Often the retained profits or surplus cash of a business, whether an operating company or an investment holding company, are invested in GICs, or taxable investments and are not paid out to the shareholder. However, these taxable investments may not be the most advantageous way for the corporation to invest its’ retained profits. Instead, profits could be deposited into an exempt life insurance policy required to provide key-person insurance, business loan protection, or other business insurance needs.

Retirement Funding/Estate Wealth Transfer

A permanent life insurance policy that qualifies as an “exempt policy” allows for tax-deferred growth of the policy’s cash value and tax-free receipt of the proceeds at death. The cash value growth within an exempt policy is not subject to annual accrual taxation. It is subject to tax if there is a policy disposition (deemed or otherwise). The significant cash value can accumulate on a tax-deferred basis if the maximum deposits permitted by the ITA are deposited into the exempt policy. The deposits can be designed to remain tax-sheltered within the contract and pay for the cost of insurance and expenses in future years.

This may be an attractive alternative to taxable investments for a corporation with excess cash reserves not set aside for a specific purpose. It is ideal for a private corporation or its owner who:

• Desires a higher immediate estate value,
• Has annual income retained but not earmarked for any particular use,
• Desires a tax-deferred investment, and
• Desires a tax-free death benefit.

Suppose the corporation of shareholders desires access to the cash at some future date before death. In that case, the policy’s cash surrender value can be accessed through policy withdrawals or a collateral loan secured against the insurance policy. Policy withdrawals may trigger some income tax at the time of departure (refer to the Tax Topic “Dispositions of Life Insurance Policies”). Advances to the corporation received as a collateral loan will be tax-free. If the proceeds are used to earn income from a business or property, and the other requirements of 20(1)(c) of the ITA are met, the interest expense may be deductible for tax purposes.

Disclaimer: Insurance, Investment and Mortgage products & services are provided by Devangkumar Shah.
Mutual Funds are sold through Shah Financial Planning Inc., the Mutual Fund Dealer.
Lotus Loans and Mortgage ltd. is the principal mortgage broker.