Business and Estate Strategies
Helping you achieve peace of mind
  About Cara       Business Planning       Estate Planning       Financial Planning       Products
Glossary: > A > B > C > D > E > F > G > H > I > J > K > L > M > N > O > P > Q > R > S > T > U > V > W > X > Y > Z

Glossary

This glossary is arranged in alphabetical order. Click on a letter in left column or scroll down to search.

< I >

Income Splitting:

This the process of diverting taxable income from an individual in a high tax bracket to one in a lower tax bracket.

The more you earn the more tax you pay. Income splitting, or sharing income between spouses and with your children, could reduce the family tax bill. Income-splitting strategies shift income into the hands of lower-income family members so that less tax is payable. Canada Revenue Agency's tax attribution rule stipulates that if you give money to your spouse or child who then invests it, you will have to pay tax on any income earned, even though you may not get to spend the income. (See Attribution Rules). This is a good tax-planning strategy for arranging income to be transferred to family members who are in lower tax brackets than the one earning the income, thus reducing taxes.

Even though attribution rules limit income splitting, there are still a number of legitimate ways to do so, such as through the use of spousal RRSPs.

Incontestable Clause:

In the absent of fraud this is a clause in an insurance contract that provides the company may not void the policy after it has been in force more than the specified period, usually two years after issue. The policy may be voided only under certain conditions (for example, a misstatement of age or sex in the application), incurred but not reported After the end of two years from issue, a misrepresentation of smoking habits or age can still void or change the policy.

Independent Broker:

This is a provincial government licensed and insurance company sponsored independent businessperson who usually represents five or more life insurance companies or mutual companies in a sales and service capacity and who is paid a commission by those companies for sales and service of life insurance/mutual fund products.

Index:

In the financial world, the index is a calculation that uses a selection of stocks or bonds to gauge a certain market. The Dow Jones Industrial Average, for example, is an index of 30 large industrial companies on the New York Stock Exchange.

Inflation:

Is defined as an increase in the price of products and services over time. A rise in the prices of goods and services, which; occurs when economic demand exceeds supply. The economy may grow so fast demand for products and services are greater than the available supply. This situation causes prices to rise. Over time, even with a relatively low inflation rate, the purchasing power of a dollar is reduced. Things cost more; your dollar buys less. The government's main measure of inflation is the Consumer Price Index.

In Force:

Insurance policy which is in effect, and has not expired or been cancelled.

Insurance:

A contract that provides compensation for specific losses in exchange for a periodic payment. An individual contract is known as an insurance policy, and the periodic payment is known as an insurance premium.

Insurable Interest:

This is an important concept in life insurance. At the time a life insurance policy is purchased, there must be an expectation of a monetary loss by the person purchasing the insurance that would result from the death of person that is insured. The insurable interest need not necessarily exist at the time of the death of the insured. An individual has an unlimited insurable interest in his/her own life. An insurable interest may not only exist between family members, like husband and wife, parent and child, but also between business partners, creditor and debtor and employer and employees.

Inspection Report:

Depending on the amount of insurance applied for, this can either be a personal visit or a telephone interview of the person applying for life insurance conducted by someone from a third party credit reporting agency such as Equifax on behalf of the insurance company. On average the interview lasts between 15 to 30 minutes. The questions asked relate to personal habits (like smoking and alcohol consumption) and finances, including income and net worth, confirmation of employment, duties and the nature of the applicant's business. In addition, there are questions about driving, sports, aviation and currently held insurance. All information obtained is strictly confidential and is submitted solely to the underwriter for review.

Insurance Trusts:

An insurance trust is a trust that is usually created in a will that name the executor as the trustee of the insurance proceeds, and directs the trustee to hold the insurance funds in a separate trusts for the beneficiaries. The will must name the insurance policy and provide that it is a declaration under the Insurance Act. The trust terms may be set out in full or may provide that the proceeds of insurance are to be dealt with as if they formed part of the residue of the estate.

