The Corporate Estate Transfer

If you are the owner of a successful company it is likely that you have retained profits or surplus cash in your corporation.  If this is the case, chances are also good that this invested surplus is exposed to a high rate of corporate income tax.  If this describes your company then you may be a candidate for the Corporate Estate Transfer.  This strategy provides tax sheltered growth as well as maximizing the estate value of your company upon your death.

What is a Corporate Estate Transfer?

The Corporate Estate Transfer is an arrangement in which the company purchases a tax exempt life insurance policy on the life of the shareholder using corporate funds that are not needed for immediate business purposes. In doing so, the transferred surplus grows tax-deferred while the death benefit of the life insurance policy increases the value to the estate when the shareholder dies.

The steps involved with the Corporate Estate Transfer are as follows:

• The corporation purchases a life insurance policy on the life of the shareholder and is the beneficiary of the death benefit;
• The corporation deposits funds into the policy which creates cash value. The cash value accumulates on a tax-deferred basis which also increases the death benefit of the policy;
• Upon the death of the life insured, the corporation receives the proceeds of the policy tax-free;
• The corporation receives a credit to its Capital Dividend Account for the life insurance proceeds (less the policy’s adjusted cost base). Dividends can then be paid tax free to the shareholder’s estate out of the Capital Dividend Account.

Who is it for?

The Corporate Estate Transfer concept would be of interest in the following circumstances:

• A shareholder, in reasonably good health, who owns a private Canadian Corporation;
• Shareholder wishes to provide a legacy at death to his or her family;
• The corporation has surplus funds to invest or corporate income well in excess of what is required for day to day business operations.

What makes this work?

• While corporate investment income is taxed at a high rate as non-business income, the cash accumulation in a life insurance policy grows tax-deferred under Section 148 of the Income Tax Act;
• The death benefit of a life insurance policy owned and received by a Canadian Controlled Private Corporation is received tax free and can be paid out to and received by the estate of the shareholder as a tax free Capital Dividend;
• The corporation has access to the cash values of the Corporate Estate Transfer either by withdrawing cash (may give rise to tax) or by borrowing against the cash value from a lending institution.

Case Study

John is an owner/manager of a successful company in Vancouver.  He is 45 year old non-smoker, married with 2 young children.  His company has been doing well for a number of years now and his corporate earnings are consistently more than is required for business operations. He estimates that the company can commit $30,000 per year to a Corporate Estate Transfer.  John decides the insurance policy to be used for this purpose is a 20 Pay Participating Whole Life policy.  Annual deposits are made for 20 years and the policy becomes paid up at that point.

The following chart compares the results between the Corporate Estate Transfer and the company simply investing the $30,000 annual surplus cash flow at a projected rate of 5% before tax.

The cash accumulation figures shown are pre-tax for the Corporate Estate Transfer and after tax for the alternative investment. The reason for this is strategies exist that can provide a tax free result for the Corporate Estate Transfer.

By taking advantage of the Corporate Estate Transfer concept John is able to move corporate investment dollars from a tax-exposed environment to a tax-sheltered environment.  This increases the amount that will be received by John’s heirs and beneficiaries when he dies.

I would be happy to help you determine if the Corporate Estate Transfer is right for you. As always, please feel free to share this article with friends and associates you think might find it of interest.