Life insurance is commonly known as a financial tool that provides liquidity to pay debts, covers tax liabilities, or creates a retirement plan. However, have you ever considered owning life insurance in a corporation? Corporate-owned life insurance offers several advantages from both financial and tax perspectives, making it a strategic choice for businesses. In this article, we will explore the reasons why corporate-owned life insurance can be beneficial for your company and your family.
Tax-Free Investment Income:
One of the primary advantages of corporate-owned life insurance is that the investment income generated within the policy is generally tax-free. By leveraging this feature, your corporation can accumulate wealth while minimizing the impact on its corporate tax rate. This becomes particularly relevant for Canadian-controlled private corporations (CCPCs) that utilize the Small Business Deduction to reduce their corporate tax rate on business income. Passive income earned by a CCPC, such as interest, rental properties, capital gains, and dividends received by the corporation, is taxed at over 50%. Moreover, if passive income exceeds $50,000, the portion of active business income eligible for the Small Business Deduction is reduced. Once passive income surpasses $150,000, the active income is no longer eligible for the Small Business Deduction. By wisely reinvesting retained earnings through life insurance, your business can achieve long-term tax-free growth, thus enhancing retirement and inheritance planning for shareholders.
Tax-Free Capital Dividends:
In the case of corporate-owned life insurance, the corporation itself is named as the beneficiary of the policy. In the event of the insured person's death, the life insurance policy proceeds, minus the adjusted cost basis (ACB), are credited to the corporation's Capital Dividend Account (CDA). This amount can then be distributed to the corporation's shareholders as capital dividends, which are tax-free. If the policy has outstanding collateral loans or insurance policy loans, the policy proceeds in the CDA account can be used to repay the principal and interest on these loans, with the remaining amount available for distribution to shareholders or beneficiaries.
Lower tax rate, more after-Tax Earnings:
Generally the premiums paid for corporate-owned life insurance are not tax-deductible for the premium payer's income, and are paid with after-tax dollars. So, when a business owns the policy, it enjoys the advantage of being taxed at a lower rate compared to personal income tax rates. This disparity allows for greater after-tax earnings within the corporation, resulting in increased policy coverage and potential long-term tax-free growth. By leveraging the corporate structure, you can maximize the benefits derived from your life insurance policy.
It is important to note that while corporate-owned life insurance offers numerous advantages, the specific analysis of your corporation and shareholders should guide your decision-making process. To ensure effective and accurate planning, it is always recommended to consult with a professional accountant and insurance advisor who can provide tailored guidance based on your unique circumstances.
In conclusion, corporate-owned life insurance can be a powerful financial tool for your family and your business. Its ability to generate tax-free investment income, provide tax-free capital dividends, and yield more after-tax earnings makes it an attractive option for long-term wealth accumulation, retirement planning, and inheritance planning. By partnering with experts in insurance and accounting, we can develop a comprehensive strategy that aligns with your business goals and maximizes the benefits of corporate-owned life insurance.
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