Permanent life insurance owned and paid for by your corporation. It can shelter long-term surplus from annual tax, provide liquidity for your estate, and create a Capital Dividend Account credit at death.
With corporate-owned life insurance, your corporation is the owner, premium payer and beneficiary of a permanent life insurance policy on you or another key person. The policy is usually participating whole life or universal life.
Premiums are paid with corporate dollars, which have generally been taxed at the corporation's lower small business rate. Paying the same premium personally would first require taking the money out of the company and paying personal tax on it. Premiums are generally not tax-deductible.
For owners with surplus they don't expect to need for many years, that combination can make permanent coverage a more efficient place for part of the surplus than a taxable corporate investment account.
Investment income in a corporation is taxed at roughly 50% in Ontario, with part refunded only when taxable dividends are paid, and passive income above $50,000 a year can start to shrink the federal small business deduction. Growth inside an exempt policy is generally not taxed each year and doesn't count as passive income.
The death benefit can fund the tax on your shares at death, a buy-sell agreement with partners, the loss of a key person, or an equal inheritance for children who aren't in the business.
The death benefit is received by the corporation tax-free. The amount above the policy's adjusted cost base is credited to the Capital Dividend Account and can be paid to shareholders, such as your estate, as tax-free capital dividends.
A corporation receives a $1,000,000 death benefit. At that time, the policy's adjusted cost base is $150,000. The corporation's CDA is credited with $850,000, which can be paid out as tax-free capital dividends. The remaining $150,000 would generally come out as a taxable dividend. A policy's adjusted cost base usually declines over time, so the CDA credit tends to grow the longer the policy is in force.
At death, your shares are generally treated as sold at fair market value. Insurance can provide cash to pay that tax without forcing a sale of the business or its assets.
Partners can fund a shareholder agreement so the surviving owners can buy out a deceased partner's family at a fair price.
Coverage on the people the business depends on can help it through the loss of revenue, relationships or credit.
A policy's cash value can be pledged as collateral for a loan, the basis of the Immediate Financing Arrangement and the corporate Insured Retirement Program. These add borrowing risk and need careful review.
Cash values are low in the early years. Surrendering the policy can create a taxable gain for the corporation.
Only the base death benefit is guaranteed. Policy dividends and values above the policy guarantees can change.
Whether a holding or operating company owns the policy affects creditor exposure and, on a sale, whether shares qualify for the lifetime capital gains exemption.
Transferring the policy out of the corporation, or naming a personal beneficiary, can trigger tax or a shareholder benefit.
We design the coverage and run the illustrations. Your accountant confirms the structure before anything is recommended.
Illustrations compared with a taxable corporate investment, including a lower dividend scale.
They confirm ownership, beneficiary, the CDA treatment and the effect on your corporate structure.
We handle the insurer, underwriting and paperwork, and review the policy with you over time.
Premiums paid with corporate dollars have generally been taxed at a lower rate than personal income, and the death benefit can create a Capital Dividend Account credit. Personal ownership is simpler and keeps the policy out of the business. Which is better depends on your situation.
Under current rules, growth inside an exempt life insurance policy is generally not taxed each year and is not counted as passive investment income for the $50,000 small business deduction test.
The death benefit minus the policy's adjusted cost base. The adjusted cost base usually declines over time, so the CDA credit generally grows the longer the policy has been in force.
It depends on creditor protection, future sale plans and how proceeds will reach your family. Cash values can affect whether operating company shares qualify for the lifetime capital gains exemption. Your accountant and lawyer should confirm the structure.
The guaranteed base death benefit, as long as premiums are paid. Policy dividends and any values above the policy guarantees are not guaranteed, so we show illustrations at more than one dividend scale.
How the CDA lets certain amounts leave a private corporation as tax-free capital dividends.
Read the guideA leveraged concept that borrows against a corporate-owned policy to supplement retirement cash flow.
Read the guideA corporate-funded pension that can allow larger contributions than an RRSP for owners on salary.
Read the guideThis information is general in nature and is not tax, legal, accounting, insurance or investment advice. It is based on current Canadian tax legislation, which can change. Any strategy should be designed and reviewed with your accountant and legal advisors based on your circumstances. Values above the policy guarantees, including dividends, are not guaranteed.
We meet at your office, by video or by phone.
A short call will show whether corporate-owned insurance deserves a closer look for your company.
