You can buy more insurance with corporate dollars

Tax integration is the idea that a person earning income as an employee should pay the same amount of overall tax as someone that earns income from his/her business first and then pays himself/herself dividends. A company that is a Canadian Controlled Private Corporation (CCPC) pays a low rate of tax on the first $500,000 of active income. It is only when those retained earnings are paid to the shareholder that the second layer of personal tax is paid. Due to this two-step nature of tax when a corporation is involved, there is an advantage of paying for your life insurance corporately.

Tax-free transfer of insurance payout

For a corporation to receive the insurance proceeds tax free, it should be both the owner and beneficiary. Oftentimes, the shareholders have purchased the corporate policy to also cover personal needs. Fortunately, there is a mechanism to flow a portion, and potentially all of the insurance proceeds, to the shareholder’s estate tax free. When the insurance payout comes into the corporation there is also a credit to a notional account called the CDA, or capital dividend account. The CDA is calculated as the death benefit minus the ACB-adjusted costs basis. The CDA is important because it can be paid tax free out of the corporation immediately or at any time in the future.

Tax-sheltered growth of premium deposits

Although mentioned above tax savings on premiums and tax-free payments from the capital dividend account, there is yet another tax advantage while the corporate life insurance is in place. That is, premium deposits into a life policy are able to grow tax sheltered. It’s important to know that many insurance policies support extra deposits into them, thereby becoming preferred tools for the accumulation of corporate assets. These assets do in fact show up on the corporate balance sheet and may provide future opportunities for the corporation or the shareholder(s). Accountants usually understand this, but sometimes lack experience on how to properly record it.

An asset on the balance sheet

Since the corporate life insurance can be an asset on the balance sheet, it directly strengthens your banking relationship and capacity for additional lending. Over time, there is often a yield enhancement over traditional investments while the insured is alive. Depending on the insurance structure you can chose to control the investment decisions within the insurance policy or you can have the insurance company make them for you. Either way, you can throttle the level of risk to your desired level, reduce it, or even eliminate it.