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Owners of privately held Canadian corporations can grow their idle surplus funds by utilizing the powerful wealth-building strategy called a corporate-insured retirement plan. Helping address the challenges of efficiently investing corporate surplus, withdrawing assets to supplement retirement income and transferring corporate assets tax-efficiently to your heirs. This powerful strategy can help you achieve these objectives while optimizing your tax savings and enhancing your net estate value.

Before the 2017 corporate passive income rules and the 2019 income tax update, owners of privately held Canadian corporations or CCPCs were able to grow their corporate wealth within their corporate entities by investing their otherwise idle surplus funds in asset classes such as mutual funds, stocks, bonds, real estate holdings, and other forms of passive income earning investments. 

The 2017 passive income tax rules state that when your corporate passive income reaches the $50,000.00 threshold, your small business deduction is reduced. For every $1 of passive income more than $50,000.00, $5 is deducted from your corporate small business deduction, and when your corporate passive income exceeds $150,000.00, you lose your corporate small business deduction entirely. It means your corporation no longer qualifies for the lower corporate income taxes in the first $500,000.00 of active business income, which most small Canadian businesses and professionals fall under. 

The 2019 passive income update ruled that when you invest corporately in mutual fundsETFs, or real estate investments, your private corporation’s passive income gets taxed in the highest corporate income tax bracket (around 50% across Canada).

What is a Corporate-Insured Retirement Plan?

The Corporate Insured Retirement Plan (CIRP) is a strategic corporate financial concept designed for business owners looking to grow surplus funds tax-efficiently in their corporate entity. These excess funds were usually invested in passive investments such as mutual funds and were covered by the corporation’s small business deduction; however, after the 2019 federal tax update, income earned passively inside the corporate entity now gets taxed in the highest corporate income tax bracket.

As an owner of a privately held Canadian corporation, you generally have three options in dealing with corporate funds that you usually don’t use for business operations: 

1. Invest corporate surplus funds corporately and potentially get hit by the passive income tax rules.

2. Withdraw funds you don’t need for business operations and invest individually

3. Just let the surplus funds sit idle in your corporate chequing account. 

  • When you invest corporately in passive income instruments, your company may pay higher taxes on the passive income earned and risk-reducing or losing its small business deduction (SBD), which results in higher income taxes on the corporation’s active business activities. 
  • You pay higher taxes when you withdraw funds from your corporation to invest personally. 
  • When you let it sit in your company’s chequing account, your asset isn’t growing.

The Benefits of a Corporate Insured Retirement Plan

One of the main advantages of a corporate-insured retirement plan is tax efficiency on asset growth. You can benefit from tax-deferred growth by redirecting your surplus funds into a cash-value life insurance policy. The investment or savings component of the plan allows your funds to grow and compound in a tax-deferred environment. A corporate-insured retirement plan provides financial security and liquidity in the event of the life insured’s death. The permanent life insurance policy is a tax-sheltered wealth growth asset class and gives your company a tax-free death benefit. It means that in the event of your passing, your company’s surviving shareholders (or your estate) will tax-efficiently receive a portion or the entire proceeds of the life insurance payout depending on how much the capital dividend account (CDA) is at the time of death; thereby securing the financial well-being of your company as well as that of your loved ones. As your asset grows inside the permanent life insurance, the death benefit component increases over time, continuously protecting your stakeholders’ financial interests as your company or professional practice grows. 

To enumerate, below are the advantages of a corporate-insured retirement program:

  • Tax savings: Redirecting surplus corporate funds into a participating whole life insurance policy instead of investing in passive income investments helps save current and future taxes. 
  • Retirement security: Insured retirement plans provide a more extended income stream than alternative investments and ensure a steady source of income during retirement. 
  • Enhanced estate values: An insured retirement plan provides immediate access to life insurance proceeds paid tax-free to your corporation. This can give a more significant amount for your estate than alternative investments, as most if not all, can be paid tax-free through a capital dividend account.

With a well-planned corporate-insured retirement plan, you can enjoy these benefits, secure your retirement, and maximize your wealth within the corporation.

It’s essential to consult with a financial advisor to understand how this strategy can work for your specific business and financial goals.

How a Corporate Insured Retirement Plan Works

A corporate-insured retirement plan is an ideal financial strategy for private Canadian corporations. It helps them grow, protect, and amplify their wealth by redirecting surplus funds toward a corporate-owned life insurance policy designed for wealth growth.

