Description

Surplus funds in a company can be redirected into an investment with the following advantages:

• Assets accumulate with no corporate taxation
• Upon death of shareholder funds are received by company tax-free
• Most of funds can be paid to estate or heirs tax-free
• If funds are needed by the company before the shareholder’s death, tax-advantaged options are available

Your client currently owns a corporation, either an operating company or holding/investment company. The company is a Canadian-controlled private corporation (CCPC). Your client is very successful and there are excess corporate funds, not needed for business activities. Paying these funds to your client would result in immediate personal taxation, either as salary or dividends. Therefore, the funds are left within the company and invested in a corporate account. This may be considered “trapped” corporate surplus. It is worth noting that corporate investments incur taxation at the highest rate, usually higher than the highest personal rates.

To solve the above issues, corporate funds are redirected to an insurance policy. The company is owner, premium payor and beneficiary. The life insured is your client or your client and spouse, assuming that the spouse is, or eventually will be, a shareholder. Upon the life insured’s death, the CCPC receives the insurance proceeds tax-free. The receipt entitles the company to establish a Capital Dividend Account (CDA). The CDA is a separate class of surplus that can be paid to shareholders as a tax-free dividend. The CDA amount equals the insurance proceeds less the policy’s Adjusted Cost Basis (ACB).

The recommended insurance plan is a Universal Life policy, either single life or joint last to die. For clients needing liquidity for business opportunities, the minimized insurance pattern with yearly renewable term costs offers maximum tax-advantaged cash accumulation.

Ideal Client
• Owner of CCPC with excess corporate assets, and whose family will be inheriting the company
• Client has sold his business and proceeds now held in a corporate investment account to be inherited by family. Although there is no immediate need for the funds, the client wishes to retain liquidity for business opportunities.
• Client interested in tax-advantaged investments within the company and tax-free payment to heirs

Suggested Approach
• For a client with a corporate investment account:
  You know that corporate tax rates are very high for investments and it is difficult to remove funds from your company without taxation. There is a way you can invest without paying corporate taxes and your heirs can receive funds tax-free.
• For a client with a buy and hold strategy for corporate investments:
  You have been successful in minimizing taxation on your corporate investments. However, if you change investments, taxation may apply. There is a way you can continue to invest within your company without incurring any tax while enhancing its value for your heirs.

For more information on how to personalize based on your own situation contact FSE Financial Group Broker at 403-253-7007