WEALTH Matters — SPRING 2014

Unlock your Holding Company

Most business owners we deal with have been through good and bad periods. Of course we all hope to end our careers on a positive note and either sell the business or its assets after a strong financial performance. Most often this results in a significant balance of cash or investments in the operating or holding company from which retirement income can be funded for many years.

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Unlock your Holding Company

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Sadly, investment income earned in a Canadian Small Business Corporation is taxed at 46% (Ontario), close to the top personal tax rate. While there are several structures that can help defer or minimize income taxes (corporate and/or personal) in this situation, there is one which can completely bypass both corporate and personal income tax when these remaining funds are to be paid out as part of the overall estate plan.

Section 148 of the Income Tax Act defines a ‘Life Insurance Policy in Canada’ as a tax-exempt policy, provided that it does not violate certain constraints. Most policies are carefully administered to ensure the tax-exempt status is not jeopardized. The insurance policy will typically be composed of two components: a risk protection part like a term or term-to-100 life insurance policy, and an investment account which can contain guaranteed investments or variable investments that fluctuate with various market indices or mutual fund values.

*Includes tax reduction from the Dividend Tax Credit (2014 proposed rates, per TaxTips.ca)

Table 1: Corporate Investment Returns After Corporate and Personal Income Tax

Policy Fund Grows Tax-Free

With this structure, the investment earnings in the investment component accumulate with 0% income tax. In fact, the earnings are not even reportable by the corporation. This simplifies corporate accounting, especially when the insurance policy is the only remaining asset of the corporation, and tax returns can show $0 income.

On death, the investment account is paid out to the corporation along with the death benefit of the insurance component – all payouts are received by the corporation tax-free. This payout also credits the corporation’s Capital Dividend Account, allowing the total of the insurance and investments to flow tax-free to the corporation’s shareholders. This structure has avoided the tax on the accumulating investments, and avoided the personal tax that would otherwise apply when removing those investments from the corporation.

In this example, two 65-year old spouses have $100,000 excess cash in their holding company, which they expect will average 5% annual interest. We compare this with using the same cash to fund a $250,000 last-to-die life insurance policy whose fund earns 4%. Note the improvement.

This structure is a powerful component of any estate plan when corporate-owned assets exist which are not needed during the business-owner’s lifetime. Careful cash flow projections can determine the amount of corporate assets which can safely be diverted to this structure without jeopardizing the owner’s retirement income goals.

Even if some of the capital in this structure is eventually needed during lifetime, there are ways of accessing the capital tax-efficiently before death. Talk to your financial advisor to see whether this structure may fit with your overall retirement and estate planning strategy.

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The insured strategy typically allows for estate beneficiaries to receive about 200% of the value they otherwise could have received.

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Corporate Return

Corporate Tax

Dividend Refund

Dividend Paid

After 43% Personal Tax*






Table 2: After-Tax Estate Values


Investments 5%

Insurance 4%


Year   5




Year 10




Year 20




Year 30



+$  67,000

Source: Canada Life, Corporate Estate Transfer