Corporations
Strengthening of balance sheets
When working with business owners, discussing the protection of human capital and the preservation of financial capital is essential.
For short and medium-term insurance needs, such as coverage for loans, term insurance is an excellent alternative. When the needs are long-term, this type of life insurance can become detrimental to the business over time. Paying the premiums will become an expense that results in a reduction of cash flow or retained earnings instead of being used to support the company's growth.
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In this case, permanent insurance is a much more compelling solution. In addition to lifetime coverage, permanent insurance acquires the following benefits:
● It allows for a tax-free accumulation of funds and can help reduce the company's liabilities.
● These funds are combined with the death benefit, in whole or part, and are not taxed at death.
● The amount of paid-up capital, minus the ACB, procures an amount that can be included in the capital dividend account (CDA).
● The amounts in the CDA are paid to the shareholders in the form of non-taxable dividends.
● The surrender values in an insurance policy are considered assets on the balance sheet.
To learn more:
Balance sheet strengtheningfile_download
Shared ownership critical illness insurance
The main objective of shared ownership critical illness insurance is to allow the shareholder of a private company to benefit from insurance coverage in the event of a critical illness that is covered by the policy. However, when a company and its shareholder take out a critical illness policy on said shareholder, this strategy can also offer other advantages:
● The insurance policy provides for the payment of benefits to the company in the event the shareholder suffers from one of the medical conditions or illnesses covered.
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● The contract is taken out with a premium repayment option if the critical illness benefit has not been paid upon termination or the expiration of the policy (for example, after 15 years).
● This option is payable by the shareholder personally through a higher salary or dividend or by the company, thus becoming a taxable benefit. However, after a certain number of years, it provides for repayment of all premiums, particularly those of the company and the shareholder, all tax-free and net of management fees. The amount is paid to the shareholder, tax-free.
● In addition to allowing the money to be released by the company, this option allows an interesting off-balance sheet return in several circumstances, especially if the shareholder’s marginal rate is high. This could also reduce the amounts of liabilities and the risk of losing the perferable corporate rate.
Financing of share redemption
Life insurance is a great way to finance a shareholder agreement in the event of the death or invalidity of a shareholder of a business corporation or company. The company takes out insurance policies on behalf of the shareholders and is named their beneficiary. At the time of a loss, the amounts paid to the company serve to redeem the shares of the disabled or deceased shareholder.
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If the shares are held by more than one person when a business corporation is established, it is recommended the shareholders sign an agreement. This agreement is a contract that will establish the general by-laws, the structure and operation of the company, the nature of the relations among the shareholders and their commitments to the company.
The agreement provides for specific actions to be taken in different circumstances to avoid disagreements among the shareholders (for example, if a shareholder desires to sell their share of the business, declares personal bankruptcy, dies, becomes ill, etc.).
Immediate financing arrangements
The immediate financing arrangement (IFA) is a financial strategy we use to allow our clients to benefit from permanent life insurance coverage while allowing those who adhere to it to retain access to the required liquidity to sustain the growth of their company.
An invested party holds a life insurance policy that will generate high surrender values. The policyholder then pays the insurance premiums and makes additional deposits to help the surrender value grow as quickly as possible based on the financial limits determined by the Income Tax Act (ITA). The surrender value of this life insurance policy will then accumulate tax-free.
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Once the life insurance policy's surrender value grows, it is used as security to acquire financing from an external financial organization. The liquidity generated by the loan is then reinvested in the course of the business's activities. When the conditions are respected, a portion of the premiums paid and the interest on the loans are deductible for tax purposes. New loans are issued each year to optimize this strategy.
In the event the insured dies, the death benefit is then paid out tax-free. A portion of this benefit is used to repay the loan to the financial organization, and the remaining balance is paid to the named beneficiaries.
To learn more:
Immediate financing arrangement – Implementation Guide (PDF)file_download
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