As a business owner, you may accumulate excess surplus not needed for the day-to-day operation of your business. You may wish to avoid personal taxable income by allowing this money to remain within the company rather than make taxable payments to yourself. When you withdraw money from your company, it's taxable, even though you may enjoy tax breaks by receiving the money as dividend income.
Safe, conservative, low-risk investments such as Guaranteed Investment Certificates (GICs) and Canada Savings Bonds (CSBs) allow surplus to grow. However, these vehicles produce an annual investment income which is taxed at the top corporate rate of approximately 50%, depending on your province. In contrast, the regular tax on the first $200,000 of active business income is about 20%. A wiser alternative, and one that may outperform regular investments such as GICs and CSBs, is to have the business use the surplus cash to purchase life insurance.
With life insurance, excess surplus in the business can generate a higher estate value for your heirs than traditional savings vehicles. It provides tax-deferred growth of the business surplus, a tax-free death benefit to the corporation and ultimately allows this capital to be paid out to your heirs virtually free of tax, using capital dividends. Alternatively, the capital can be retained in the business and used for other purposes.
Our firm can design an insurance package to fit your long-term needs in order to maximize what you leave to your heirs. For more information, contact our office to schedule a free consultation.