common Law provinces, (all provinces 

except Quebec), a spouse, child, grandchild, mother 

or father designated as a beneficiary before 

July 1, 1962 will also have to give consent if the 

contract is to be leveraged.

Compounding effect of loan 



In a case where the interest is capitalized, the 

loan will increase each year by the amount of 

the interest. If the loan is in effect for a long 

period of time, the compounding effect of these 

additions may cause the loan amount to exceed 

the financial institution’s lending ratio based on 

the policy cash value and the financial institution 

may call the loan. Therefore, use of this loan 

arrangement should be restricted to applications 

where there is a natural limit to the likely 

duration of the loan. Use of the arrangement 

at retirement is ideal because life expectancy 

will tend to limit the loan duration. Since the 

ultimate intent is to repay the loan from the 

policy death benefit, the arrangement would not 

be appropriate if a person aged 40 or 50 were to 

start a series of loans today. 

Financial institution calls the loan 

If the loan were to exceed the maximum 

allowable percentage of the cash value, the 

financial institution could call the loan. If the 

financial institution recalls the loan, the life 

policy would be surrendered resulting in the loss 

of the tax-free death benefit and the triggering 

of tax on the accumulated gain. This possibility 

should be averted at all costs. It is especially 

important to note that any income tax liability 

arising out of a forced policy surrender is a 

liability for the policy owner, not the financial 

institution. 

The risk of the loan exceeding the cash 

value arises from three sources: 

1. An increase in the spread between the interest 

rate charged on the loan and the interest 

being earned within the policy. 

2. The time over which the loan is growing is 

longer than anticipated. 

3. The cost of insurance has a negative impact on 

the growth of the account. 

Investment risk 

There are risks associated with any type of 

investment. When debt is also incurred, 

additional factors must be considered. The 

maximum loan amount will depend on the 

investments held in the policy account. Financial 

institutions, currently, will generally loan up 

to 85% to 90% of the value of fixed income 

investments but only up to 50% to 60% of 

equity-linked investments. At the time of 

borrowing, the investment mix may need to 

be amended to maximize the amount that may 

be collateralized. 

Since the loan is generally a variable rate 

loan, the interest rate can increase without a 

corresponding increase in the return on the 

investments. Higher interest charges, if not paid 

yearly, can cause the outstanding loan balance 

to increase more rapidly and thus reducing 

future loan capacity. If the return on investments 

also drops, the fund and the maximum loan 

amount are also reduced. The outstanding loan 

and the policy account need to be monitored 

frequently to avoid a situation where the loan 

exceeds the financial institution’s ratio and 

forces a reduction in the loan through capital 

repayments or a collapse of the life policy to 

repay the debt. 

Changes in financial institution policy 

or tax rules 

Currently financial institutions make no 

commitment that they will continue to offer 

these types of loans in the future. Lending rules 

can change and may make this type of loan 

unavailable. As well, upon renewal, the financial 

institution may wish to change the terms of 

the loan. In addition, should the treatment 

of these loans by the tax authorities change, 

this arrangement could be rendered much 

less attractive. 



Using a corporation to own and leverage the life insurance policy 

Using a corporation to own and 

leverage the life insurance policy 

There are situations where a corporation is the 

owner of the life insurance policy on the life of 

one of its shareholders. The corporation may 

want to leverage the policy and use the loan 

proceeds to redeem the shareholder’s shares 

as part of a retirement strategy. There could, 

however, be negative tax consequences if the 

loan proceeds are forwarded to a shareholder 

or employee directly, for the purpose of 

supplementing retirement cash flow. 

In general, loans to shareholders will be 

included in the shareholder’s income without 

a corresponding deduction to the corporation 

pursuant to subsection 15(2) of the ITA. The only 

way to avoid this result is for the shareholder 

to repay the loan within 1 year of the end 

of the taxation year in which the loan was 

made. (Note: there cannot be a series of loans 

and repayments). The same rule applies to 

employees unless the employee (and related 

family members) own less than 10% of any 

class of shares of the business. If the employee 

fits within the exception, the loan will not be 

included in income but an imputed interest 

benefit will be included. 

If the business redeems shares or distributes 

the loan proceeds by way of dividend to the 

shareholder, they will be considered taxable 

dividends in the hands of the shareholder. 

(assuming that the corporation does not have a 

balance in its Capital Dividend Accont (CDA) and 

thus cannot declare a Capital Dividend) 


Retirement Compensation Arrangement 

(RCA) Rules 

Where a corporation acquires a life insurance 

policy with a view to providing retirement 

benefits, the policy may be deemed to be an 

RCA pursuant to subsection 207.6(2) of the ITA, 

and specific tax rules will apply. This would have 

negative tax implications. 

