Tax exemption opportunities for businesses recommended by the top four world-class accounting firms
According to the latest recommendations from one of the world’s four largest accounting firms Deloitte: “Corporate owned insurance —- Opportunities to die for.” Let’s take a look at why corporate owned insurance is such a rare opportunity for business owners.
From the perspective of Canadian income tax law, the reason why participating saving life insurance is so attractive is that the growth of the income generated by the investment part of the policy in the policy is tax-free, it has a great help for wealth accumulation. In almost all cases, life insurance companies will ensure that the insurance contract is a tax-free policy. If the policyholder holds the policy until his death, the death benefit received including all investment income during the policy holding period will be tax-exempt. If the policy is redeemed before death, a portion of the proceeds may be taxed. Compared with other general investments, participating saving life insurance has the advantages of tax-deferred growth of investment income and complete exemption of death benefit, which is an irreplaceable financial management tool.
Why corporate-owned life insurance is more attractive than ever？
In the 2018 federal budget, the federal government proposes to limit the use of preferential tax rates for small businesses。The restriction will be applied to Canadian Controlled Corporation (CCPC). Once the company has received more than $50,000 in passive investment income in the previous year, for every additional $1 of investment income, the amount of $5 will be used to offset the $500,000 federal preferential tax rate for small businesses. When the passive investment income of the previous year reaches $150,000, it will completely offset the preferential tax rate for small businesses, and all profits will be paid at the normal corporate tax rate of 26%. The new tax law came into effect on January 1, 2019.
According to the rules of the new tax law, investment income obtained from tax-exempt life insurance policies is not considered passive investment income. Therefore, the investment income obtained through tax-exempt life insurance will not affect the ability of CCPC’s small business tax rate deductions, and can be an ideal tool to help business owners like you accumulate wealth and plan for retirement.
Tax incentives for corporate-owned life insurance
It is important to ensure that the policies owned by the company designate the company as the beneficiary and policy owner, and the shareholders as the insured.
First, for business owners, the capital cost of paying premiums by companies rather than individuals will be much lower.
Secondly, investment growth in life insurance policies owned by the company is tax-free. The concession is similar to tax-deferred growth in investment income in registered retirement savings plans, and it allows faster asset accumulation.
The benefit of tax-exempted investment income of savings life insurance is also applicable to such insurance held by individual. However, premium paid by the retained earning from the company will be more tax effective than paying by individual after-tax money (such as share holder dividend paid out form company).
If the company has idle retained earning and hopes that these funds can accumulate over a long period of time and become a part of retirement planning and wealth inheritance, the participating savings life insurance plan is a very attractive financial tool.
As mentioned earlier, the new corporate tax law stipulates that the amount of passive investment income of individual companies affects the preferential tax rate of CCPC. Therefore, the choice of participating saving life insurance to achieve wealth accumulation will become increasingly popular.
Last but not least, the most important is the corporate-owned life insurance will be tax-exempt at the company level, including the death benefit received when the insured person passes away. The insurance premium paid by the company will be returned to the company’s retained earning after deducting the pure insurance cost, and most of the rest will be entered into the company’s tax-free capital dividend account (CDA). Shareholders and family members can get this part of death benefit tax-free.
Generally speaking, the corporate-owned life insurance has most tax advantages for accumulating wealth and transferring wealth to family members. However, as the federal government is stretched by the epidemic, it is not clear whether these opportunities will last. We recommend that you consult us in a timely manner, and we will provide you with the most professional and most suitable insurance planning for you.