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
As a business owner, you may be aware that when you dispose of shares in your business you could receive an exemption on all or a portion of the capital gains that ordinarily would be taxable. This is due to the Lifetime Capital Gains Exemption which says that, for 2016, up to $824,176* of capital gains is exempt from taxation.
The Lifetime Capital Gains Exemption (LCGE) is available to individuals who are disposing of or deemed to have disposed of:
- Qualified Small Business Corporation (QSBC) shares;
- Qualified farm property; or
- Qualified fishing property **.
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
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
Owners of very successful private corporations are well aware of the importance of cash flow. Many are protective of how they allocate corporate capital so that business ventures are adequately funded and investment opportunities are not missed.
The Immediate Financing Arrangement offers an opportunity to provide life insurance coverage and accumulate wealth on a tax-advantaged basis without impairing corporate cash flow.
What is an Immediate Financing Arrangement (IFA)?
An IFA is a financial and estate planning strategy that:
- Combines permanent, cash value life insurance with a conservative leverage program allowing the dollars allocated to the life insurance premiums to do double duty by still being available for business and investment purposes;
- In the right circumstances and when structured properly so that all possible tax deductions are used, an improvement in cash flow could result.
Focusing on growth is harder when your co-owners are your relatives
by Fred Pidsadny for ProfitGuide.com
Family-run businesses are like elastic bands—they can be stretched only so far, in different directions, before tensions cause them to snap. Those who run family businesses know that stress can often be elevated by forces that don’t exist in non-family firms, from hiring obligations and bloodline silos to next-generation financial demands to under-performing family members. It’s one thing to discipline or even fire a stranger, quite another to turf a brother or daughter. For such businesses, finding a successful balance is an ongoing challenge.
So how can family-owned businesses avoid conflict and focus on growth? For a number of years I’ve been working with a company run by three brothers, each with their own family and their own unique take on strategy and succession planning. They have benefited tremendously by learning and practicing what I call the four Cs of strategy execution for owner-managed businesses: