Corporate Insured Retirement Planning Services

Corporate IRPs can be suitable for Canadian business owners with excess corporate cash flow. However, it’s important to note that suitability depends on various factors, including the business’s financial situation, the owner’s retirement goals, and the overall tax strategy.

A corporately-owned permanent life insurance can be tax-efficient for corporate wealth accumulation and distribution. Its key purposes and benefits include tax-deferred growth of the policy’s cash value and a tax-free death benefit received by the corporation. Depending on how it’s structured, this strategy may also offer potential tax-efficient access to funds through third-party loans. It allows for the potential growth of corporate assets outside of active business income and provides flexibility in retirement planning as an alternative or supplement to traditional retirement savings vehicles. 

There are no statutory limits like those for RRSPs. However, contributions are limited by the policy’s ability to maintain its tax-exempt status under the Income Tax Act.

Passive income can significantly affect small business deduction limits for Canadian-controlled private corporations (CCPCs).

Under current Canadian tax laws, CCPCs with more than $50,000 of passive investment income in the previous year will see a reduction in their small business deduction (SBD) limit. Specifically, for each dollar of passive income over $50,000, the SBD limit is reduced by $5. This means that once passive income reaches $150,000, the entire SBD is eliminated.

The small business deduction allows eligible corporations to pay a lower rate of tax on the first $500,000 of active business income (as of 2024). This reduction in the business limit is calculated based on the greater reduction under these passive income rules and the taxable capital rules.

Passive income, in this context, includes interest, taxable capital gains, and certain rental income, among others. It’s important to note that dividends from non-connected corporations are also included in this calculation.

While policy contributions are generally not tax-deductible for the corporation, the growth within the policy is tax-deferred. The death benefit is typically received tax-free by the corporation. Policy funds can also be accessed tax-preferred by leveraging the policy at retirement.

Your corporation can generally access the cash value through policy loans, collateral bank loans, or withdrawals. Withdrawals and policy loans may reduce the death benefit and could have tax implications. The tax treatment depends on various factors, including the policy’s adjusted cost basis.

Unlike RRSPs or IPPs, corporate IRPs have no statutory contribution limits. They typically have higher upfront costs and less liquidity in the early years than these other options. However, implementing a corporate IRP allows you to grow wealth tax-deferred, much like you would in registered funds, taking advantage of the lower corporate tax rate, which allows you to contribute cheaper after-tax dollars than when you contribute on an individual level. Ultimately, you will have higher wealth built up, which you can access tax-efficiently, and a higher net estate value at death.

An asset class enabling tax-efficient growth of surplus corporate funds, exempt from passive income classification.  

The policy can be transferred to the new owners, surrendered for its cash value, or potentially retained by you. Each option has different tax implications. If there’s a possibility of business sale in the future, it’s better to implement an insurance asset class in a holding company, instead of an operating company.

To implement a corporate-insured retirement plan and build your retirement nest egg, follow these steps: 

• Consult with a life insurance advisor. 
• For tax advice, a tax accountant’s involvement may be necessary.
• Decide how much you want to save or how much wealth you want to build inside the policy. 
• Apply for the life insurance policy with the corporation as the owner and named beneficiary. 

• Deposit funds into the life insurance policy annually (or monthly). 
• Let your wealth grow over time. 
• Connect your accountant with your insurance advisor (hopefully us) for annual cash value tracking. 
• At retirement, apply for a bank line of credit, pledging the policy corporately or personally (your accountant can advise you which option is best. 
• Access tax-free funds through bank loans to fund or supplement your retirement. Your accountant should help facilitate this and determine the best way to access the funds to minimize the tax implications.
• Either service the bank loan interest or have the bank capitalize it. 
• At death, your holding company will receive the life insurance proceeds tax-free. The bank will then have a lien to the extent of your indebtedness. 
• The net death benefit is paid tax-free to surviving shareholders or your estate through the capital dividend account. Any funds over the capital dividend account are typically taxed as shareholder dividends.