Life insurance may be used as an important estate planning tool. Too many people purchase life insurance but do not think what happens if they sell their business and is the insurance owned by the business? Can I take the insurance out without any tax consequences?
It is great to purchase insurance but talk to your accountant before you buy the insurance. Determine who should pay the premiums and who should own the policy. Yes, the operating company can pay the premiums but the beneficiary be another business. In Canada, it may be possible to flow the insurance premiums through your company on a tax free basis to fund a buy sell agreement or to flow through to the spouse/next of kin. If you buy term insurance, in the early years, Canada Revenue Agency deems that a portion of the insurance premiums cannot be flowed through the company on a tax free basis however this problem can be easily over come by making another company as the beneficiary of the insurance policy.
In Canada, if you do not pledge the insurance policy to the bank, the premiums on your life insurance policy are not deductible for tax purposes. They must be added back on the tax return. If the corporate tax rate is only 17%, it is cheaper to use the corporate profits to pay the premiums. If you personally are in a top tax bracket in Canada, your marginal tax rate is 46%. For you to be able to pay $1,000 premiums personally, you have to earn $1,851 personally. In order to pay the premiums in the company with the low rate of tax, you only need to earn $1,204, which is 53% less money than if you had to pay the premiums personally. The more expensive the premiums, the greater the personal savings that you will have. The insurance in my example should be owned by a corporation and not you personally. Please contact your accountant and insurance broker to find out the rules that relate to your personal tax situation and if you are eligible to flow the insurance proceeds tax free out to the shareholder’s estate.