The insurance policy is typically a permanent policy with an investment or savings component, like participating whole life or universal life insurance. Some of the money contributed to the policy covers the insurance cost. At the same time, any additional funds are invested in a tax-sheltered portfolio or put into a dividend-paying savings account.

The cash values and death benefit are compounded by automatically reinvesting the policy’s earnings in the underlying market portfolios or a dividend-paying whole-life account. This strategy provides insurance coverage for the corporation and helps build a tax-efficient retirement nest egg for the shareholder(s).

Understanding the Insurance Coverage in a Corporate Insured Retirement Plan

A Corporate Insured Retirement Plan is a life insurance retirement plan that allows corporate business owners to grow their company’s otherwise idle funds tax-efficiently. Over and above the investment or wealth growth component of a CIRP is the death benefit coverage. At its core, this asset class is a corporate-owned life insurance policy, which pays out a tax-free death benefit to the corporation in the event of the life insured’s passing. The death benefit can be used by corporate business owners for various purposes, such as a source of funds for a buy-sell agreement between the company’s shareholders, to provide liquidity in the event of the key person’s death, to transfer corporate assets tax-efficiently to the next generation, to pay for any taxes at life’s end that may arise, or to provide estate equalization to the deceased heirs.

As you may already know, any other asset you own (including your corporate shares), with the exemption of your primary residence, is subject to taxes at death since all your possessions, including shares in a company, are considered to be sold at their current market value. The short of it is recognizing that taxes will be due at death, and necessary funds must come somewhere. Either your corporation, other shareholders, your estate, or heirs have to come up with the funds needed.

With corporate-owned life insurance, you know that your corporate assets are protected since the life insurance’s death benefit can pay for whatever tax implications arise due to one’s passing.

Planning for a Secure Retirement With a Corporate-Insured Retirement Plan

A corporate IRP allows for effective and tax-efficient retirement planning. While you can invest your corporate funds in traditional investments such as mutual funds, stocks, or real estate, the tax efficiency of a corporate-insured retirement plan far outweighs all these asset classes since investment income earned within a corporation is subject to tax the year it is made. Asset growth inside a life insurance policy isn’t considered investment income for tax purposes; hence, it is exempt from the passive income rules. 

During your retirement, there are a couple of ways you can access your corporate-owned policy’s cash values:

1. You can withdraw a lump sum or on an annual basis directly from the policy, which isn’t tax-efficient because any drawing from the corporation will either be taxed as a shareholder or employee benefits. 

2. Leverage the policy corporately with a third-party financial institution. The bank collateral loan is usually tax-free to the corporation. Still, there may be tax implications if the money flows from your corporation into your account, which may be deemed a dividend payout for tax purposes. 

3. Leverage corporate policy as collateral for personal bank loans or lines of credit to supplement one’s retirement. Since you’re not drawing assets from your corporation, this strategy usually has no tax implications. 

Talk with your CPA or tax advisor before leveraging any corporate asset for personal borrowing for proper tax advice, treatment, and record-keeping. A contract between you and your corporation and a guarantee fee of 1.5% and 2% is usually required for this leveraging. 

Corporate-Insured Retirement Plan Maximizes Asset Growth

Compared to other investments, asset growth in a corporate-insured retirement plan is generally tax-deferred, and the compounded wealth stays tax-free as long as it’s inside the life insurance policy. As such, a corporate-insured retirement program can maximize asset growth because it doesn’t get taxed yearly. While it’s already advantageous to invest the money in passive investments within the corporation instead of withdrawing it to invest personally, investments in traditional assets like stocks, mutual funds, real estate, or bonds still get taxed every year as earnings are earned. 

Asset growth inside a life insurance policy is tax-deferred and, as such, does not get taxed every year, which allows for higher compounded growth over time. When using participating whole life insurance, your policy benefits from a more predictable wealth growth as it earns policy dividends instead of relying on fluctuating market returns. As of this writing, the average dividend scale of insurance companies that offer participating whole life stands between 6.25% and 6.65%. When leveraged, instead of directly drawing funds, your policy benefits from uninterrupted wealth growth as the policy’s cash values continuously earn dividends and compound even when you’re utilizing the funds through third-party borrowing.

While universal life can be the core policy for a corporate-insured retirement plan, leveraging it usually requires moving your investment portfolio to fixed-income instruments such as a high-interest savings account or a guaranteed investment account (GIA/GIC). Depending on the interest environment, borrowing can halt your policy’s wealth growth.

