The Liberal Government’s Federal Budget was delivered by Finance Minister, Bill Morneau, on February 27, 2018. There had been much concern and speculation about the direction the budget would take with respect to the taxation of private corporations. This was due to a release of the Department of Finance in July 2017 which contained private corporation tax proposals which addressed areas of concern to the government involving, among other things, business owners holding passive investments inside of their corporation. There was speculation that if these proposals were implemented the effective tax rate on investment income earned by a private corporation and distributed to its shareholders could increase astronomically. Thankfully, the concerns voiced by business and professional groups following the July proposals were effective in moderating the government’s actions.
Considering that the proceeds of a life insurance policy are received tax free upon the death of the life insured, it is not surprising that the premiums of the policy are not tax deductible. There are two circumstances, however, where premiums would be deductible for income tax purposes:
- If the life insurance policy is assigned to a lending institution that requires the assignment as a condition for a loan, for either investment or business purposes.
- If the life insurance policy is donated to a registered charity and the donor continues to pay the premiums on behalf of the charity.
Life insurance policies used as collateral security for a loan
The conditions under which the owner of a life insurance policy would be entitled to a collateral insurance deduction are as follows:
- The loan advance must be made by a qualified financial institution that is in the business of lending money. This includes banks, finance companies, trust companies, credit unions or insurance companies. It does not include private lending arrangements such as with friends or family members;
- The lending institution must require the assignment of the policy owned by the borrower as a condition for granting the loan and a formal assignment of the policy must be made. There should be a letter or other documentation on file to substantiate the lender’s requirement for the life insurance assignment;
- The proceeds of the loan must be used for investment or business purposes the income of which would be taxable to the borrower;
- The life insurance policy assigned can be either an existing policy or one taken out for this specific purpose.
If you are the owner of a private corporation you should be concerned about the commentary that is coming from the Department of Finance. In the Federal Budget of March 2017, Finance expressed their concern that private corporations were being used by high income Canadians to obtain tax advantages that were not available to other Canadian tax payers. That concern has led to the release on July 18th 2017, of a consultation paper along with draft legislation. Finance is currently asking for input from interested parties and stakeholders and has stated that the consultation period will end on October 2, 2017. At this point, whatever happens after that date is anyone’s guess, but speculation is high that changes will be introduced to close what the Department perceives as abusive practices relating to private corporations.
Specifically, there are three specific tax planning strategies employed by private corporations that the department is most concerned with:
Sprinkling income using a private corporation
Income tax paid on income from a private corporation can be greatly reduced by causing that income to be received in the form of dividends by individuals who would pay tax at a much lower rate or not at all. These dividends are usually paid to adult children or other family members who are shareholders of the private corporation or to a family trust. By “sprinkling” the income in this manner the amount of income tax paid can be greatly reduced. Read more
Many business owners understand the important role that life insurance plays in effective corporate planning. Whether it is the funding of a shareholders’ agreement, life insuring corporate debt, or protecting against loss from the death of a key employee, life insurance is of great value in underpinning the financial success of a corporation.
Just as life insurance needs for families change over time the same is also true for requirements of a business. If it has been some time since you last reviewed your corporate needs then it is probably time for a corporate insurance audit. This is especially true if the company has grown in value since the time the insurance was first implemented. The scope of the audit and the insurance related issues include the following: Read more