About Jiayue Tax & Financial Planning:
Jiayue Tax Planning is jointly offered by Michael Gao CPA Inc. and its affiliated firm,
Citistar Wealth Management. By combining expertise from our respective fields,
we aim to serve every client professionally. With our knowledge and experience,
we help power your success.

According to a recent recommendation by Deloitte, one of the global “Big Four” accounting firms,
corporate-owned life insurance is described as a once-in-a-lifetime opportunity:
“Corporate owned insurance — Opportunities to die for.”
So why is corporate-owned life insurance such a valuable opportunity for business owners?

From the perspective of the Canadian Income Tax Act,
participating / cash value life insurance is extremely attractive because
the investment growth inside the policy is tax-exempt,
which greatly enhances long-term wealth accumulation.

Under Canadian tax rules, the investment income earned within a tax-exempt life insurance policy
does not need to be included in taxable income.
This allows the investment portion of the policy to grow on a tax-exempt basis.

In almost all cases, life insurance companies design and maintain contracts so that they qualify
as “exempt policies” under the tax rules. If the policyholder keeps the policy in force until death,
the death benefit — including all investment growth accumulated in the policy —
will generally be received tax-free.

If the policy is surrendered before death, a portion of the investment growth may be taxable.
Compared with regular investments, tax-exempt life insurance offers:

• Tax-exempt investment growth inside the policy
• Fully tax-free death benefits to beneficiaries

This makes permanent, savings-type life insurance a unique and irreplaceable financial planning tool.

Why Is Corporate-Owned Life Insurance More Attractive Than Ever?

In the 2018 Federal Budget, the Government of Canada introduced measures limiting access to the
small business tax rate for Canadian-Controlled Private Corporations (CCPCs).
Under these rules, if a CCPC earns more than $50,000 in passive investment income in the previous year,
its access to the $500,000 small business limit is gradually reduced.

Specifically, for every additional $1 of passive investment income above $50,000,
the corporation’s small business limit is reduced by $5.
When passive investment income reaches $150,000,
the entire $500,000 small business limit is eliminated,
and all active business income is taxed at the general corporate rate (around 26%),
instead of the lower small business rate.

These rules became effective on January 1, 2019.

Under the new rules, investment growth inside an exempt life insurance policy
is not counted as passive investment income.
Therefore, the investment income accumulated in a tax-exempt corporate life insurance policy
does not affect the corporation’s small business limit.

As a result, corporate-owned tax-exempt life insurance can be an ideal tool to help CCPC owners:

• Accumulate wealth without triggering passive income grind on the small business limit
• Plan for retirement using retained corporate earnings
• Build long-term, tax-efficient estate and succession strategies

Tax Advantages of Corporate-Owned Life Insurance

It is important to structure corporate-owned policies correctly:
the corporation should be both the policyowner and the beneficiary,
and the shareholder (or key person) is typically the life insured.

There are several key advantages for business owners:

1. Lower After-Tax Cost of Paying Premiums via the Corporation

When premiums are paid out of corporate after-tax dollars (taxed at corporate rates),
rather than personal after-tax dollars (taxed at higher personal rates),
the effective cost of funding insurance is often significantly lower for the owner.

2. Tax-Exempt Investment Growth Inside the Corporate Policy

Investment growth inside a corporate-owned tax-exempt life insurance policy is not taxed each year.
This works in a similar way to the tax-deferred growth in an RRSP,
allowing assets to accumulate faster over the long term.

While this tax-exempt investment growth also applies to personally owned exempt life insurance,
using retained corporate earnings to fund a policy inside the company
is usually more tax-efficient than paying personal tax first and then funding a personal policy
through salary or dividends.

For corporations with surplus profits that are not required for day-to-day operations,
and that want to:

• Grow these funds over the long term
• Use them as part of retirement planning
• Include them in estate and legacy planning

a corporate-owned savings-type life insurance policy can be a very attractive financial tool.

As noted above, because the new corporate tax rules link the amount of passive investment income
directly to the availability of the small business rate,
using tax-exempt life insurance as a wealth accumulation vehicle inside the company
is becoming increasingly popular.

3. Tax-Efficient Payout and Capital Dividend Account (CDA)

Most importantly, when the insured person passes away,
the death benefit paid to the corporation — including the investment growth within the policy —
is generally received tax-free at the corporate level.

After deducting the policy’s adjusted cost basis (ACB),
the remainder of the death benefit is credited to the corporation’s
Capital Dividend Account (CDA), a notional tax-free account.

Funds in the CDA can then be distributed to shareholders and their families as
tax-free capital dividends, making it a highly efficient way
to pass corporate wealth to the next generation.

In summary, corporate-owned life insurance offers:

• Significant tax advantages
• Enhanced long-term wealth accumulation within the corporation
• Tax-efficient transfer of capital to family members and heirs

However, as federal finances come under pressure — especially in the wake of the pandemic —
there is always a possibility that some of these favorable tax rules may change in the future.

We therefore recommend that you consult with an insurance advisor at
Citistar Financial as soon as possible.
They can help you evaluate whether corporate-owned life insurance is appropriate for your situation
and design the most suitable strategy for you.

Source: Citistar Financial