What are the tax benefits of holding your term life insurance policy in a corporation you own as opposed to personally?
If a term life insurance policy is owned by a corporation and the corporation is also the beneficiary, the corporation is able to pay the annual premiums with after tax profits.
If the corporation owning the term life insurance policy is a BC Canadian Controlled Private Corporation and their taxable income is under $500,000 annually, their corporate tax rate is approximately 13.5%. If the corporation’s taxable income is over $500,000 then their corporate tax rate is approximately 26.5%. These tax rates are lower than most personal tax rates and this is what creates the savings.
Example: If you are personally in a high tax bracket of approximately 44% and you pay the premiums through your corporation who’s tax rate is 13.5%. Say the annual term life insurance premium was $5,000 this would be an annual savings of $3,148 since you would need to earn $8,928 pre-tax dollars personally and only earn $5,780 pre tax dollars in the corporation to pay the premium. Over the term of the life insurance policy this results in great savings; 10 years = approximately $31,000; 20 years = $63,000. Based on 2011 combined personal tax rates for BC, if you earn over $42,000 annually your personal tax rate will be higher than the large corporations tax rate of 26.5% which would warrant the savings.
The death benefit received is tax free to the corporation and can be paid out to the surviving shareholders or the inheriting shareholders tax free. This makes the tax free treatment very similar to the tax free benefit your beneficiary would receive if none of this tax planning was done and the insurance was held personally.
It is best to have a shareholder agreement in place that discloses that the company is to pay the premiums, how the proceeds are to be treated and how the proceeds are to be distributed. It is always good to have a written agreement in place in case laws change and also to help the remaining shareholders distribute the funds properly in their time of grief.
For more information on owning term life insurance policies in a corporation and their deductibility, please contact Gilmour Knotts Chartered Accountants.Download a copy of this issue