Tax planning becomes more and more critical for many Canadian businesses. Simply speaking, the goal of tax planning is to maximize all the deductions available as well as defer the tax as much as you can to the future.
Under the existing tax rules, a corporation purchases a life insurance policy purchased by a corporation brings significant taxable benefits for corporations as well as individuals.It is a very effective tool in estate planning.
Let’s take a look at it.
First of all, in general, corporate income tax rates are way lower than personal tax rates,definitely it is more beneficial to use after tax corporate dollars to cover cash-flows for life insurance policy.
Secondly, in Canadian corporate tax, Capital Dividend Account (“CDA”) is used to keep track of tax-free corporate accumulated surplus. And the corporation can distribute the surplus through tax-free capital dividends to shareholders.A death benefit from a life insurance policy can be distributed to shareholders tax-free.
How does it work?
Basically, if a corporation is the beneficiary of the life insurance policy but not the policy holder, when the corporation receives the death benefit, such amount is tracked in CDA and the related Adjusted cost base is nil. Under the existing tax rules, the death benefit can be received tax-free by the corporation.
Generally speaking, corporate owned life insurance policy can be used in the following situations:
- to fund estate tax when shareholders die
- to provide funding in a loss of key employees/shareholders
- required by the financial institutions as a condition of a loan
On the last situation, a portion of the insurance premiums may be deductible depending on the comparison of the premium paid in the year and the net cost of pure insurance.
Things change. Tax rules for life insurance policies will be changed effective on January 1,2017. Under the new rules, the tax benefits derived from the new policies will be reduced compared to the ones issued pre-2017.
If you are planning purchasing a life insurance as part of your estate plan, you still have two months to have a thorough discussion with your accountant as well lawyers,insurance advisor. Plan ahead and assess the situation carefully before the new rules kick in.
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P.S.
The article has been translated and posted on Yorkbbs.ca. Enjoy!
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