Life insurance? Pay less

National Post

2009-07-07


Succession planning should be a critical part of any business owner's long-term strategy, especially when the value of the business accounts for a significant portion of the owner-manager's personal wealth. The succession plan would include arranging for what happens to the business upon the death of the principal owner and would include a strategy for funding both any outstanding debts of the business as well as the possible tax liability on the death of the owner.

Often life insurance can play a key role in funding this liquidity event (that is, an event that may trigger an immediate need for cash, a death being a prime example.) But for business owners who operate their business through a corporation, an important question is whether their life insurance should be held personally or by the corporation. From a tax point of view, it may be possible for an absolute savings to be realized if life-insurance premiums are paid for by the corporation. That's because, generally speaking, life-insurance premiums are not tax-deductible. (Life insurance is only deductible where the insurance is required as collateral for a loan, assuming certain very specific criteria are met.)

To illustrate this point, let's assume that Sylvain, a business owner, has a life-insurance policy to provide for his family in the case that he dies prematurely. His annual premiums total $1,000. If Sylvain were to pay the life- insurance premiums personally, he would have to earn about $1,818 personally in order to be able to pay the $1,000 insurance premium, assuming his income is taxed at the top personal rate of 45%. If, on the other hand, Sylvain's company was to own the life insurance policy, it would pay the $1,000 insurance premium, which is assumed not to be tax-deductible, as discussed above. But if Sylvain's company is a Canadian-controlled private corporation (CCPC) that can take advantage of the small-business deduction on its first $500,000 of active business income, its corporate tax rate is approximately 20% or less (the actual rate varies by province). Thus, the corporation only needs to generate $1,250 of pre-tax income, taxable at 20%, to generate after-tax cash of $1,000 to pay the annual premium on the life-insurance policy. This results in an annual pre-tax savings of $568.

In this example, the corporation would own the policy - but death benefits can generally be paid out of the corporation to its shareholders, either mostly, or in many cases, entirely tax-free, as a special dividend, known as a "capital dividend."