Corporate Insurance: A Strategic Advantage for Your Business

If you own an incorporated business, you've already made a smart decision, gaining access to significant advantages like:

• Limited Liability: Protects your personal assets from business-related risks.
• Business Continuity: Ensures the seamless continuation of your company.
• Access to Capital: Simplifies the process of raising funds.
• Lower Tax Rates: Takes advantage of the small business tax deduction.
• Tax Deferral Opportunities: Provides flexibility in managing taxable income.

But have you considered how corporate-owned life insurance can further enhance your business strategy? This type of insurance differs from policies meant to cover operational risks. Instead, it's a life insurance policy owned by the corporation, designed to protect the business in the event of a shareholder's death. Here’s how it can add value:

Corporate Dollars vs. Personal Dollars

In today’s tax environment, it's generally more economical to purchase life insurance with corporate dollars rather than personal income. Imagine your business is a Canadian-controlled private corporation (CCPC) that qualifies for the small business tax deduction. Depending on the province, your corporate tax rate could be around 11%. For every $100 earned, your company retains $89 after tax to allocate towards insurance premiums. By contrast, if you were purchasing life insurance with your personal income at a marginal tax rate of 50%, only $50 out of every $100 would be available.

Using corporate dollars often makes paying for insurance more efficient and leaves more of your personal income intact for other needs. It’s worth noting, however, that insurance premiums generally are not deductible to either the corporation or the individual.

Enhanced Investment Potential

A corporate-owned life insurance policy also has potential advantages as an investment vehicle. Life insurance policies benefit from preferential tax treatment—they allow funds to grow on a tax-deferred basis, similar to an RRSP, within the corporation. These funds can be invested up to a maximum amount, effectively creating a tax-advantaged investment channel for your company. Keep in mind, however, that any withdrawal of these funds may be subject to tax.

Collateral Flexibility

Corporate-owned insurance is not just a safety net; it can also provide practical financial flexibility. The policy itself can be used as collateral to secure loans from financial institutions. These loans can be directed back into your business for expansion or can be utilized by you personally for investments or retirement purposes. As with any complex financial strategy, consulting a tax specialist is important to ensure the process is executed correctly.

Added Strategic Value

Corporate life insurance opens up unique opportunities for structuring other business strategies. These include:

• Funding Buy-Sell Agreements: Ensuring the seamless transition of ownership in the event of a shareholder's death.
• Key-Person Coverage: Protecting your company against the loss of an essential team member.

Leveraging the Capital Dividend Account (CDA)

One of the most impactful advantages of corporate-owned life insurance is its connection to the Capital Dividend Account (CDA). Life insurance proceeds are received tax-free by your corporation, and the net amount is credited to the CDA. This account allows the distribution of tax-free capital dividends to shareholders, which can be a vital part of both estate planning and tax optimization.

Important Considerations

While the advantages are considerable, there are some nuances to corporate-owned life insurance that require careful attention. For instance, owning the policy through your operating corporation could expose it to creditor claims, or make it difficult to transfer the policy tax-efficiently if the company is sold. For these reasons, it’s often recommended to hold the policy within a holding company, with the operating corporation named as the beneficiary.

For businesses with multiple shareholders, issues like fair valuation and proper funding of obligations become even more important, making a well-drafted shareholder agreement essential.

Next Steps

Corporate-owned life insurance can be a powerful tool to protect your business and create tax advantages. To make the most of it, contact Garrett Agencies to speak with a professional licensed insurance advisor and tax specialist who can guide you through corporate insurance planning and ensure the right coverage for your business needs.