Often the retained profits or surplus cash of a business, whether an operating company or an investment holding
company, are invested in GIC’s, 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 that is required to provide key-person
insurance, business loan protection, or some other business insurance need.
Retirement Funding/ Estate Wealth Transfer
A permanent life insurance policy that qualifies as an “exempt policy”, allows for tax-deferred growth of the cash
value of the policy and tax-free receipt of the proceeds at death. The cash value growth within an exempt policy
is not subject to annual accrual taxation and is only subject to tax if there is a disposition (deemed or otherwise)
of the policy. 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 so that they 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 which has 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.
If the corporation or shareholder desires access to the cash at some future date prior to death, the cash surrender
value of the policy 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 withdrawal (for details refer to the Tax Topic
“Dispositions of Life Insurance Policies”.) Advances to the corporation received as a collateral loan will be tax
free, and if the proceeds are used for the purpose of earning 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.
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