Entrepreneurship & Small Business

Hold a permanent life insurance policy within corporation?

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  • Jan 5th, 2021 1:56 am
[OP]
Deal Expert
Mar 23, 2009
20998 posts
7335 upvotes
Toronto

Hold a permanent life insurance policy within corporation?

My financial advisor is suggesting I consider a permanent life insurance policy owned by my corporation. This is presented as a method to reduce taxes on corporate income. The policy would be paid out upon my death. My family consists of me, my wife, and our two young children.

I currently already have personal term life insurance until 2027 and with our projected finances at that time, we won't actually need life insurance after that since we do not have a mortgage and my wife can collect my pension (and her pension) if necessary. So the main point of it would be to reduce corporate taxes. However, I am finding the complexities of this somewhat hard to navigate. I am consulting my investment advisor, but I have to keep in mind that their bias is to sell the insurance.

I have read a bit from these articles:

https://www.bdo.ca/en-ca/insights/tax/t ... te-wealth/
https://ca.rbcwealthmanagement.com/dele ... 28/content

Anything specific I should be aware of, or are there other recommended online resources?
14 replies
Newbie
Dec 31, 2013
37 posts
19 upvotes
Mississauga
In case of your death the money will be paid to company which own the insurance, not your family. If your family does not own the 100% of the corporation, they may have trouble receiving all money. But if that is a not the case it's fine to do insurance through the corporation, your accountant will take care of reducing taxes.
Alex Shapovalov
Taxory accounting services
Sr. Member
Feb 23, 2005
944 posts
64 upvotes
EugW wrote: My financial advisor is suggesting I consider a permanent life insurance policy owned by my corporation. This is presented as a method to reduce taxes on corporate income. The policy would be paid out upon my death. My family consists of me, my wife, and our two young children.

I currently already have personal term life insurance until 2027 and with our projected finances at that time, we won't actually need life insurance after that since we do not have a mortgage and my wife can collect my pension (and her pension) if necessary. So the main point of it would be to reduce corporate taxes. However, I am finding the complexities of this somewhat hard to navigate. I am consulting my investment advisor, but I have to keep in mind that their bias is to sell the insurance.

I have read a bit from these articles:

https://www.bdo.ca/en-ca/insights/tax/t ... te-wealth/
https://ca.rbcwealthmanagement.com/dele ... 28/content

Anything specific I should be aware of, or are there other recommended online resources?
If your objective is to reduce corporate taxes, this is not for you. Premiums for life insurance policies on directors or key persons are not tax deductible. The proceeds, however, will be tax exempt to the corporation when it's paid out.

Joseph Kwan, CPA, CA, CPA (Illinois)
[OP]
Deal Expert
Mar 23, 2009
20998 posts
7335 upvotes
Toronto
Thanks for the responses.

Wife and children are shareholders of the corporation. I have common shares and they have special shares.

I was looking at this as a corporate tax shelter for a professional corporation, with tax deferred growth avoiding the passive income clawback for the small business deduction. If I understand it correctly, the main issue here addressed by a permanent life insurance policy (not now in my case but in the future) is the passive income limit for small business deductions. Growth inside the life insurance plan does not get included in the passive income calculation, so this can potentially reduce the clawback due to high passive income.

https://www.advisor.ca/tax/tax-news/usi ... come-rules

Am I understanding this correctly?
Sr. Member
Feb 23, 2005
944 posts
64 upvotes
EugW wrote: Thanks for the responses.

Wife and children are shareholders of the corporation. I have common shares and they have special shares.

I was looking at this as a corporate tax shelter for a professional corporation, with tax deferred growth avoiding the passive income clawback for the small business deduction. If I understand it correctly, the main issue here addressed by a permanent life insurance policy (not now in my case but in the future) is the passive income limit for small business deductions. Growth inside the life insurance plan does not get included in the passive income calculation, so this can potentially reduce the clawback due to high passive income.

https://www.advisor.ca/tax/tax-news/usi ... come-rules

Am I understanding this correctly?
Yes, this is correct. I thought you meant trying to reduce current corporate taxes.