Insured:

In most cases the insured is the policy owner - the person whose risk is covered by the policy. For life insurance, the insured person is the person upon whose death life insurance benefits will be paid. The benefits are paid on a tax-free basis to the beneficiary

Insured Mortgage:

An insured mortgage protects only the mortgage lender in case you do not make your mortgage payments. This coverage is provided by CMHC (Canada Mortgage and Housing Corporation) and is required if a person has a high-ratio mortgage. (A high-ratio mortgage is defined as follows; if the amount borrowed is more than 75% of the purchase price or appraised value.)

Insured Retirement Plan:

This is a recently coined phrase describing the concept of using Universal Life Insurance to tax shelter earnings, which can be used to generate tax-free income in retirement. The concept has been described by some as "the most effective tax-neutralization strategy that exists in Canada today."

In addition to life insurance, a Universal Life Policy includes a tax-sheltered cash value fund that cannot exceed the policy's face value. Deposits made into the policy are partially used to fund the life insurance and partially grow tax sheltered inside the policy. It should be pointed out that in order for this to work, you must make deposits into this kind of policy well in excess of the cost of the underlying insurance. Investments of the cash value inside the policy are commonly mutual fund type investments. Upon retirement, the policy owner can draw on the accumulated capital in his/her policy by using the policy as collateral for a series of demand loans at the bank. The loans are structured so the sum of money borrowed plus interest never exceeds 75% of the accumulated investment account. The loans are only repaid with the tax-free death benefit at the death of the policyholder. Any remaining funds are paid out tax free to named beneficiaries.

Recognizing the value to policyholders of this use of Universal Life Insurance, insurance companies are reworking features of their products to allow the policyholder to ask to have the relationship of insurance to investment growth tracked so that investment growth inside the policy may be maximized. The potential downsides of this strategy are the possibility of the government changing the tax rules to prohibit using a life insurance product in this manner and a significant raise in the interest rate after the loan thereby eliminating the point spread advantage.

Insurer:

The company providing the insurance coverage.

Interest:

Interest is an amount charged to the borrower for the privilege of using the lender's money. Interest is usually calculated as a percentage of the principal balance of the loan. The percentage rate may be constant throughout the life of the loan (fixed rate) or it may change at specified times (variable rate).

Intestate:

This means dying without a will, in which case the provincial laws of the province in which the death occurred apply to the manner in which assets will be distributed. In other words, if you don't write your own will, the government will do it for you after your death and it may not be as you would have wished.

Investment Category:

Is defined as a broad class of assets with similar characteristics. The five investment categories include cash equivalents, fixed principal, equity, debt, and tangibles.

Inter Vivos or "Living" Trust:

An inter vivos or "living" trust is arranged during a person’s lifetime, and falls outside a person’s estate and therefore, is not subject to public scrutiny or probate. Most inter vivos are irrevocable, which means the transfer of assets is permanent. This is done for tax purposes. The assets are transferred to a trustee, who ensures that the terms of the trust are carried out. The income in an inter vivos trust will be taxed at the highest rate regardless of the settlor’s own tax level. An inter vivos trust will often become the foundation of an estate plan.

Irrevocable Trust:

A trust that, once made, cannot be undone, you have no power to amend or revoke. Unlike a revocable trust, this trust stands a greater chance of providing tax benefits to the settlor in that it can take the trust asset outside the estate of the settlor and potentially reduce the size of the settlor’s estate that will be subject to taxation.

Once an irrevocable trust has been settled, the assets within the trust no longer belong to the settlor. The settlor cannot revoke (cancel/dissolve) the trust. The assets become the property of the trust until they are distributed to the beneficiaries. Irrevocable trusts have the disadvantage that they require you not retain control, but they can provide significant tax benefits. A trust that cannot be revoked modified or amended once it has been established. Irrevocable trusts are often used in tax planning to get property "out" of a person's estate so that it will not be subject to capital gains upon his or her death. The more common irrevocable trusts are "Irrevocable Life Insurance Trusts" and "Charitable Remainder Trusts

Irrevocable Beneficiary:

A beneficiary designation, which requires that written consent be obtained from, named beneficiaries before adding or removing beneficiaries and before making changes to the insurance coverage.

Next Page

Back to top