Money leaving your company usually gets taxed. Life insurance can be the exception.
Getting money out of a corporation almost always costs tax. When you die, there's often a second hit: tax on the growth in your shares. Life insurance owned by your company follows different rules, and much of the payout can reach your family tax-free.
How it works, in plain English
- 1Your company owns a life insurance policy on you and pays the premiums with corporate dollars, which are often taxed at a lower rate than your personal income.
- 2When you die, the payout goes to the company, tax-free.
- 3Most of that payout is credited to a special tax account inside the corporation, called the capital dividend account.
- 4The company can then pay that amount to your family or your estate as a tax-free dividend.
The same dollars paid out as a regular dividend would be taxed in your family's hands. With insurance, the company's money takes the tax-free road.
What it's good for
- Covering the tax bill on your shares at death, so your family doesn't have to sell the business or its assets to pay CRA
- Turning money that would sit in the company into a bigger inheritance
- Funding a buy-sell agreement (Protect the business)
Is this a fit?
Usually a good fit
- A profitable company with money it doesn't need for day-to-day operations
- An owner who wants to leave money to family
- A long-term view: this is planning for decades, not years
Probably not yet
- A company that needs every dollar to grow, or a need that's only short-term.
The honest fine print
- Premiums generally aren't tax-deductible.
- Permanent coverage is a long-term commitment. Dropping it early usually costs you.
- The tax-free amount isn't always 100% of the payout. Your accountant can show you how it works for your policy.
- Coverage depends on your health, so the earlier you look, the more options you have.
Questions to take to your accountant
- 1.Should my operating company or my holding company own the policy?
- 2.Roughly what would my estate's tax bill look like today?
- 3.How would the payout flow through the capital dividend account to my family?
FAQ
Is this different from buying insurance personally?
Same kind of policy, different owner. The difference is whose dollars pay the premiums, and corporate dollars are often cheaper dollars.
What happens if I sell the company?
The policy can usually be moved out of the company, but that can trigger tax. Plan for it before the sale, not after.