The following rules would apply: 

1. The employer/corporation would be required 

to withhold and remit a tax equal to the 

amount of the insurance premium to a 

refundable tax account with Canada Revenue 

Agency (CRA). 

2. The employer would receive a tax deduction 

for twice the amount of the insurance 

premium. 

3. Refunds from the refundable tax account 

would be included in the income of 

the recipient. 

4. The full amount of the death benefit that is 

received by the employer would be taxable to 

the employer as a distribution from the RCA. 

Deductibility for tax purposes 

Deductibility for tax purposes of interest 

incurred on a loan 

The general rule is that interest is only 

deductible for tax purposes when it is paid or 

payable pursuant to a legal obligation to pay, 

and when the proceeds of the loan are used for 

the purpose of earning income from a business 

or property (paragraph 20(1)(c) of the ITA). With 

the LSRA strategy, where an individual leverages 

the policy and the loan proceeds are used for 

personal living expenses, the interest would not 

be deductible since the borrowed funds are not 

used to gain or produce income.


Deductibility for tax purposes 

General Anti-Avoidance Rule (GAAR) 

Conclusion 

In cases where a business leverages the life 

insurance policy, one must look at the facts on 

a case-by-case basis to determine if interest will 

be deductible. 

On October 31, 2003, the Department of 

Finance introduced proposals relating to 

interest deductibility. If a deduction is to be 

sought for the interest paid on any borrowings, 

the borrower should consult their tax advisor 

as to the impact of these proposed rules. For 

additional information on this topic, please refer 

to the Taxing Issues document entitled, “Interest 

Deductibility” (PC 6141). 

Deductibility for tax purposes of life 

insurance annual premiums 

A policyholder may be able to deduct all or a 

portion of the life insurance premiums where 

the policy is used as collateral, provided that 

the policy is assigned to a restricted financial 

institution, the interest incurred on the loan 

is deductible, and the restricted financial 

institution requires the policy as collateral. 

The amount deductible is to be capped at the 

lesser of the premiums payable in respect of 

the year, and the Net Cost of Pure Insurance 

(NCPI) for that year. It will also need to be related 

to the amount owed versus the life insurance 

coverage amount. 

For additional information on this topic, please 

refer to the Taxing Issues document entitled, 

“Leveraging Life Insurance Policies” (PC 6244). 

General Anti-Avoidance Rule 

(GAAR) 

Subsection 245(2) of the ITA contains a provision 

called the General Anti-Avoidance Rule (GAAR). 

The provision allows CRA to recharacterize a 

transaction if the transaction is a misuse or 

abuse of the provisions of the Act. If CRA applied 

GAAR to leveraged insurance transactions, it 

might attempt to recharacterize the loan from 

the financial institution as a policy loan. If it is 

deemed to be a policy loan, amounts in excess 

of the policy’s adjusted cost basis would be 

taxable. It is arguable that GAAR should not 

apply to recharacterize the loan. One argument 

is that a policy loan is defined in the Act to be an 

amount advanced by an insurer in accordance 

with the terms of the policy. Since the insurer is 

not advancing the funds in accordance with the 

terms of the policy, the transaction should not fit 

within the definition of policy loan. 

Conclusion 

As with any investment option, it is important to 

review both the risks and rewards. In the right 

situation, an LSRA can provide additional cash 

flow in retirement and provide permanent life 

insurance for the individual’s beneficiaries. 



Appendix A 

Appendix A – Comparison of features of LSRA, 

registered plans and non-registered plans 

Type of Plan Deposits 

into Plan 


Accumulating 

Assets 

Registered Plans Tax-deductible Tax sheltered while in 

the plan 

Non-registered Plans / 

Portfolio Investments 

Accumulation in an 

Exempt Life Policy 

After-tax deposits Taxable subject to type 

of income earned 

After-tax deposits Accumulating assets 

tax-sheltered while in 

the policy 

Cash Flow 

from Plan 

Taxable when 

withdrawn 

After-tax capital not 

subject to taxation 

Taxable if withdrawn 

or loan taken out from 

policy; if leveraged 

loan is used, proceeds 

from loan not taxable

Retirement 

Investments 

Insurance 

Talk soon. 

www.standardlife.ca 

The Standard Life Assurance Company of Canada 

5477C-02-2008

Leveraged Supplementary Retirement Account - Standard Life

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