Joseph Kwan, CPA, CA, CPA (Illinois)
Member
Jan 18, 2017
361 posts
274 upvotes
Pay really, really, close attention to the policy fees and cash-surrender values. I've seen too many clients screwed by these "magical" policies that promise fantastic tax-free returns, but when you run the numbers, it's just the life insurance company making money off of you via fees (hidden or otherwise.) And if you don't continue the policy payments for "X" number of years, you typically lose all of your investment.

Also remember that the SBD clawback kicks in at $50k in passive income. So hypothetically, you'd be looking at $1mil in invested capital at 5% return rate to generate the $50k. Do you have this freely sitting around right now? (Not calling you out, just saying it's usually my Step 4 of tax planning for a PC.)

Worry about the "life insurance" crap once you have at least that much in capital to freely play around with.

(If you can't tell, I'm sick of insurance brokers screwing professionals. I see it too many times and it pisses me off.)
EugW wrote: Thanks for the responses.

Wife and children are shareholders of the corporation. I have common shares and they have special shares.

I was looking at this as a corporate tax shelter for a professional corporation, with tax deferred growth avoiding the passive income clawback for the small business deduction. If I understand it correctly, the main issue here addressed by a permanent life insurance policy (not now in my case but in the future) is the passive income limit for small business deductions. Growth inside the life insurance plan does not get included in the passive income calculation, so this can potentially reduce the clawback due to high passive income.

https://www.advisor.ca/tax/tax-news/usi ... come-rules

Am I understanding this correctly?
______
Canadian & US tax guy (CPA)
[OP]
Deal Expert
Mar 23, 2009
20998 posts
7335 upvotes
Toronto
crossborderguy wrote: Pay really, really, close attention to the policy fees and cash-surrender values. I've seen too many clients screwed by these "magical" policies that promise fantastic tax-free returns, but when you run the numbers, it's just the life insurance company making money off of you via fees (hidden or otherwise.) And if you don't continue the policy payments for "X" number of years, you typically lose all of your investment.
Thank you for this. I suspected as much. I will meet with them again at a later date to see the options, but if the advantage is not significant, I probably just won't go through the hassle. I don't want to be locked in for 30 years or whatever for a marginal benefit.
Also remember that the SBD clawback kicks in at $50k in passive income. So hypothetically, you'd be looking at $1mil in invested capital at 5% return rate to generate the $50k. Do you have this freely sitting around right now? (Not calling you out, just saying it's usually my Step 4 of tax planning for a PC.)

Worry about the "life insurance" crap once you have at least that much in capital to freely play around with.

(If you can't tell, I'm sick of insurance brokers screwing professionals. I see it too many times and it pisses me off.)
I don't have that much yet, but even if I had twice that I'm thinking that I might have some room to spare, since the portfolio is structured as a growth oriented one, mostly medium risk with some high risk. So the actual returns of dividends, interest and (50% of) realized capital gains would probably be much lower than 5%. (Most of the increase in value of the portfolio would ideally be in unrealized capital gains.) It wouldn't be until I get closer to retirement would I consider trying to generate more passive income in the portfolio, but even then I probably would not need as much as some, since I have a partial pension from a previous job.

As it stands now, I am leaning toward not getting any life insurance plan (other than keeping my existing term-life until it ends in 7 years), but I'm keeping my options open.
Member
Jan 18, 2017
361 posts
274 upvotes
Just a heads-up: Brokers talk fast and promise lots. Just focus on the numbers, and only the numbers. Hire an outside guy to review the numbers for you if you need.

I had an optometrist get talked into an $11k/year policy. He paid into it for something like 15 years. A few years ago he walked away from it. I think he got something like $30k back. That's the kind of BS that gets pushed in these policies. When you focus on the actual numbers, they typically don't hold up to scrutiny.

If you want corporate life insurance to help with "tax", get regular old term-life on the director, and that's it. As a PC/Holdco, you don't need anything other than this.

Separately, you're further ahead than most by realizing that most of your gains will be sitting unrealised on the books. Just make sure that you diversify as you go. Also, mind the time-horizon. By the time you amass a bunch of capital in your PC, you'll likely be working (ie. active business income) a lot less than you were when you first started. Who cares if you can't use the full $500k of SBD when you're netting $150k in professional income. It's a non-issue as you transition from a roaring PC to a holdco.

