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 the shareholder, funds are received by the company tax-free
• Most of the funds can be paid to estate or heirs tax-free
• Capital gains tax in shareholder’s estate is reduced

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 as salary or dividends would result in immediate personal taxation. 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).

An added benefit is a reduction in capital gains tax payable. When CCPC shares are inherited by your client’s heirs, the shares are deemed to be sold based on fair market value and capital gains tax applies, even though the heirs have not sold the shares. Corporate investments are included in the fair market value share valuation. However, for insurance policies, only the cash value immediately before your client’s death is included, not the insurance proceeds. A policy designed with maximum insurance for deposits received is attractive in reducing possible capital gains tax.

The recommended insurance plan is a Universal Life policy , either single life or joint last to die. To maximize CDA, increasing insurance pattern with level insurance costs and maximum insurance is suggested.

Ideal Client
• Owner of CCPC with excess corporate assets, and whose family will be inheriting the company
• Client has sold his business and proceeds are now held in a corporate investment account to be inherited by family. There is no immediate need for the funds
• Client is interested in tax-advantaged investments within the company and tax-free payment to heirs
• Client is looking for ways to reduce capital gains tax on the company shares at death

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 from your company without taxation. There is a way you can invest without paying corporate taxes and for your heirs to 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, all growth will be taxed as capital gains when the company shares transfer to your children. There is a way in which you can continue to invest within your company without incurring annual tax, minimize capital gains tax, and enhance its value for your heirs.

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