Life insurance inside a corporation can save on taxes if done correctly
Posted on Dec 14, 2015 7:59am PST
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.