Do creditor protection concerns exist within the company? Ultimately, who will receive the proceeds of your insurance?

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1 Corporate Owned or Personal Owned Life Insurance When considering life insurance as a shareholder of an incorporated business, you may have wondered if your life insurance policy should be personally owned, or owned through your corporation. Unfortunately, there is no straightforward answer! All life insurance policies, unless specifically stated, can be personally owned or corporately owned. The right choice for you will depend on a few factors. Consider the following questions: What is the purpose of your insurance? Do creditor protection concerns exist within the company? Ultimately, who will receive the proceeds of your insurance? How quickly will the funds be needed after death? Are there any family law concerns? Are there any liability concerns? There are several key reasons why a business would require life insurance. To protect key employees o Some companies buy life insurance to protect the business from financial loss in the event of an employee dying or becoming disabled. To fund buy/sell o Shareholders can fund the Buy/Sell provisions in a shareholder agreement through life insurance. It is economical and can also be used to help settle a buy/sell agreement between more than two partners.

2 For estate planning o Offsetting tax liabilities on death is just one way that life insurance can be an efficient tool. Life insurance receives special tax treatment, and using that treatment, you may be able to gain investments that are not subject to accrual taxation. In some instances, life insurance may even reduce the amount of taxes projected to be due upon death. For tax planning o The moment before death, there is a deemed or fictional disposition of assets owned by the deceased, including shares of a corporation they may own. Whether or not any of assets were actually sold, this disposition happens. Planning in advance can extend the disposition until the death of a spouse. It also defers any potential tax liability. If there is NO life insurance at the time of the second death and assets have been acquired in the corporation, several things may happen. For one, there will be a Taxable Capital Gain on the disposition of those shares. Secondly, a taxable dividend payment will likely appear if the executors of your estate/beneficiaries are instructed to access the accumulated capital. By having life insurance, you also have a way to fund this tax liability, allowing your beneficiaries to receive insurance proceeds with no tax. The tax liability could even be reduced by planning. Both ownership structures, personal or corporate, have their own merits, as well as considerations. If you have researched on both and decide that corporate ownership is right for you, it s important to further consider the pros and cons.

3 PRO: Capital Dividend Account (CDA) There a number of mechanisms CRA has in place in order to preserver integration. The term integration stands for something created with intentions to create equality between the amount of income tax paid by a person receiving income through a Canadian Controlled Private Corporation ( CCPC ) and the amount paid by an individual taxpayer. Personally received life insurance proceeds are tax-free. A funnel is provided by the Capital Dividend Account whereby life insurance proceeds received by a CCPC are able to be paid to a shareholder usually, in some cases, tax-free. PRO: Premiums are paid by the company Though deducting the premium is usually not impossible unless under special circumstances, there may still be an advantage to using after-tax corporate dollars, as opposed to after-tax personal income. For example, in Ontario, the highest marginal tax rate is 46.41% for a shareholder versus the 15.50% for the active business income of a corporation under $500,000. This chart explains this in numbers.

4 Shareholder Policyowner Corporation Pre- Tax Revenue / Income Required $18,660 $11,834 Tax Rate 46.41% 15.50% Income Taxes $8,600 $1,834 After- Tax Dollars Available $10,000 $10,000 As you can see, the pre-tax corporate revenue and pre-tax personal income differs greatly even though it pays for the same $10,000 insurance premium. CON: There is no liability or creditor protection Corporate policies are not protected from the owner s creditors. This could be an issue to those whose cash values have accumulated and are concerned about potential malpractice and other forms of litigation. NEUTRAL: Potential increase in the value of shares Any cash surrender value of corporate owned policies is included in the value of the shares when the shareholder dies. In this instance, Capital Gain could be created or increased, generating taxes within the deceased s estate. On the other hand, even if there is an insurance policy being used to shelter investment income from taxes, the corporation likely has investment assets that will result in the same outcome. It is beneficial to have cash in the insurance policy due to the fact that, on death, the cash value is paid out as a death benefit, sometimes adding to the CDA (mentioned earlier).

5 We hope we have been able to increase your awareness on the pros and cons of different ownership possibilities as the owner of an incorporated business. To discuss specifics, call today to talk to one of our amazing advisors.

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