When you invest in passive investments, aside from potentially getting taxed at a higher corporate tax rate every year. Your asset erodes and eventually liquidates at retirement since you have to withdraw funds from your portfolio directly to fund your retirement. The potential liquidation of your corporate savings means that there may no longer be enough funds left to finance the potential tax implications of the corporate wealth transfer at death. With a life insurance retirement plan, you can magnify wealth at the end due to the increased death benefit in old age, which is tax-free to your corporation. The corporation can then pay the proceeds to other shareholders or your estate, in part or whole, tax-free, depending on how much the capital dividend account is at the time of death.

Flexibility and Options in a Corporate Insured Retirement Plan

Maximizing asset growth and securing a sizeable retirement cushion in a tax-efficient manner are two of the most sought-after benefits of a Corporate Insured Retirement strategy. 

While building wealth inside the corporate-owned life insurance policy, your contributions aren’t necessarily locked in. In case of cash flow shortages in your operating company, you can access the policy’s cash values to reinvest in business operations through a bank collateral loan or an IFA (Immediate Financing Arrangement). While you can directly withdraw funds from your corporate-owned life insurance, it usually isn’t the best way to utilize the cash values inside a company-owned policy since it requires asset erosion, as with most traditional investments.

Implementing a permanent life insurance policy as an asset class in your company grows your net estate value over time, so eroding the cash value build-up isn’t the most innovative strategy. Third-party loans such as bank collateral loans are more beneficial to your business and to you as a business owner since you benefit from uninterrupted wealth building while creatively accessing the funds. It also means you can write off any interest incurred due to the business loan against your policy’s premium contribution or the cash value build-up.

You also have the option of investing in market portfolios if the policy implemented is a universal life insurance policy or the less exciting asset growth strategy that a participating whole life policy presents – asset growth through policy dividends, which is usually more preferred both by corporate business owners and lenders due to the more predictable nature of the latter.

In the worst case, a policy loan or direct cash value withdrawal is always an option when a third-party loan isn’t possible. Note, however, that policy loans and cash value draws in a corporate setting may be deemed policy disposition and, hence, may be subject to capital gains taxes in the corporation’s hands. Again, please consult with your CPA before requesting a policy loan or withdrawal.

Risks Associated With Corporate Insured Retirement Plans

Managing risk is essential when considering a Corporate Insured Retirement Plan. Here are some risks associated with these plans that you should be aware of:

  • Market Risk: Corporate IRPs using universal life often depend on the performance of the underlying investments, which can be affected by fluctuating market returns.

    • Solution: When using universal life insurance for a corporate IRP, diversify the underlying investment portfolio within the policy. Not putting all your eggs in one basket can reduce the impact of interest rate fluctuations on your overall investment. Participating whole life, instead of universal life, offers a more solid ground since your policy isn’t dependent on market performance, which allows you to build wealth without market risks, making it more predictable.
  • Policy Loan Risk: A policy loan (borrowing money from the insurance company that manages your policy) may be deemed policy disposition and trigger a taxable event.

    • Solution: Taking out policy loans on a corporate-owned life insurance policy isn’t necessarily recommended. Considering that the life insurance company has direct access to your policy’s cash values, it isn’t a good idea to take out policy loans; instead, apply for a bank line of credit or a series of bank collateral loans with third-party institutions that don’t have direct access to your policy’s cash values. Borrowing funds from third-party institutions by pledging the life insurance policy isn’t considered policy disposition. Hence, the loan proceeds aren’t taxed.
  • Taxation Risk: Changes in tax laws can affect the tax-advantaged status of corporate IRPs, potentially impacting the after-tax value of the retirement income.

    • Solution: Stay informed about tax law changes and work with a financial advisor to adjust your strategy. This might include restructuring the IRP or considering alternative tax-efficient investment vehicles.
  • Interest Rate Risk: As most of us know, interest rates on borrowing can fluctuate much as market returns do. Interest rate hikes may affect the future borrowing of corporate IRP owners, which may result in a lower amount of funds borrowed or the net estate value at death.

    • Solution: Having multiple sources of income at retirement mitigates this risk. If you are a reasonably successful business owner, you may already have invested in traditional investments such as RRSPs and TFSAs. If you’re earning a salary as an employee of your operating company, you would also have access to government pensions such as CPP and OAS. Like any other loan strategy, you can avoid borrowing or leveraging the policy when interest rates are high. At such times, you can use your other retirement income sources until the interest rate hike settles. When you have a sizeable wealth to collateralize, you can negotiate fixed interest rates with third-party lenders so your borrowing remains unaffected by interest rate hikes. Another thing to keep in mind is that you can either service the interest rate every year or have the bank capitalize it; when you opt for the latter, the bank will collect both principal and interest from your corporate insurance when you pass away – your policy’s death benefit pays off any amount owing from your corporate IRP strategy.
  • Liquidity Risk: Like any other wealth-building strategy, wealth created in a corporate IRP is slow in the policy’s early years but compounds exponentially in the long term. If there’s a need for funds in the early years due to cash flow issues in the company, there may not be enough funds to provide liquidity if the cause of the cash flow crunch isn’t a result of the life insured’s death. 

