The cash value of a corporate-owned participating whole life insurance policy, when structured using one of our Bank On Whole Life™ concepts are not taxed as a capital gain like other savings and investment products. The cash value in the policy grows on a tax-preferred basis, within limits set out by the Income Tax Act and Regulations. This provides you as a business owner, a tax-sheltered vehicle to store retained earnings while continuing to grow your money undisrupted.
The cash value of your policy also provides your business or corporation with accessible, liquid equity year over year through guaranteed returns and potential dividends you can leverage as a source of business financing through the withdrawal of a policy loan. Accessing the funds in your policy through a policy loan can be done without creating a taxable event and getting added to your company’s gross revenue.
When you use the cash value of a corporate-owned participating whole life insurance policy as a source of business financing for vehicles, equipment, office buildings and more you can get tax deductions for interest and depreciation.
Although interest is paid back on the policy loan, the way a corporate-owned participating whole life insurance policy is designed allows interest to be recaptured when it is paid back to the place it was originally taken from—your corporate-owned participating whole life insurance policy.
Interest is recaptured because the interest you pay the life insurance company is deposited into a Participating Account that is managed with low risk and diverse investments to create potential dividends. The interest paid essentially becomes available to use again once your policy earns dividends. So even when you borrow from your policy, the cash value in your policy continues to grow interrupted and accumulate wealth.
Transferring funds from other taxable investments to a tax-exempt, corporate-owned participating whole life insurance policy can also help reduce overall taxable income within a corporation, resulting in additional tax savings.
For corporate beneficiaries of a whole life insurance policy death benefit, the Capital Dividend Account (CDA) provides a tax-efficient method of moving money out of the corporation to the estate or new shareholders. The tax-free death benefit is first paid to the corporate beneficiary. The death benefit, less the policy’s Adjusted Cost Basis, can be credited to the corporation’s CDA. This credit can then be used to pay a tax-free capital dividend out of the corporation. Any portion of the death the benefit that exceeds the CDA credit can be paid out of the corporation as a taxable dividend. These factors will often allow strategies using corporate-owned life insurance to outperform an alternate taxable investment especially when the policy is held until the death of the life insured.
Avoiding Capital Gains
If you are the owner of a corporation or a majority shareholder in a Canadian corporation with taxable investments, the Corporate Estate Transfer can help you reduce the impact of the “double tax trap” of transferring your shares from your corporation to your estate by redirecting corporate surplus from taxable investments into a permanent whole life insurance policy instead. As a corporate owner, you must pay a capital gains tax on any value of shares you have within your corporation. This is the first tax trap. When the executor of your will then makes payments from the corporation to the beneficiary of your estate, a dividend tax is payable. This is the second tax trap.
A corporate estate transfer allows you to reduce the Fair Market Value (FMV) of the corporation while increasing your estate value. The value of your shares as a corporate owner is based on the FMV of the corporation’s assets. Redirecting corporate surplus from taxable investments into a corporate-owned participating whole life insurance policy reduces the FMV because only the policy’s cash value is included in the calculation, creating a larger estate and possibly reducing the capital gains tax payable.
Corporations are entitled to tax deductions when making a charitable donation. The death benefit that eventually pays out tax-free via the company’s capital dividend account can be paid out to a charitable organization.
One way a corporation can achieve this is by designating the charity as a beneficiary on a new or existing policy. The estate of the insured will receive a charitable tax receipt for the face amount of the policy. The charity receives a substantial donation and the tax deduction can be applied by the estate in the year of death and carried back to the preceding year.
Another strategy a corporation can use is to transfer a new or existing policy to a charity and pledge to pay the premiums on the policy each year. As a business owner, you receive a charitable tax receipt for the total amount of premiums paid in a given year. No receipt is issued for the proceeds of the life insurance on the death of the insured.
Wealth Replacement Insurance Concept
Many people are unaware of the increased contribution they can make to charities by using more creative methods of giving. Careful planning can result in larger amounts being available to meet your philanthropic goals and help others in need. Wealth replacement insurance is one of these creative concepts by which you can donate a large sum of money to a charity of your choice. In return, you receive a charitable credit for the donation which results in tax savings for the year the donation is made. You can then invest these tax savings in a whole life insurance policy that potentially results in enough proceeds to replace the value of the gifted property.
Tax-Free Retirement Income
If you are the owner of a corporation or a majority shareholder in a Canadian corporation with taxable investments, the Corporate Retirement Solution could help you protect your business, reduce corporate taxes, grow your business assets, while increasing your future personal retirement cash flow at the same time.
The way it works is simple. A participating whole life insurance policy is purchased by the corporation on your life and the corporation serves as the beneficiary of the policy. Corporate surplus from taxable investments is then reallocated into the participating whole life insurance policy to reduce tax.
When you structure a corporate-owned participating whole life policy using one of our Bank On Whole Life™ concepts, you can use the cash value to fund business expenses during your working years. However, under current tax law, as the cash value in your policy continues to grow, it can later serve as funding or a supplemental stream of tax-free retirement income when you do stop working.
The funds within the policy grow on a tax-advantaged basis which you can later use as collateral for a tax-free bank loan to fund or supplement your retirement income. Upon your death, the corporation receives the life insurance proceeds, (death benefit) and receives a tax-free dividend from the capital dividend account to your estate. Your estate pays off the retirement funding loan and retains the balance.