Corporate Owned Life Insurance (H1)
Rob:
Corporate owned life insurance is a neat way to save some taxes inside of your corporation while also protecting any and all risk inside your corporation. I'm Rob Tétrault from robtetrault.com, head of the Tétrault Wealth Advisory Group here at Canaccord Genuity Wealth Management.
This is Adam Buss. He's a really smart guy and we're thrilled to have him here.
Adam:
Thanks for having me.
Rob:
A bit of a superstar. All right, Adam - corporately owned insurance. Where do we begin?
Adam:
Well first of all, who doesn't love talking about life insurance; it doesn't get any more exciting of a topic than that! But there's a variety of reasons that somebody may want to have corporately owned life insurance. Often, we see buy/sell agreements, which are a great way of kind of protecting the corporation.
Rob:
Okay. So, you and I are partners in a business. We put in our shareholders' agreement, and there's an agreement where if I pass or if you pass, you're buying out my shares.
Adam:
I'm going to buy your shares from you. It's pre-agreed upon that this is what's going to happen. But I don't want to go to the bank and borrow, let's say half a million dollars to buy you out from the corporation.
Rob:
Right.
Adam:
I'm going to put life insurance on you, and if you pass away, that guarantees that there is cash in place for me to buy your shares …
Rob:
And then that money goes?
Adam:
To your estate.
Rob:
To my estate, to my family, and that just comes out?
Adam:
Yeah. It’s guarantee that that is going to happen. It gives the liquidity; your family has the peace of mind knowing that the cash is there for that transaction.
Rob:
Okay. For that, I assume you'd have to factor in growth of the company and that would be like the corporation would pay for both of our policies. I understand.
Adam:
Yeah. It's much more efficient if you have the corporation own the policies, as it's paid with after tax corporate dollars instead of after-tax personal dollars.
As we all know, the corporate tax rate is a lot lower than the personal tax rate if you had to pay for that policy yourself.
Rob:
We're chugging along, we're running our business, and the corporation has a monthly expense or an annual expense for insurance. But you and I don't suffer as a result in our day to day salary or anything. And if ever anything happens to me heaven forbid, you get the company; you get ownership of it and my family gets the wealth.
Adam:
Exactly.
Rob:
It's a neat way to structure something to protect ourselves and our interest. Because you know, if there's no USA in place, maybe my wife now gets the shares or my partner or my estate gets the shares. Maybe they don't know anything about our business. It could be complicated. That's very important to look at.
Adam:
Absolutely, it’s a key component.
Rob:
That's one. You could do buy/sell agreement. What else could corporately owned insurance cover?
Adam:
Well, a lot of corporations have debt within the corporations; whether it's buying real estate or operating loans, it's nice to have that debt paid off in in case of one of the key owners of the corporation passing away.
Often banks require that the loans have adequate insurance coverage on it as well to give them the peace of mind that if the key employee, let's say Rob, passes away, that they're going to get their money to pay off that loan.
Rob:
Okay. You're covering the debt much like you would like on a mortgage or personal debt.
Adam:
Yes.
Rob:
Okay. You're covering the debt now. What about a key person - you hear that term a lot for sure?
Adam:
Yeah. A key person is basically there to make sure that any lost income for that corporation could be replaced if that key individual was to pass away.
There's also such things as key person for critical illness or disability coverage. It's a way of the corporation protecting its earnings in the event that that key individual passes away or experiences and unfortunate illness.
Rob:
That would likely be for a corporation where there's potentially one or two individuals that are driving most of the revenue in the corporation.
Adam:
Yes.
Rob:
A trade perhaps, or a consulting business where one individual is driving a lot of the revenue.
Adam:
Absolutely.
Rob:
Okay. And then you insure the protection. That person's no longer to drive the revenue. You insure that. And then the corporation still has the assets. And the estate benefits from that.
Adam:
You bet.
Rob:
Okay. What about these tax planning strategies that I hear about where you're using corporate dollars to pay for a policy to effectively protect some wealth long-term, and to pull some money out of the corp effectively tax free?
Adam:
Absolutely. It is a great strategy we talk to clients pretty much every day about which is using a whole life insurance policy owned by the corporation, paid for by the corporation.