    • Solution: Corporate finance is much like our personal finance. You need to set aside funds for emergencies, especially in the early years of your corporate-owned life policy, until your policy has more than enough cash value to weather down any cash flow emergencies that may arise in your business operations.

Tips to Maximize Your Insured Retirement Plan

To maximize your insured retirement plan, consider these tips for optimizing your financial strategy.

Understand Policy Details: Familiarize yourself thoroughly with the specifics of your policy, including the benefits, restrictions, investment or dividend options. Understanding these details ensures that you can make informed decisions.

Fund the Policy Adequately: Ensure you fund the policy sufficiently to meet your retirement goals. Underfunding can lead to a shortfall in expected retirement income.

Regular Review: The financial market (universal life) and circumstances can change over time. Periodically review your policy to ensure it aligns with your current financial goals and market conditions.

Optimize Investment Choices: Within a universal life policy, choose investment options that align with your risk tolerance and retirement goals. Diversify your investments to balance risk and return.

Plan for Liquidity Needs: Have a strategy for liquidity to cover any unforeseen expenses without making unplanned withdrawals from your IRP.

Utilize Bank Loans Strategically: You can borrow against your policy’s cash value, often at a favourable interest rate. Use this feature for liquidity needs or as part of your broader financial strategy, but manage this carefully to avoid diminishing the policy’s benefits.

Leverage Tax Advantages: Make the most of the tax benefits offered by the corporate IRP, including tax-deferred growth and tax-free death benefit payouts under certain conditions.

Manage Loans and Withdrawals Carefully: If you plan to borrow against the policy, do so judiciously. Understand the terms and impact of any loans or withdrawals on your policy’s value and the death benefit.

Plan for Long-Term Growth: A corporate life insurance retirement plan is a long-term financial tool. Make decisions with a long-term perspective, considering how the policy will contribute to your retirement and estate planning goals.

Consider Estate Planning Implications: Understand how your corporate IRP fits into your broader estate plan. Consider the impact on your beneficiaries and how it aligns with your legacy goals.

Consult with Financial Advisors: Work with financial advisors who specialize in corporate IRPs. We can provide valuable insights and help tailor the policy to your needs. You can book a discovery call here.

By following these tips, you can maximize the benefits of your corporate-insured retirement plan and ensure a secure financial future.

Comparing Insured Retirement Plans With Other Retirement and Wealth Growth Options

A corporate-insured retirement plan offers unique advantages, such as insurance coverage, tax-efficient asset growth, tax-efficient access to funds at retirement, and tax-efficient wealth transfer at death. As you’ve learned in the preceding sections, investing funds corporately in traditional investments gets taxed in the highest corporate tax bracket due to the passive income rules update that took effect in 2019. When you withdraw your corporate funds to invest personally, it may result in an increased personal tax bracket before you can invest in personal investment tax shelters such as RRSPs and TFSAs, which defers the whole purpose of trying to shelter your investment growth.

Your corporation will generally have a lower tax bracket than you, so when you channel your corporate funds in an asset class that grows your wealth yet isn’t considered a passive investment for tax reporting purposes, you naturally save on taxes today and in the future.

By channelling your idle funds into a well-planned participating whole life policy, you benefit from a more predictable asset growth that isn’t affected by market volatility or market downtrends – hence, it is risk-free.

Transitioning From a Traditional Retirement Plan to a Corporate Insured Retirement Plan

Below are some key points to consider when transitioning from a traditional retirement plan to a corporate-insured program:

