Using the corporation to plan across generations.

A permanent life insurance policy owned and paid for by a corporation, insuring the owner or another key shareholder. The policy can build cash valuecash valueThe amount a permanent policy would pay if it were surrendered, net of any charges. Surrendering a policy or withdrawing value can have tax consequences. over time and pays a death benefit to the corporation.

Owners with capital in the corporation that is not needed for operations or retirement income, who want part of that capital to pass to the next generation.

It can provide cash at death to pay tax or fund a share redemption. The death benefit above the policy’s adjusted cost basis is generally credited to the Capital Dividend AccountCapital Dividend AccountA notional account a private corporation keeps to track certain amounts it received tax-free, such as the untaxed portion of capital gains and qualifying life insurance proceeds. The balance may be paid to shareholders as a capital dividend, which Canadian residents can generally receive tax-free when the election is filed correctly., which may allow it to be paid to the estate or heirs as a capital dividend, subject to the tax rules. Growth inside the policy is generally not taxed each year, as long as the policy keeps its exempt status.

Premiums are a long-term commitment and are generally not deductible. Cash values are low in the early years. Taking value out of the policy during life can have tax consequences. Because the corporation owns the policy, it forms part of the corporation’s assets.

A strategy built on a permanent policy with significant cash value. Later in life, the owner uses the policy as collateral for loans from a third-party lender. The loans, rather than withdrawals, provide funds, and the loan is repaid from the death benefit.

Business owners and individuals who have used other retirement savings options and want a potential source of supplementary funds later, while keeping a death benefit for the estate.

It can provide access to capital in retirement without surrendering the policy. Loan proceeds are generally not taxable income. The death benefit repays the loan and can leave value for the estate.

Lenders are not obliged to lend on today’s terms in the future. Interest rates, lending limits and collateral requirements can change, and if the loan grows faster than the policy’s value, the lender may require repayment or more collateral. Policy performance is not guaranteed. When the policy is owned by a corporation, getting the borrowed funds to you personally raises further tax issues. Tax rules can change.

A corporation buys a permanent policy and pays the premium, then assigns the policy to a lender as collateral for a loan. The loan is invested back into the business or into investments, so the capital used for premiums goes back to work.

Profitable corporations that need permanent insurance and want to keep capital deployed, with strong cash flow, a stable lending relationship and a long time horizon.

It can let a corporation hold permanent insurance without tying up working capital. Interest may be deductible when the borrowed funds are used to earn business or investment income, and part of the premium may be deductible as a collateral insurance cost, where the conditions are met. At death, the benefit repays the loan and may create a Capital Dividend Account credit.

It is a leveraged strategy and carries the risks of leverage: rising interest rates, lender conditions and the possibility the loan is called. Deductions depend on meeting specific conditions and can be reviewed by the CRA. It is complex to set up and needs ongoing monitoring by your accountant.

A notional account kept by a private corporation. It tracks amounts that may be paid to Canadian-resident shareholders as capital dividends, which can generally be received tax-free. These include the non-taxable portion of capital gains and qualifying life insurance death benefits.

Any private corporation that realizes capital gains or owns life insurance, and its shareholders.

It can allow value to leave the corporation without personal tax, through an election to pay a capital dividend. In estate planning, it is often how corporate-owned insurance proceeds reach the family.

The balance can change over time, including when capital losses are realized. The election must be filed correctly, and paying more than the balance can lead to penalties. Capital dividends are generally tax-free only for shareholders resident in Canada.

A reorganization in which the owner exchanges common shares for fixed-value preferred shares. New common shares are issued to the next generation or a family trust, so future growth accrues to them.

Owners of a corporation that is still growing, who want to begin passing on that growth while keeping control and a predictable tax position at death.

It can cap the tax on the owner’s shares at death at today’s value, shift future growth to the next generation and make the eventual tax bill predictable enough to plan for and insure.

It requires a valuation, legal reorganization and accounting work. tax on split incometax on split incomeOften called TOSI. Rules that can tax certain income a family member receives from a family business, such as dividends, at the highest personal rate unless an exclusion applies. and attribution rules can affect income paid to family members. If a family trust holds the growth shares, the 21-year rule21-year ruleMost personal trusts are treated as having sold their capital property at fair market value every 21 years. Without planning, this can trigger tax on gains that have built up inside the trust. applies. A freeze can be hard to undo, although some can be adjusted later.