Insurance planning papers

Corporately Owned Life Insurance

Most of us are aware that life insurance can be used by individuals to cover debts, pay for funeral expenses, and provide a financial cushion for families after death. You may have even considered owning personal life insurance to fund the income tax bill resulting from the deemed disposition of your private company shares. But did you know that life insurance can also be purchased and used by your corporation for a variety of issues that may arise with your passing? For example, it can be used to pay off corporate debt, shore up operating capital, or buy out shareholders’ estates.

A CCPC (Canadian Controlled Private Corporation) can own a life insurance policy if it is the sole beneficiary. One of the main benefits of having your corporation hold the life insurance policy instead of owning it personally is that in enables you to use corporate dollars to finance the policy. Although the premiums are not deductible, this is still a more efficient way of paying for the policy compared to using after-tax personal dollars. Once the insured individual(s) passes away, the insurance proceeds are received by the corporation. They are not taxable to the corporation, and an equivalent amount (net of the adjusted cost basis) is added to the company’s capital dividend account (CDA), which can then potentially be paid out tax-free to shareholders as a capital dividend.

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Four Practical Uses of Corporate Insurance

Estate Tax and Equalization

Consider a situation where a business owner has grown a majority of their wealth inside their business.  Whether it is in an operating company (OPCO) or holding company (HOLDCO) does not concern them, but the thought of the impending tax bill when they pass might give them pause. In many cases, business owners continue to grow their assets while deferring their taxes. Often, with the help of their accountant(s), we have assisted clients in realizing that this bill needs to be paid eventually. Business owners want to preserve their estate best, and having their children, or beneficiaries liquidate their estate is not their idea of leaving a legacy. Corporate insurance planning for paying the final taxes is an ideal way to fund this impending bill. We work in counterpart with the client’s tax team to build a solution for this potential future problem.

Key Person Protection

The death of a shareholder or key person can put a financial strain on a company in a variety of ways. It can be very disruptive to a small business and can cause problems with efficiency and profitability. It even can cause smaller companies to go out of business. Having a life insurance plan in place to protect the company can provide the needed cash flow to shore up working capital, repay debts, or provide the funds necessary to hire and train a replacement when a key executive or manager passes away.

Buy-Sell Agreements

Situations in which multiple partners own shares in a private corporation can be complicated should one of the business owners prematurely pass away. The majority of our clients would prefer to purchase the shares of the deceased, rather than work with his or her spouse or children. Not all small and medium-size businesses, however, have liquid funds to pay out the spouse, children, or estate of the deceased.  Life insurance is frequently used by private companies to fund buy-sell transactions that are triggered by a shareholder’s agreement upon death. Using corporately owned life insurance to finance the buyout helps ensure that the business can carry on while providing cash to the deceased’s beneficiaries. There are many ways to do this. For example, the proceeds can be used to redeem shares or can be paid as a capital dividend to fund a personal purchase of shares from the deceased estate.

Loan Protection

When starting a small business, individuals often take out loans. Lenders may require the owner to personally guarantee the loans. In some cases, lenders may also require life insurance on a key person for the duration of the loan. Even if lenders don’t require life insurance, we often recommend it.  A personal guarantee becomes a liability of the person’s estate, meaning the estate can be held liable for outstanding debts that the business cannot pay. Using life insurance as loan protection can prevent a client’s young family from having to sell a principal residence to pay off business debt in the event of the client’s death. Having life insurance can also improve a business’s ability to obtain financing.