  • Tax efficiency: A Corporate Insured Retirement Plan allows you to redirect surplus funds from your corporation tax-efficiently, avoiding high personal tax rates. By shifting these funds into a life insurance policy with an equity component, you can achieve tax deferral and potentially reduce the impact of passive income on your corporate tax rate.
  • Wealth transfer: With a Corporate Insured Retirement Plan, you can effectively transfer the assets in your corporation to your heirs. The death benefit of the life insurance policy can provide a tax-free inheritance (to the extent of CDA), allowing you to pass on your wealth to the next generation.
  • Retirement savings: Building up your retirement savings is the primary goal of a Corporate Insured Retirement Plan. By financing a corporate life insurance wealth plan, you can grow your savings tax-sheltered and access tax-free retirement funds through third-party borrowing at retirement.
  • Insurance coverage: A Corporate Insured Retirement Plan also provides insurance coverage for your corporation. This can benefit various needs, such as buy-sell funding and key-person insurance, to fund working capital or pay off corporate debts.
  • Guarantees and collateral: When leveraging your life insurance policy for tax-efficient retirement funds, the lender will require you to assign your life insurance policy as collateral but only to the extent of your debts at death. If leveraging a corporate policy for personal borrowing, a guarantee fee and a contract between you and your corporation are often required – talk to a business lawyer knowledgeable about corporate insurance policies for proper legal advice when leveraging a corporate asset for personal borrowing.

Considerations for Choosing a Corporate Insured Retirement Plan Provider

As mentioned, two types of permanent life insurance policies can support a corporate-insured retirement strategy:

  1. Universal Life Insurance, and
  2. Participating Whole Life Insurance

Both build wealth tax-efficiently inside the corporate entity. Two essential factors will help you in deciding which insurance policy best fits your needs:

  1. Your Personal risk tolerance and 
  2. Asset growth continuity while borrowing

While universal life can give you higher net returns, asset growth depends entirely on your portfolio’s performance. Which is precisely similar to market investments – the only difference is the life insurance coverage that comes with it. Thus, it goes without saying that when the market is down, the investment component of your life insurance is most likely down as well. If you’re comfortable with market risks, you can choose universal life as your CIRP’s core plan.

The asset growth in Participating Whole Life Insurance is independent of the market’s ups and downs. While the dividend fund is partly invested in the market, the insurance company absorbs any negative returns. In saying this, you know that you will always get positive returns because instead of earning market returns, your asset grows through policy dividends, which is a more predictable and less risky asset growth strategy.

Now, the question remains: which life insurance carrier should you choose? Not all insurance carriers offer these plans depending on what type of policy you will implement (participating whole life vs universal life). For those that offer them, some have a beautiful universal life. Some have desirable participating whole life policies. 

Regarding participating whole life insurance policies, two companies stand out due to dividend scale history and experience. 

One has been paying dividends consistently since the 1840s, and the other since the early 1900s.

When choosing a corporate-insured retirement plan provider, it is essential to consider their experience and expertise in managing tax-efficient, tax-efficient policies.

Frequently Asked Questions

How Does a Corporate Insured Retirement Plan Help Small Business Owners Grow Their Surplus Funds in a Tax-Efficient Manner?

A corporate-insured retirement plan helps small business owners grow funds tax efficiently. It allows them to redirect surplus funds into a life insurance policy with a cash value component, providing tax-sheltered growth through market portfolios or policy dividends.

What Is the Purpose of a Tax Shelter Inside a Corporation, and How Does It Benefit Business Owners?

A tax shelter inside your corporation aims to minimize passive income tax and preserve the small business tax rate. It benefits business owners by allowing them to invest and grow their savings tax-efficiently.

How Does Passive Income Impact the Small Business Deduction Limit and What Can Corporations Do to Reduce Its Impact?

Passive income can reduce the small business deduction limit. Corporations can mitigate this using a tax shelter like a permanent life insurance policy. By redirecting your corporate surplus funds or funds already invested in passive income instruments into a tax-advantaged corporate-owned life insurance, you minimize the potential of paying tax in the highest corporate tax rate today, and in the future for earnings from passive investments.

What Is a Permanent Life Insurance Policy and How Can It Help Save on Corporate Taxes

A permanent life insurance policy is an asset class that allows surplus corporate funds to grow tax-efficiently inside your corporate entity and is not considered a passive income investment. 

What Are the Steps Involved in Implementing a Corporate Insured Retirement Plan?

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

  • Consult with a life insurance advisor
  • 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.
  • Put your accountant in communication with your 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.
  • 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 tax-free to surviving shareholders or your estate through the capital dividend account. Any funds over the capital dividend account are taxed typically as shareholder dividends.

Get Started with a Corporate Insured Retirement Plan

A Corporate Insured Retirement Plan offers a unique and efficient solution for Canadian business owners looking to maximize their wealth and secure their financial future. To understand how this strategy can align with your business goals and financial planning, it’s crucial to seek professional advice. Contact us to book an appointment and explore how a Corporate Insured Retirement Plan can work for you, providing a secure path to a prosperous retirement and a robust legacy for your heirs.

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