Advantages of Using Life Insurance for Corporate Investing

For business owners including those who own a professional corporation, once they have decided on paying themselves with salary and/or dividends, they should evaluate where to invest their corporate retained earnings either by leaving those funds inside the corporation or taking them out to invest personally.

The main advantage of leaving funds inside a corporation is the favourable tax rate, when compared to personal income tax rates. This allows a much larger after tax investment available when left within the corporation.

However corporate investments have pitfalls that should be considered. First off, passive investment income inside a corporation is taxed at the least favourable tax rate. This means any investment income earned inside a corporation may be subject to a nearly 50% tax rate.

2ndly, due to recent Canadian tax changes, the previous year’s investment income now reduces the federal small business deduction by $5 for every $1 the investment income exceeds $50,000. In practical terms, for a corporation earning 5% on 1M of retained earnings or $50,000 of investment income, every dollar that corporation earns beyond this reduces the federal small business deduction by $5. Furthermore, once $150,000 is earned the deduction is eliminated entirely.

This is where life insurance can play a crucial role. Cash value, permanent policies such as universal life and whole life grow tax free. The corporation must be both the owner and beneficiary of the policy. This allows corporate retained earnings to efficiently be invested without being subject to much higher passive income tax rates and having no impact on reducing the small business deduction.

Corporately owned life insurance is an investment vehicle which is tax sheltered. Effectively, the policy is almost like having a corporate tax free savings account with tremendous additional benefits. Corporately owned insurance policies can be used to borrow against for investment purposes, create an extremely efficient way of transferring corporate retained earnings and may allow for additional assets to flow out of the corporation tax free through a notional capital dividends account.

We would be happy to provide further analysis for your specific circumstances and evaluate corporately owned insurance options and scenarios. Contact Protect Your Wealth today to learn more!

We proudly service life insurance clients in Ancaster, Burlington, Dundas, Hamilton, Oakville, Waterdown and the surrounding areas.