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From self employed business owners and medical professionals to retired business owners, we help Canadians find the corporate life insurance that best suits their needs.

How corporate-owned life insurance helps reduce taxes and puts money back into your pocket

Business owners who are shareholders of private corporations and have cash flow in excess of what is required to operate their business will often accumulate wealth within their company as retained earnings.

Most prefer not to take extra income or dividends from the company and pay more tax since their annual income is sufficient enough that doing so does not mean sacrificing their lifestyle. By leaving the money in their company, there can be a significant tax deferral rather than distributing it through dividends or income then paying personal tax on it.

However, these retained profits or surplus of cash build passive investment portfolios that typically consist of investment vehicles that return a mix of interest, dividend and capital gains. The high amount of tax paid on passive investments and the loss of wealth due to loss of compounding growth can make this type of investment at times less desirable.

An alternative solution would be to invest the profits into a corporate-owned, tax-exempt permanent insurance policy. An exempt insurance policy is defined in regulations 306 and 307 of the Income Tax Act (ITA). The ITA provides that the cash value accumulation is exempt from annual accrual taxation, provided certain conditions within the regulations are met. Significant cash values can accumulate on a tax deferred basis if the maximum deposits permitted by the ITA are deposited into the exempt policy. The deposits can be designed so that they remain tax-sheltered within the contract.

Not only does a corporate-owned exempt policy allow for tax-deferred growth of the cash value of the policy, but there’s also a mechanism that allows the death benefit proceeds to go tax-free to shareholders through the corporations capital dividend account (CDA). The CDA credit is unique to corporate-owned life insurance. Upon death of the insured, a private corporation receives the death benefit tax-free and that amount less the adjusted cost basis (ACB) of the policy is added to the corporation’s capital dividend account. The policy’s ACB is generally the sum of the cumulative premiums paid minus the cumulative net cost of pure insurance. The CDA balance resulting from receipt of death benefit proceeds from a life insurance death benefit will remain until such time as capital dividends are elected. This allows corporations the ability to elect to pay a capital dividend when it’s most advantageous for shareholders.