Again, it's paying for it with after tax corporate dollars. And the idea is to try to get some of that cash out to the beneficiaries tax-free, or maybe to pay a tax liability on the disposition of your corporate shares when you pass away, maybe a large real estate tax liability, or you just have far too much money in your corporation, which is a good problem to have.
But we want to try to get that out tax free to your beneficiaries as much as possible. And whole life insurance is one of the best strategies to do that.
Rob:
Okay. So let's talk about that last scenario.
You've got too much money in your corp; great problem to have by the way. Super fun problem. So you've got a ton of money in your corp. You're not going to be able to spend it all. You're in the kind of high net worth ranking - you would consider yourself to be high net worth. There's a lot of money built up in the corp, but you do it through an operating company or a holding company.
So, you've made profits in your operating company. Maybe it's moved to the company. Now there's wealth that's accumulated there. You're never going to spend it. You’ve got RRSPs, you've got TFSAs. Is that a situation where you could potentially consider a whole life policy?
Adam:
It's certainly something that we take a deep dive into every client's unique situation. I want to address and see, okay, how much of this corporate cash is actually needed to fund your lifestyle over time?
Is any of it earmarked for a particular corporate project? Maybe the person wants to go and buy a new rental property in the near future, but we want to look at how much of that cash is surplus and is just sitting there. You're having to pay tax every year on the investment growth and we want to see how we can try to make that a bit more tax efficient moving forward.
We're basically going to take some of that corporate cash every year and shift it from pocket A to pocket B into a tax-exempt life insurance policy where all of the growth is tax sheltered. Down the road when you pass away, it pays out to the corporation 100 percent tax free and then it pays out to the beneficiaries of your estate through the CDA credit.
Rob:
The CDA would be the capital dividend?
Adam:
The capital dividend account, which is a tax-free amount that can come out of the corporation.
Rob:
The corporation pays the insurance policy, correct? I pass away the corporation gets it tax free. Yes, the million or 2 million or whatever it may be. Absolutely. And then it also comes out of there completely tax free through the CDA.
Adam:
Yes. So generally it is going to be completely tax free. There may be a portion which is taxable, but it's very minor by comparison and generally the tax savings is huge by comparison to not having the strategy put in place.
Rob:
This would not be a situation like we've done in some other videos where we've talked about protecting risk through insurance. This would not be a situation where you're trying to protect the risk. This would be a situation where you're trying to optimize your estate for...
Adam:
Optimizing your estate. You're optimizing your tax efficiency for your corporation. Some people will use it as a tool to avoid the small business deduction.
The grind on the small business tax rates since they implemented the passive income changes. Any income generate within the life insurance policy does not apply towards the passive income.
Rob:
It’s exempt from that $60 grand rule?
Adam:
Yes.
Rob:
The passive income grind, if you make more than $50 grand of passive income annually in your corporation, your small business tax rate exemption gets grinded away. And this income would exempt that.
Adam:
That's correct.
Rob:
Okay, so just another way to shelter income. All right, we've talked about a whole bunch of different things – we talked about protecting debt, we talked about key person insurance, we talked about the tax efficient strategies, and we've talked about the buy sell agreements. Anything else you can think of that would make sense for a corporately owned policy?
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I guess the key thing we're taking away from all this is you're not paying this with after tax dollars, right?
Adam:
Yeah. You're paying it with after tax personal dollars. It's maybe costing you, you know, 90 cents on the dollar instead of more because you're using after tax corporate dollars and you have a fantastic low corporate tax rate.
The other thing we often look at is which corporation, if you have multiple, should these policies be owned. Again, that's something we look at with our clients to make sure we find the right fit.
Rob:
Many times, we'll meet a client and their insurance is either not owned by the right corporation or we're being paid by the wrong corporation or its own personal when it should be owned corporately.
Adam:
Yep.
Rob:
This is stuff that I feel is fairly high level and you probably need really good advice on this.
If that's something that's on your mind, make sure to go to speaktorob.com to get a free consultation with us. Adam, I thank you for your time today. We looked at a lot of really neat things. I'm Rob Tétrault from robtetrault.com, head of the Tétrault Wealth Advisory Group here at Canaccord Genuity Wealth Management. Today I had with me Adam Buss, Senior Wealth and Estate Planner here at Canaccord Genuity Wealth Management.
