Life insurance inside a corporation can save on taxes if done correctly

Why put your life insurance inside of your corporation?

If you have a small business the cost of your life insurance could be cut approximately in half. A Canadian Controlled Private Corporation that is earning active business income below the small business limit pays 14% tax in Alberta. The tax rate varies by province. In Alberta the 2015 top personal tax bracket is 39%. With proposed tax increases that is expected to be 48% in Alberta and over 50% in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia.

The life insurance (in most cases) is a non-deductible expense for the corporation just as it is not deductible on your personal tax. However, your corporation may be paying less tax. Consult your tax professional to find out your marginal tax rate.

Let’s use the 50% marginal tax bracket to make the comparison simple. To pay for $1000 in life insurance you need to earn $2000 before taxes to pay for it personally. Your Canadian Controlled Private Corporation that is earning active business income needs to earn $1162.79 before tax to pay for the $1000 in life insurance. That is a savings of $837.21.

If you are not sure how to do this talk to me or your tax advisor.

The Details.

First make sure you have a Canadian Controlled Private Corporation that is earning active business income below the small business limit.

You have to sell the insurance policy to your corporation. The corporation has to be the owner of the policy and the beneficiary. You can sell it at the ACB (Adjusted Cost Basis). Ask your insurance agent for this number. You may be able to sell it at a higher number but that is beyond the scope of this article.

On your passing the insurance is paid out to the corporation. This amount is credited to the Capital Dividend Account and can be paid to shareholders tax free.

Cautions

Remember to consider the shareholders of the corporation. If you are the only shareholder there is no issue. If you have other shareholders they may have a claim on this payout.

Remember to have a will that specifies who gets your shares of the corporation. Talk to your lawyer, insurance agent, financial planner and tax professional.