A Tax-Efficient Strategy to Protect Your Assets
You’ve worked hard to build your company, grow its earnings, and provide for your employees. But how are you maximizing those earnings? It’s smart to invest your excess retained earnings to earn passive income.
Successful business owners understand how much of their wealth they lose to taxes each year. In some cases, you may be losing as much as 50.67% on passive income earned by your business.
What if you could keep more of that capital in your business’s hands? The corporate asset transfer strategy allows you to take advantage of the tax benefits of life insurance to help decrease taxes related to passive income and maximize cash flow during retirement.
The Corporate Asset Transfer Strategy Is Right for You If:
You are an incorporated business owner who needs life insurance to protect your business.
Your corporation is earning passive income through corporate investments.
You are looking for stable, low-risk investment opportunities for your corporation.
You are looking to reduce corporate taxes.
You have will that is up to date.
What Is the Corporate Asset Transfer Strategy and How Does It Work?
This strategy involves transferring excess retained earnings towards a tax-exempt life insurance policy owned by your corporation.
The life insurance can be used to cover business needs if the shareholder were to pass away. This is one of the common uses of life insurance for a business. However, this is also a growing asset with accessible cash values.
By transferring from taxable passive investments to a tax-exempt life insurance policy, you pay less tax today—and tomorrow, since any cash values in the policy grow at a tax-advantaged basis.
This can be a tax shelter for the excess retained earnings or any passive income generated by your corporation.
Supplement Your Retirement Income
At retirement, you have the option of utilizing your cash values to supplement your retirement cash flow. One of the most tax-efficient ways of doing so is by borrowing against your cash values through a personal bank loan.
Given you meet the bank’s requirements, you can use the policy as collateral for a corporate guarantee on the loan. With proper planning with your tax professionals, this loan can be used to supplement retirement with tax-free dollars.
In order for the bank to not be a taxable benefit under the Income Tax Act of Canada, a guarantee fee should be paid by the shareholder to the corporation, which counts as taxable income for the corporation.
This should be organized with your tax professional to ensure its effectiveness and to avoid adverse tax consequences.
Here’s an Example:
Kevin is a 35-year-old business owner who’s worked hard to build his business. He’s accumulated a substantial amount of retained earnings in his corporation and has some corporate-owned passive investments.
While he was planning for retirement, he realized that he has a shortfall of $36,000 per year, which he wants to find a tax-efficient way to supplement—that way—he can live the lifestyle he desires once he reaches 65.
His corporation can conservatively allocate $29,000 per year towards this strategy.
What can the corporate asset transfer strategy do for Kevin?
We’re going to compare two scenarios to see the difference this strategy can make.
- Kevin invests $29,000 annually in passive taxable investments.
- Kevin directs $29,000 annually towards paying the premium for a corporate-owned life insurance policy and borrows against the cash values as a shareholder using the policy as a corporate guarantee on the loan.
How does it compare?
- Kevin has an immediate $950,000 death benefit to protect his business should something happen to him.
He has tax-free funds from the bank loan to supplement his retirement income. If he’s stuck with passive taxable investments, they will deplete sooner.
- The life insurance coverage can grow. In this case, it could grow up to $1,937,054 based on the current dividend scale, which is the net amount payable to his heirs. That amount would be $0 with passive investments.
A few things to note for this example:
- We used a participating whole life insurance policy that is paid in full by 20 years. However, we used a premium offset in the 10th year, where the payor no longer needs to pay an additional premium beyond that point.
- The performance of the policy is determined by the sample insurance company’s current dividend scale rates. Performance and dividends are not guaranteed.
- The maximum loan most institutions lend is up to 90% of the cash values.
The loan is based on $36,000/year for 20 years, with an assumed interest rate of 7%. This varies from lender to lender.
- The interest rate is capitalized and added to the loan balance. Interest repayment is also an option.
Why Choose Our Commonwealth When Setting up the Corporate Asset Transfer Strategy?
At Our Commonwealth, life insurance is our specialty, and we have experienced insurance planners who will work with you to create specialized coverage based on your needs.
Choosing a strong life insurance carrier is essential when it comes to this strategy. We are contracted with top life insurance carriers, so you can rest easy knowing that you have access to the best options on the market.
We also make sure that your plan is holistic and work with your existing financial plans that you already have in place. We work with your tax advisors to ensure your strategy is sound and reliable.
Frequently Asked Questions
Is the Corporate Asset Transfer a Legitimate Strategy?
How Does It Compare With Other Investments?
Are You Ready to Keep More of Your Wealth at Retirement?
Let’s Create Your Corporate Asset Transfer Strategy Today