Retirement Planning Inside Your Corporation - Is It Worth It?

Many small to medium sized business owners look to use their corporation as a way to save for their retirement because of the tax advantages - but over the last several years the government has introduced further taxation on Canadian Controlled Private Corporations (CCPC), so is it still worth it?

Let's take a look into what changes were made.

In 2018, the federal government introduces a tax on passive income for CCPCs that earn more than $50,000 in passive income either within a operating or holding company that is close to 50%.

In 2024, the federal government introduces the concept of increasing the 'inclusion rate' on capital gains earned by a CCPC in its non-registered corporate investment account from 50% to 66.6%, plus reduces the tax-free capital dividend account credits from 50% to 33%.

Because of the introduction to more taxation for Canadian private companies, it means business owners will have less cash flow and profits, less of a retirement income, and less of a legacy to pass down to their loved ones.

So is planning for your retirement inside your corporation still worth it?

Fortunately yes, with the latest capital gains inclusion of 66.6% Corporate Owned Life Insurance becomes an even more advantageous tool for your corporation!

How it works.

Your corporation buys a participating whole life insurance policy on a shareholder and/or the life of a key employee, to protect the value of the corporation for future generations. Your corporation owns the policy and pays the premiums from the company's retained earnings.

Key Benefits.

Tax sheltered Growth and Capital Gains: Given the tax landscape in Canada, tax sheltered growth within a whole life insurance policy can be particularly advantageous. It shelters the dividend growth within the policy from taxation, addressing concerns about capital gains taxes that business owners often face. Especially when saving for retirement inside the corporation, having your retirement fund grow tax-sheltered means more income for you in retirement.

Tax-Free Loans and Liquidity Needs: Moreover, the ability to take tax-free loans against the cash value can help address liquidity needs without triggering capital gains taxes or losing out on opportunity cost. For example if you have $500,000 of cash value and take a loan for $200,000, you will still receive the dividend based on the $500,000. This can be vital for funding business expansion, managing cash flow, or addressing unforeseen expenses without incurring additional tax burdens while still operating the business.

Supplemental Retirement Income: In addition to the last point, leveraging the cash value of a whole life insurance policy for supplemental income can be part of a tax-efficient retirement plan. Accessing funds through policy loans can supplement other retirement income sources while considering Canada's tax landscape. As policy loans aren't seen as income, the loans are not taxable, making it tax-free retirement income.

Death Benefit and Estate Planning in Canada: Canada's tax and estate considerations also make Corporate Owned Life Insurance tax-free death benefit significant. A policy provides liquidity to pay estate taxes or other expenses without requiring the sale of business assets, which could disrupt business operations or reduce the inheritance for heirs.

Case Study

I have a client who owns a construction business and has the aspirations to expand. Three years ago, we started allocating $100,000 per year to this concept. If he died today, his family could hire someone to run the business, but we designed the policy to stockpile his retained earnings. Currently, he has accumulated over $285,000, and in two years that will rise to over $510,000. In 5 years the cash value will grow to $1.2 million, giving him more than enough capital to expand his business!

At retirement he will have over $6.7 million in cash growing inside his holding company not being taxed. He could enjoy a tax-free retirement income of over $350, 000 per year from ages 65-90.

This case study is a perfect example of how thinking differently and repositioning corporate assets can help business owners stockpile capital more efficiently to expand their business and/or plan for a tax-efficient worry-free retirement.

For more information on this tax and wealth strategy or if you have any questions, send an email to [email protected] or call 519-222-6105.