How Business Owners Can Use Corporate-Owned Life Insurance to Save on Taxes.
As a business owner in Canada, finding tax-efficient strategies to grow and protect your wealth is crucial. One often-overlooked financial tool is corporate-owned life insurance (COLI), which can provide significant tax advantages while ensuring financial security for your company. In this article, we will explore how corporate-owned life insurance works and how it can help Canadian business owners save on taxes.
What is Corporate-Owned Life Insurance?
Corporate-owned life insurance is a policy purchased and owned by a corporation on the life of an executive, owner, or key employee. The corporation pays the premiums, and in return, the policy can provide tax-free benefits to the company and its shareholders.
Tax-Efficient Life Insurance Strategies for Canadian Business Owners
- Tax-Free Death Benefit
When a business owns a life insurance policy, the death benefit is paid out tax-free to the corporation. This ensures that funds are available for business continuity, debt repayment, or buy-sell agreements without creating a taxable event for the company. - Capital Dividend Account (CDA) Benefits
A key tax advantage of COLI is its ability to create tax-free capital dividends. When the insurance payout exceeds the policy’s adjusted cost base (ACB), the excess amount is credited to the corporation’s Capital Dividend Account. Shareholders can then receive tax-free distributions from this account, creating a tax-efficient strategy for wealth transfer. - Tax-Deferred Growth
Unlike traditional investments that may be subject to annual taxation, the cash value inside a corporate life insurance policy grows on a tax-deferred basis. This allows business owners to accumulate wealth within the corporation without immediate tax liabilities.
How to Use Corporate-Owned Life Insurance for Business Planning
- Business Succession Planning
If you are planning to transition your business to the next generation or sell it in the future, COLI can be an essential tool. The tax-free proceeds from the policy can be used to equalize estate distributions, fund buy-sell agreements, or provide liquidity to cover tax obligations upon the owner’s passing. - Key Person Insurance
Losing a key employee or executive can be financially devastating to a business. Corporate-owned life insurance ensures that the company has the necessary funds to cover losses, recruit new talent, and maintain operations. - Retirement Planning for Business Owners
Many business owners use COLI as a tax-efficient way to build retirement savings. By leveraging the policy’s cash value, you can create an additional income stream in retirement through tax-advantaged withdrawals or loans.
Is Corporate-Owned Life Insurance Right for You?
If you are a Canadian business owner looking for tax-saving strategies and long-term financial security, corporate-owned life insurance could be a smart addition to your financial plan. Consulting with a financial advisor specializing in corporate insurance solutions can help you determine the right policy for your needs.
By leveraging corporate-owned life insurance, you can protect your business, reduce tax liabilities, and ensure a smooth financial transition for your company and heirs. If you want to explore how this strategy can work for you, contact Solis Financial Services today for a personalized consultation.