You built a company, it makes more than you spend, and the surplus is piling up inside it at a low tax rate with no obvious next step. The problem is not finding a return on it. The problem is that every ordinary route out, a dividend today or an estate tomorrow, hands close to half of it to the Canada Revenue Agency.
What we see most often
- Retained earnings of $500,000 to several million in an operating or holding company, invested in bonds, GICs or a portfolio that is now grinding down the small business limit.
- An estate plan that assumes the shares will pass to the family, without a plan for the capital gains tax on those shares or the second tax when the company's surplus is finally paid out.
- Term insurance bought years ago for a mortgage or a buy-sell, owned personally and paid for with after-tax dollars.
- An accountant who handles the filings well but has not been asked to design the structure.
How we approach it
- Structure first. Which company should own what, whether a holding company belongs in the picture, and how surplus moves between entities without tax. This is done with your accountant and lawyer, not instead of them.
- Size the obligation. The tax the estate will owe on the shares, the surplus that will be trapped, and the liquidity the family will need. That number, not a product, decides how much permanent insurance belongs in the plan.
- Fund it with corporate dollars. A participating policy owned by the right company, funded from active income, with the death benefit flowing out through the capital dividend account tax-free. Where it fits, the cash value is borrowed against so the capital keeps working.
Some owners also want the insurance value directed to specific family members, or kept out of the probated estate, rather than shared across all shareholders. There are share structures that do this; they are specific to the corporation and we work them out with your lawyer in a review rather than describe them here.
What to bring to a first conversation
The last two years of corporate financial statements, your will, any shareholder agreement, and a rough sense of what the business is worth. Thirty minutes with those is enough to say whether there is a structure worth building.
Guides for this situation
Corporate-owned life insurance and the capital dividend account
How a corporate policy turns a death benefit into a tax-free capital dividend, and the adjusted cost basis mechanics that decide how much.
Leveraged corporate life insurance: how it works and when it does not
Borrowing against a corporate policy to keep the capital working: the tax treatment, the three numbers that decide the arithmetic, and the risks.
Corporate or personal ownership of life insurance: how to decide
Premium cost, death benefit, cash value access, creditor protection, probate and tax on death, compared side by side.