Corporate Owned Life Insurance
Regardless of whether the need is primarily personal, we almost always recommend owning and paying for life insurance in your corporation. The difference between corporate and personal tax rates can result in a significant savings in premium while the tax-preferred treatment of the death benefit will still give you the personal protection you need.
Lower after-tax cost
In Ontario, corporations pay 11.5% tax on the first $500,000 of profit and 26.5% thereafter. Even the lowest personal tax brackets are higher than these amounts while a high income earning individual can pay up to 53% income tax! As our example will show, you can take advantage of the difference in these tax rates to lower your after-tax cost.
You’ve determined that for the protection of your family, you need a $1 million Term life insurance policy with a premium of $100/month or $1200 per year. You have two choices to pay for this premium – you can pay for it personally or corporately. In neither case is the premium tax-deductible – it has to be paid out of after-tax earnings. Let’s assume 1. the business owner earns $100,000 per year personally – putting them in the 46.41% tax bracket for salary and 35.76% for dividends. 2. Corporate profit is less than $500,000 – putting it in the 11.5% tax bracket.
Corporate Paid Life Insurance Premium
After-tax cost to the corporation – $1,200
To pay the premium Personally:
After-tax cost to the Corporation of a shareholder dividend – $1868
The shareholder pays personal income tax of $ 668
Personally Paid life insurance premium $1200
Corporation pays the shareholder a bonus of $2,239
Corporation deducts bonus –tax savings of – $ 257
After deducting the bonus, the after- tax cost to the corporation is $1,982
The shareholder pays personal income tax on bonus of $1,039
Personally paid life insurance premium of $1,200
Regardless of the method of compensation, the cost to the corporation is about $700 lower. This is a savings of over 50% on the cost of life insurance!
In order to enjoy this premium savings it is important to designate the corporation as the beneficiary of the insurance proceeds. If you designate anyone else, such as a spouse, the premium paid by the corporation becomes a taxable benefit to the shareholder – undoing all of the savings.
But what if the life insurance is intended for the protection of my spouse or family? The tax-advantaged treatment of life insurance proceeds along with an up-to-date Will leaving the shares of your corporation to your intended beneficiary will do the trick. Upon your death, life insurance proceeds will be received tax-free by the corporation. It will also result in a credit of the same amount1 to the corporation’s Capital Dividend Account. When a corporation has a balance in its Capital Dividend Account it can elect to pay a tax-free dividend to shareholders. Because your beneficiary inherits your shares, they will receive the life insurance proceeds as intended.
1. Beware of Corporate Creditors – Because the life insurance must first pass through the corporation on death, the proceeds may be subject to claims of corporate-creditors before they can be paid out as a Capital Dividend.
2. You may have to share with partners – If you are not the sole shareholder of the corporation, the Capital Dividend may have to be shared with all shareholders of the corporation. This can be solved with a shareholder agreement and small reorganization that results in each shareholder holding a different class of shares.
Contact us if you are interested in more information firstname.lastname@example.org
1 The amount of the Capital Dividend credit is actually the amount of life insurance proceeds minus the adjusted cost base. For most policies this is the amount of premium paid and is usually a small fraction of the death benefit.
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