"Pay the cost of your Corporate Insurance from your company bank account, and create a tax free payout of proceeds at death!"
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Are you aware that your Private Corporation can pay the premiums on an insurance policy on you or any other key individual, and that a large percentage of the death benefit can flow into the capital dividend account tax free!
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The amount of death benefit that exceeds the Adjusted Cost Basis (ACB) qualifies as tax-free surplus for the Capital Dividend Account. Moneys in this account can be paid out tax free to the Canadian resident shareholders of the corporation.
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Many people are unaware that:
- They can pay the cost of Collateral Insurance, Key Person Insurance, or Buy-Sell Insurance from the corporate accounts, with the corresponding advantage of a lower income tax rate.
- Paying taxes on income needed to fund Term Insurance premiums, means that you are working for the government when it is not necessary!
- If the ACB of the policy proceeds paid at death is kept in the corporation then it remains tax free and is credited to retained earnings!
A Life insurance policy that qualifies under section 148 of the Income Tax Act, is an excellent planning tool that can be used to create a growing tax advantaged account. This account is totally accessible and under your control while you are alive, and is paid out to your company as the designated beneficiary at death. By accumulating funds inside the tax advantaged account you can stop paying premiums earlier by using some of the taxes you would have paid on income your company must earn to pay the premiums!
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A private corporation is entitled to maintain a notional tax account, called the Capital Dividend Account (CDA) which keeps track of various tax-free surpluses accumulated by the firm. These surpluses may be distributed as capital dividends free of tax to the corporation's Canadian-resident shareholders.
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If the corporation owns a life insurance policy and receives the proceeds upon the death of the insured, that portion of the death benefit which exceeds the Adjusted Cost Basis of the policy qualifies as a tax-free surplus for the CDA under The Income Tax Act (Canada).
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