As we discussed earlier, the Federal budget in February of 2018 introduced new rules on how passive investment income inside a corporation is taxed and viewed. Passive investment income has always been taxed at a very high rate, which made it important to be clear on how your corporate cash surplus was invested or saved. High interest or GIC savings accounts produce interest income, which is 100% taxed. Capital gain taxed investments are much more efficient, as only 50% of your gain is taxable. There always was another option, which included “tax sheltering” your corporate investment dollars inside of a corporately owned insurance policy.
Both Universal Life and Whole Life policies allow you to accomplish this feat. The difference between the two types of policies is how the insurance cost and investment/cash value are derived. It definitely makes sense to sit down with an advisor who specializes in this advice to determine which type of policy makes the most sense for you.
Life insurance should already be on the radar of business owners as a way to protect partners, employees and family members should the owner die. But now it offers the further benefit of being able to grow your corporate cash investments 100% tax free, and there are different strategies on how best to withdrawal or use your cash value for retirement needs during your lifetime which could potentially mean accessing this cash personally tax free.
Upon death, the death benefit AND the investment cash value will be paid to your corporation 100% tax free. The total death benefit and cash value component minus the adjusted cost basis of the policy can be paid to the remaining shareholder of the corporation through the Capital Dividend Account (CDA account) personally 100% tax free. I know all these accounting terms can be intimidating…but simply put, there is the potential for most, if not all of this entire death benefit and investment cash value to be stripped out of the company and into your survivors’ hands 100% tax free.
Now I am sure you already knew all of this, and thought it all sounds too good to be true already. But now there is even an added advantage to the corporate insurance tax shelter strategy. Again, as we discussed in the previous blog article, https://wiim.ca/blog/the-small-business-clawback/ the Federal Budget in February, 2018 has introduced new rules around passive investment income inside of a corporation beginning in 2019. The budget introduced a $50,000 threshold for passive taxable income within a year, and tied that threshold to the small business deduction. Any passive investment income above $50,000 for a tax year will clawback the small business deduction by $5 for every $1 of passive income above the $50,000 threshold.
By using the strategy of depositing this corporate surplus cash into a corporately owned insurance policy with an investment/cash value component, it will eliminate the annual gains of being taxed as well as not counting towards your passive investment income threshold. Hence, you won’t have to worry about ever having your small business deduction clawed back.
I know we have all heard of the 2 birds, 1 stone analogy…but corporately owned life insurance can be viewed closer to 4 or 5 birds and 1 stone.