Corporate-Owned Life Insurance Strategy for Tax-Efficient Wealth

By Laura Fitzsimons

Many Canadian business owners build significant wealth within their corporations through surplus income or corporate investments. Often, these assets are held without a clear long-term strategy, leaving them vulnerable to significant taxation—both annually and at death. A powerful alternative to traditional investments is the strategic use of corporate-owned, tax-exempt life insurance. This approach can help protect, grow, and efficiently transfer your wealth to future generations.

Traditional Investment Approach vs. Tax-Exempt Life Insurance

Traditional Corporate Investing

Typically, corporations invest surplus funds into taxable accounts:

• Growth is subject to annual taxation.

• Upon the shareholder’s death, assets face a deemed disposition, triggering substantial capital gains taxes.

• Heirs often need to liquidate corporate assets quickly, potentially under unfavorable conditions, to pay taxes.

  
  

Tax-Exempt Life Insurance Strategy

Alternatively, using corporate-owned permanent life insurance:

• Investment growth within the policy is tax-exempt.

• Death benefits are received tax-free by the corporation.

• Funds can flow tax-free through the corporation’s Capital Dividend Account (CDA) to beneficiaries, maximizing the legacy passed on to heirs.

  
  

Benefits During Your Lifetime

When your corporation holds a permanent life insurance policy:

• You benefit from tax-deferred cash value accumulation.

• You can access policy funds through various means such as collateral loans, policy loans, or direct withdrawals.

• Diversification reduces your corporation’s tax burden, enhancing long-term financial stability.

  
  

Benefits Upon Death

At death, corporate-owned life insurance significantly enhances your estate:

• The death benefit is paid directly to your corporation, tax-free.

• This death benefit boosts the Capital Dividend Account (CDA), enabling tax-free dividend distributions to your heirs.

• Any remaining balance not distributed via CDA is considered a taxable dividend but is typically smaller as the CDA benefit grows over time, reducing your heirs' tax burden.

  
  

How the Strategy Works

1. Acquisition: Your corporation purchases and owns a permanent life insurance policy on your life. Premiums are funded from corporate cash flow or existing investments.

   
   

2. Tax-Deferred Growth: The policy’s cash value accumulates without annual taxation, preserving more capital for growth.

   
   

3. Liquidity Options: If needed, the corporation can access the accumulated cash value through loans or withdrawals, offering strategic financial flexibility.

   
   

4. Estate Liquidity: Upon death, the corporation receives a substantial tax-free benefit. This benefit flows into the Capital Dividend Account, enabling your estate to transfer wealth tax-efficiently to heirs.

   
   

Who Should Consider this Strategy?

This strategy is ideal if you:

• Own a Canadian-controlled private corporation (CCPC).

• Have excess corporate cash or investment assets.

• Aim to reduce corporate taxes significantly.

• Wish to maximize your business’s value for estate and succession planning.

• Want to protect your heirs from unnecessary financial strain or forced asset liquidation.

  
  

Conclusion: Optimize Your Wealth Transfer

Integrating corporate-owned, tax-exempt life insurance into your overall investment strategy can protect your assets, reduce taxes, and ensure your legacy is maximized for your beneficiaries. By acting strategically today, you can significantly enhance the financial security and prosperity of future generations.

This publication contains the opinion of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any securities. The information in this publication is intended for informational purposes only and is not intended to constitute investment, financial, legal, tax or accounting advice. Many factors unknown to us may affect the applicability of any statement or comment made in this publication to your particular circumstances. Hence, you should not rely on the information in this publication for investment, financial, legal tax or accounting advice. You should consult your financial advisor or other professionals before acting on any information in this communication.