You've worked hard for many years to build a successful business, and you have amassed a significant amount of retained earnings. Your corporation has been consistent and generates more cash than you need day-to-day. If excess cash is sitting in investments, Canada Revenue Agency (CRA) taxes these passive investments at the highest corporate rate. You can take the money out as a salary or as a dividend, but there could be significant taxes incurred as well.
How do you get money out of your corporation the most tax-efficient way possible?
There are a couple of great tools to access this cash without giving virtually half to CRA:
Tax-advantaged life insurance strategy
#1. Redirect a portion of your company's excess cash from retained earnings or taxable investments to a permanent, participating life insurance policy. This will keep more money working for you as the growth inside the policy is not eroded by taxes.
#2. You can access accumulated cash value within the policy as a collateral line of credit as loan advances, which can provide a business or personal stream of income.
#3. The policy loan will be paid off at time of death, and the remainder (less adjusted cost basis) is eligible for distribution to shareholders or your heirs as tax-free dividends.
Split dollar critical illness arrangement
If you are an incorporated business owner you can own a critical illness (CI) insurance plan jointly with your corporation using tax effective corporate rate income tax dollars. Pair this plan up with a Return of Premium (ROP) rider to get all of your money back in 15-20 years if you haven’t made a claim.
John, 40, applies for $500,000 of lifetime critical illness coverage with a return of premium benefit upon surrender. He sets up a Shared Ownership Agreement which stipulates that the corporation owns and is beneficiary of the $500,000 critical illness benefit while John owns and pays for the Return Of Premium benefit.
The total annual premium for the policy is $17,615.
The Corporation pays the cost of insurance $12,685
John personally pays the ROP benefit of $4,930
How does John benefit?
Twenty years later, when John turns 55, he determines that the CI coverage is no longer required. His company cancels the policy and John exercises his return of premium option. John receives a cheque from the insurance company for $264,225 tax-free*.
Please contact the advisors at VanFraser Financial to see if either of these strategies would work for you. If they appear appropriate, a personalized report can be prepared and tailored to your company's cash flow, its current investments and your personal goals.
These strategies are not for everyone. Talk to your advisor and accountant about the risks and benefits, and if either might work for your situation. E&OE *Based on current CRA guidelines. Tax rules are subject to change.