The Liberal Government’s Federal Budget was delivered by Finance Minister, Bill Morneau, on February 27, 2018. There had been much concern and speculation about the direction the budget would take with respect to the taxation of private corporations. This was due to a release of the Department of Finance in July 2017 which contained private corporation tax proposals which addressed areas of concern to the government involving, among other things, business owners holding passive investments inside of their corporation. There was speculation that if these proposals were implemented the effective tax rate on investment income earned by a private corporation and distributed to its shareholders could increase astronomically. Thankfully, the concerns voiced by business and professional groups following the July proposals were effective in moderating the government’s actions.
Many business owners understand the important role that life insurance plays in effective corporate planning. Whether it is the funding of a shareholders’ agreement, life insuring corporate debt, or protecting against loss from the death of a key employee, life insurance is of great value in underpinning the financial success of a corporation.
Just as life insurance needs for families change over time the same is also true for requirements of a business. If it has been some time since you last reviewed your corporate needs then it is probably time for a corporate insurance audit. This is especially true if the company has grown in value since the time the insurance was first implemented. The scope of the audit and the insurance related issues include the following: Read more
If you are the owner of a private corporation you should be concerned about the commentary that is coming from the Department of Finance. In the Federal Budget of March 2017, Finance expressed their concern that private corporations were being used by high income Canadians to obtain tax advantages that were not available to other Canadian tax payers. That concern has led to the release on July 18th 2017, of a consultation paper along with draft legislation. Finance is currently asking for input from interested parties and stakeholders and has stated that the consultation period will end on October 2, 2017. At this point, whatever happens after that date is anyone’s guess, but speculation is high that changes will be introduced to close what the Department perceives as abusive practices relating to private corporations.
Specifically, there are three specific tax planning strategies employed by private corporations that the department is most concerned with:
Sprinkling income using a private corporation
Income tax paid on income from a private corporation can be greatly reduced by causing that income to be received in the form of dividends by individuals who would pay tax at a much lower rate or not at all. These dividends are usually paid to adult children or other family members who are shareholders of the private corporation or to a family trust. By “sprinkling” the income in this manner the amount of income tax paid can be greatly reduced. Read more
Many business owners are unaware that corporate owned life insurance combined with the Capital Dividend Account (CDA) provides an opportunity to distribute corporate surplus on the death of a shareholder to the surviving shareholders or family members tax-free.
Income earned by a corporation and then distributed to a shareholder is subject to tax integration which results in the total tax paid between the two being approximately the same as if the shareholder earned the income directly. Integration also means that if a corporation is in receipt of funds which it received tax-free, then those funds should be tax free when distributed to the shareholder.
The Capital Dividend Account is a notional account which tracks these particular tax-free amounts accumulated by the corporation. It is not shown in accounting records or financial statements of the corporation. If there is a balance in the CDA it may be shown in the notes section of the financial statements for information purposes only.
Generally, the tax-free amounts referred to, are the non-taxable portions of capital gains received by the corporation and the death benefit proceeds of life insurance policies where the corporation is the beneficiary. Read more
If you are the owner of a successful company it is likely that you have retained profits or surplus cash in your corporation. If this is the case, chances are also good that this invested surplus is exposed to a high rate of corporate income tax. If this describes your company then you may be a candidate for the Corporate Estate Transfer. This strategy provides tax sheltered growth as well as maximizing the estate value of your company upon your death.
What is a Corporate Estate Transfer?
The Corporate Estate Transfer is an arrangement in which the company purchases a tax exempt life insurance policy on the life of the shareholder using corporate funds that are not needed for immediate business purposes. In doing so, the transferred surplus grows tax-deferred while the death benefit of the life insurance policy increases the value to the estate when the shareholder dies. Read more
67% are at Risk of Succession Failure
If you are an owner in a family enterprise, the chances of your business transitioning successfully to the next generations is not very good. This has not changed over the years. Statistics show a failure rate of:
- 67% of businesses fail to succeed into the second generation
- 90% fail by the third generation
With 80% to 90% of all enterprises in North America being family owned, it is important to address the reasons why transition is difficult. Read more
Don’t Put Off Your Decision to Buy Life Insurance
2016 is an opportune year to buy life insurance. New laws affecting the taxation of life insurance come into effect on January 1, 2017. After this date new policies will not perform as well as they do currently.
The good news is that the proceeds of life insurance policies paid at death still remain tax free. What has been affected is the amount of cash value that may accrue in a policy and the tax-free distribution of death proceeds from a life insurance policy owned in a corporation.
How will this impact your existing and future policies?
Adjustment to the Maximum Tax Actuarial Reserve
Whole Life and Universal Life policies are valuable vehicles in which to accumulate cash value. The limit of how much can be invested is governed by the Maximum Tax Actuarial Reserve (MTAR). If the cash value ever exceeds the MTAR limit, the policy is deemed to be “offside” and will be subject to accrual taxation. Read more
Or so the saying goes. This certainly is true in Canada where there is a “deemed disposition” when a taxpayer dies. What this means is that a taxpayer is deemed to dispose of all his or her assets at fair market value immediately preceding death.
How does this affect your assets?
- For certain assets (e.g. stock investments, company shares, revenue property, collectables), if the fair market value is greater than the adjusted cost base then capital gains will result.
- Fifty percent of capital gains are included in the deceased taxpayer’s income.
- Revenue property could also attract additional tax in the form of recaptured depreciation.
While most business owners realize the benefits of corporate-owned insurance, many do not realize that flexible life insurance products such as universal life can provide them with the protection they need as well as a source of cash for business purposes.
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Raman is a high- impact financial change-agent with a strong ability to identify initiatives and facilitate action-driven plans for financial management and marketing.
He is a seasoned sales professional with years of experience in marketing and financial consultancy. He has eight years of pertinent college education in the fields of financial and business planning, programming as well as electronics and telecommunications. He has a proven track record of recruiting, training and supervising licensed financial agents with a focus on bottom-line improvement.
Mutual funds are offered through Networth Financial Corp., member of the MFDA and MFDA Investor Protection Corporation. Commissions, trailing commissions, management fees, and expenses may all be associated with mutual fund investments. Please read the Fund Facts Sheets before investing. Mutual funds are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer and are not guaranteed, their values change frequently and past performance may not be repeated.