It is not uncommon to see a business’s profits or surplus cash invested in GICs or taxable investments. These taxable investments may not always be in business’s best investment option.
If the business or corporation already needs an exempt life insurance policy for key-person insurance, business loan protection or some other business insurance need, the policy could also be used as a vehicle for investing the company’s excess profits.
An exempt, permanent life insurance policy allows for tax-deferred growth of the cash value and tax-free receipt of the proceeds at death. The cash value growth within an exempt policy is not subject to annual accrual taxation and is only subject to tax if there is a disposition of the policy.
Significant cash value can accumulate on a tax-deferred basis if the business deposits the maximum amount permitted by the Income Tax Act into the exempt policy. The deposits can remain within the policy on a tax-sheltered basis and pay for the cost of insurance expenses in future years.
If the corporation or shareholder needs access to the cash at some future date, the policy’s cash surrender value can be accessed through withdrawal or a collateral loan secured against the insurance policy.
Policy withdrawals may trigger some income tax at the time of the withdrawal. Advances to the corporation received as a collateral loan will be tax free and if the proceeds are used to earn income from a business or property, and the other requirements of 20(1)(C) of the Act are met, the interest expense may be deductible for tax purposes.
DISCLAIMER: Please be advised that the information on this web site is intended to present a broad variety of general information as simply and accurately for your knowledge as we possibly can. In no event does this information form part of or apply as a legal document. Therefore, please note that rules, conditions and industry practices discussed may be changed over time. Please consult Health Risk Services Inc. with specific questions
E & O Insurance applies.