corporate life insurance - why it matters

Corporate Life Insurance has Tax Characteristics that no Other Product Offers

Corporately owned life insurance is the most powerful tax planning product available in Canada.  Depending on a clients particular situation an insurance structure can provide the following:

  1. Eliminate tax on passive income (50.17%)
  2. Eliminate the new punitive passive tax rules (up to $30K/yr in tax savings in Ontario)
  3. At death, replace highly taxable dividends (47%) with tax-free capital dividends (0%)
  4. Provide a fixed income investment allocation with low risk and significant investment guarantees (and no tax)
  5. Provides valuable leverage opportunities (banks will often lend up to 100% of the value of the policy)
  6. Can create a tax-free retirement "income" using shareholder borrowing techniques

If you are a business owner who has a corporation with significant investment portfolios, you are a candidate for a corporate life insurance policy.


Passive Income is Taxed at 50.17%

Active business income is generally the main and incidental income that a corporation earns from a business source carried on in Canada. Passive investment income generally consists of corporate earnings not directly related to those business sources. Passive investment income can come from certain interest types, capital gain, rent, royalties, or dividend amounts received by a corporation (and by its associated corporations). Corporations with large portfolios may earn significant passive investment income, as corporate portfolios typically contain assets such as fixed income investments and dividend-paying stocks.

Right now, many Canadian-controlled private corporations (CCPCs) reduce the corporate tax rate on their active business income by using the Small Business Deduction (SBD). This entitles them to the small business tax rate, which is lower than the general corporate tax rate on business income. The amount of active business income eligible for the small business tax rate is limited to a CCPC’s business limit for the year. Since 2009, the federal business limit has been $500,000 (although limits for similar measures at the provincial level can vary). That means that a CCPC using the SBD can claim the small business tax rate on up to $500,000 of its active business income carried on in Canada, offering a significant reduction in tax. 

If a CCPC earns more than $150,000 in passive investment income, its active business income is no longer eligible for the small business tax rate.

The image below shows an example of a corporate investment portfolio of $3,000,000 that generates $150,000 of passive income.  Click the button to calculate your own passive tax cost.

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If you are generating income from your investments, it's important to run long-term projections to make sure the tax-cost is appropriately evaluated.

corporate life insurance - "Brian, what do you do?"

Understand the Current Situation

A feasibility analysis is developed to determine the tax efficiency of the business owners current situation.  The goal is to approximate the total current tax liabilities from investments, income and death..  After the feaibility analysis is complete, the discussion moves to strategic planning.....what does the business owner want to accomplish (see below)?  Does the existing corporate structure provide  for effective tax planning?  Only after understanding the complexities of a situation can it be determined if a corporate life insurance policy is required.

1. Retirement Planning

Many business owners have no idea if they have saved enough for retirement.  An interactive retirement model is developed to determine how much money is required to provide the desired retirement income.  Are there enough personal assets to provide income for life?  Does a corporate life insurance policy have to supplement retirement income or are the corporate investments surplus and earmarked for heirs/charity?  

2. Tax Strategy for Estate Planning

When as business owner already knows that they have sufficient assets for their lifetime, corporate assets become 'surplus' which should be redirected towards corporate life insurance with a primary focus of maximizing capital dividends.  Without insurance, when heirs 'wind-up' the corporation they are exposed to taxable dividends.  Corporate life insurance converts highly taxable dividends (47%) with tax-free capital dividends (0%).

Also, a business owners professional team (ie. accountants) may have already conducted a tax analysis for estate planning whereas a future tax liability is projected.  In situations like these, the primary goal is to collaborate with other professionals to develop the best possible corporate insurance solution.

3. Tax Strategy for Investment Planning

Business owners are paying too much passive tax within their corporations and/or they wish to unwind market-based investments (ie. stocks) into a lower risk investment.  Corporate life insurance eliminates passive tax, creates capital dividends and can offer investment returns and guarantees that non-insurance based investments cannot match.

Having any interest earning investments (ie. GIC's, real estate and bonds) is taxed at 50.17%.  Insurance can provide higher returns, lower risk and 0% tax.