Corporate owners have the unique option to fund life insurance policies through their corporation. When life insurance is owned inside a corporation, the corporation pays the premiums and is the beneficiary of the plan. Owning insurance inside a corporation offers several tax advantages.
Premiums paid by a corporation will be lower than premiums paid by an individual, so long as their personal tax rate is higher than their corporate tax rate. Also, compared to a corporate investment account, the cash value of a permanent life insurance plan offers tax deferred growth. Upon death of the insured individual, the cost basis of the policy can be paid as a tax-free capital dividend. In this way, a tax-free benefit can be paid to a beneficiary, similarly to a personal insurance policy.
Starting January 1st 2019, investment income in a Canadian-controlled private corporations will reduce their small business deduction (SBD). At $150,000 of passive income, the SBD will be completely eliminated for corporations. Investment Income from a life insurance policy, however, will not contribute to this reduction of the SBD.
For our corporate clients, using life insurance as a tax deferral plan is something we are very familiar with. Determining the appropriate size of corporate payments to the plan takes knowledge and experience. Beware of insurance brokers selling unnecessarily large plans for the commission.