Anyway I'm probably ranting now.
EugW wrote: Thank you for this. I suspected as much. I will meet with them again at a later date to see the options, but if the advantage is not significant, I probably just won't go through the hassle. I don't want to be locked in for 30 years or whatever for a marginal benefit.


I don't have that much yet, but even if I had twice that I'm thinking that I might have some room to spare, since the portfolio is structured as a growth oriented one, mostly medium risk with some high risk. So the actual returns of dividends, interest and (50% of) realized capital gains would probably be much lower than 5%. (Most of the increase in value of the portfolio would ideally be in unrealized capital gains.) It wouldn't be until I get closer to retirement would I consider trying to generate more passive income in the portfolio, but even then I probably would not need as much as some, since I have a partial pension from a previous job.

As it stands now, I am leaning toward not getting any life insurance plan (other than keeping my existing term-life until it ends in 7 years), but I'm keeping my options open.
______
Canadian & US tax guy (CPA)
Jr. Member
User avatar
Oct 25, 2016
185 posts
92 upvotes
crossborderguy wrote: J

If you want corporate life insurance to help with "tax", get regular old term-life on the director, and that's it. As a PC/Holdco, you don't need anything other than this.
I already have term, is it possible to have the corporation pay that annual bill? Any guidance is appreciated.
Member since Feb 19, 2008
Member
Jan 18, 2017
361 posts
274 upvotes
Generally speaking, yes you can. However, you need to make sure the policy is held by your PC, and payable by the insurance co to the PC. And fun fact: The PC can pay the bill, but it won't be deductable for tax purposes. (Unless of course you want to screw yourself.)
______
Canadian & US tax guy (CPA)
Member
Sep 8, 2010
335 posts
60 upvotes
Chambly
Would love to hear back as to what you decided with this. Did you go ahead with it?

I was proposed similar thing since i have an amount of cash in my corp and a great strategy to get it out tax free using a loan against the policy or death benefit paid tax free upon death. I've read a lot on it and if properly structured, you get 90% in cash value of what you put into it as of the first year. It just sounds too good to be true
Deal Addict
Dec 13, 2007
2026 posts
539 upvotes
Toronto
mcu wrote: Would love to hear back as to what you decided with this. Did you go ahead with it?

I was proposed similar thing since i have an amount of cash in my corp and a great strategy to get it out tax free using a loan against the policy or death benefit paid tax free upon death. I've read a lot on it and if properly structured, you get 90% in cash value of what you put into it as of the first year. It just sounds too good to be true
It is too good to be true. You can't just take loan from the corp. Not without consequences.
Member
Apr 6, 2019
219 posts
76 upvotes
GTA
mcu wrote: Would love to hear back as to what you decided with this. Did you go ahead with it?

I was proposed similar thing since i have an amount of cash in my corp and a great strategy to get it out tax free using a loan against the policy or death benefit paid tax free upon death. I've read a lot on it and if properly structured, you get 90% in cash value of what you put into it as of the first year. It just sounds too good to be true
Yeah I don't think this would work.

So Corp is holding the policy and loan would also come in corporation books. Now the corporation can loan that money to shareholders but then shareholders loan implications would kick in. So practically this won't work like you are thinking.

Would definitely work for your insurance advisor as permanent life insurance policies in corporations have crazy crazy huge commissions. I know of a person who got 40k in commission just from one policy like this.
Member
Sep 8, 2010
335 posts
60 upvotes
Chambly
You are not actually getting a loan from the corporation. The loan comes from the bank as they are using your policy as collateral.
Member
Apr 6, 2019
219 posts
76 upvotes
GTA
mcu wrote: You are not actually getting a loan from the corporation. The loan comes from the bank as they are using your policy as collateral.
I just did a quick google on this and found this under FAQs section . Such kind of arrangement would result in taxable benefit for the shareholder, but would vary based on each situation. Complete document for reference is here : https://www.sunnet.sunlife.com/files/ad ... 0-2876.pdf
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