How Business Owners Can Minimize Their Taxes While Maximizing Their Cashflow

It might surprise you that today, more and more of Canada’s wealthiest business owners are turning to Whole Life Insurance to help protect their estates and address tax issues. This article examines how a tax-exempt insurance policy enhances a corporate balance sheet, minimizes tax burdens, and ensures liquidity.? This wealth preservation strategy will help solidify your business until the time comes to move on to your next chapter. The opportunity that insurance offers as a tax-efficient asset, and not just an expense.? Used well, a tax-exempt insurance policy provides an opportunity to help solve significant problems for business owners, by:

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●?????? Minimizing corporate tax during lifetime asset accumulation

●?????? Minimizing personal tax at death

●?????? Preserving and improving liquidity - having access to capital when needed

●?????? Allowing business income to grow in a tax-exempt environment

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How it Works?

Your corporation buys a participating whole life insurance policy on your life, any other shareholder’s life, and/or the life of a key employee, to protect the value of the corporation for future generations.? Your corporation owns the policy, pays the premiums and is also the beneficiary.? The premiums are paid from the company’s cashflow or by transferring funds from investments the corporation owns.

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In addition to protection, the policy also offers a number of benefits:

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●?????? Since business income is taxed at a lower rate than personal income, using after-tax corporate dollars from active business income to pay the premiums is the least expensive way to fund a policy. (e.g. in Ontario 53.53% personal vs 12.2% corporate tax rate)

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●?????? The policy's Cash Surrender Value (CSV) is added to your balance sheet, increasing the assets of your business. You are purchasing an asset at a significant discount, paying pennies for every dollar of value.

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●?????? Tax-preferred cash value accumulation.? The cash in the fund is tax sheltered, including at death when the benefit is paid out tax-free. It also provides a high degree of stability, flexibility, and low risk returns. In comparison, typical investment portfolios are subject to annual taxation of earned interest, dividends received and realized capital gains (taxed up to 50%) . When these assets are liquidated, it also triggers taxation of deferred capital gains.? For corporations, money is typically moved to the estate or new shareholders by payment of a taxable dividend.?

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●?????? If the corporation needs access to the cash value in the policy, there are options available – like taking a policy loan, taking withdrawals from the policy, or assigning the policy to a lending institution as security for a loan, acting as a line of credit.? The cash values in the policy may offer higher collateral values than typical investment portfolios offer, and it may be possible to access up to 90% of the cash value in this manner.

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●?????? On the death of the insured, the tax-free death benefit is paid to the corporation.? Even if part or all the death benefit goes to pay off an outstanding loan, the corporation may post the entire death benefit to its capital dividend account (CDA), minus an amount equal to the policy’s adjusted cost basis (ACB).? An amount equal to the CDA can be paid out of the corporation as a tax-free capital dividend.?

In addition, life insurance is the only vehicle that gives you these benefits for Canadian corporations making it a 1/1 tool that can propel your business to the next level, but as long you're thinking of insurance being only an insurance policy and not all of the amazing living benefits then you won't fully see how it can transform your business.

If you're interested in having a further conversation talking about your unique situation, email me at [email protected].

I hope you enjoyed and take care,