As we all know, Canada is a high welfare state and therefore also subject to higher taxes. Especially after the tax reforms made in 2016, Canadian businesses have been facing a high tax environment. Canadian small business itself is not a high tax rate, 11% in BC, but the personal tax rate that business owners have to pay if they want to withdraw their earnings from the company to their personal name is horrendous, and in BC, for example, the highest personal income tax has reached 53.5%. As a company's profits rise and rise, and the owner receives more dividends and pays out more wages, the individual's marginal tax rate will rise even further. At the same time, if a business owner wants to pass on the company and wealth to the next generation, the tax rate will also be high.
High tax rates create a burden for businesses, business owners and even shareholders and executives of the company. If you are a business owner and want to preserve your assets and wealth, and successfully realize the wealth inheritance, you can not do without professionals for you to carry out corporate tax planning, the company's asset allocation for a higher level of layout. A company insurance policy is an effective choice for corporate tax planning. If you are a shareholder or an important employee of the enterprise, you will also benefit from it.
What is a company policy?
So what does a company policy mean? Simply put, it is a life insurance policy purchased by a company for its shareholders and key employees. The company pays the premiums and also enjoys all the benefits that come with the policy. In the event of an accident to the insured, the insurance payout goes into the company's Capital Dividend Account CDA and can be withdrawn tax-free.
And why were company policies created?
The essence is still to try to share the future risk for the business and its owners. We never know which will come first, tomorrow or the unexpected. If a shareholder of a company dies suddenly and unexpectedly, the equity in hand can become tricky to keep the company running normally. If a key employee has an accident, it may also have a negative impact on the company's operation and even cause some financial losses. At this point, if the company has life insurance for them, they can use the compensation to buy out the equity or stabilize the company's cash flow as much as possible. In addition to this, a company policy can also provide protection for the business owner and the insured themselves and their families.
After the company earns a profit
Then you need to consider tax planning. As a simple example, if a company makes a profit of $100w and withdraws it in the name of an individual, the tax rate will be very high. If you continue to invest in the company's account, the interest generated is considered passive income and the tax rate will be as high as 50.67%, thus losing the advantage of the 11% income tax deduction enjoyed by CCPC (Canadian Controlled Private Corporation).
So is there a way to invest and grow in value and still be tax free?
Naturally, there is, and that is company life insurance. The advantages of company life insurance are as follows:
Insurance value-added
Typically, passive income (PASSIVE INCOME) tax rates on corporate earnings can be as high as 50.67%. However, investment appreciation generated in an insurance policy is tax-deferred. A company can enjoy compounding growth by virtue of the investment appreciation of the insurance account, and does not need to pay the high tax on passive investment income in the current year, so it will not affect the company's current earnings and investment efficiency. At the same time, after the policy generates investment income, the company does not need to pay the "value-added" tax, nor does it need to pay personal income tax.
Tax-free claims after death
As already mentioned above, a company policy mitigates the risk of running a company. In addition to this, a company policy also creates a layer of protection for the insured and his/her relatives. In the unfortunate event of the death of the insured, the company as the beneficiary receives the insurance proceeds within a short period of time and the proceeds go into the company's CDA account and are passed on to the relatives tax free.
A must read for business owners: how to pocket 100% of your company's earnings tax-free
Cost after tax
Compared to personal income, paying premiums with a company's after-tax income can buy more coverage. In other words, the actual cost of purchasing insurance for a company is significantly lower because the corporate tax rate is usually much lower than the personal income tax rate, so for the same benefit, purchasing in the company's name will cost less and allow you to purchase more coverage. As a simple example, the highest personal tax rate in BC is over 53%, and the corporate tax rate is 11%, so when a company makes 10w profit, it can buy insurance at a cost of 8w9 after tax. However, when an individual earns 10w, after paying personal tax, he can only use 5w after tax to buy insurance.
current asset
If you are a business owner, your company has a steady income and already has passive investment income, as well as a high personal income tax rate, you can choose to purchase life insurance for yourself in the form of a company policy. Additionally, if you are a shareholder or key employee of a company facing high tax rates and want to smoothly pass on your equity or wealth to the next generation under favorable tax policies, you can also choose to purchase life insurance through your company.
Company policies have real benefits for businesses, their owners and shareholders as well as key employees and even their relatives, so we hope that you will take a holistic approach when choosing the type of product and select it in conjunction with your other financial planning, and we have a team of professional certified public accountants who can work with you on this as well. You are welcome to click on the link to make enquiries with Carlson's professional advisors.
* Charles Schwab Wealth Management kindly reminds that the information in this article is for reference only, when choosing a specific product, it is recommended that specific consultation, according to their actual needs, choose the right program, in order to maximize the protection of your interests. Finally, please do not take any action based on the information in this article, Charles Schwab will not be responsible for the information in this article or any choices you make as a result or losses incurred.
