PROTECTING YOUR WEALTH
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Strengthening of Balance Sheets
When working with business owners, discussing the protection of human capital and the preservation of financial capital is essential.
Term insurance is an excellent alternative for short- and medium-term insurance needs, such as coverage for loans. 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 reduces 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
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.).
Intergenerational Wealth Transfers (Cascade)
Some clients benefit from a desirable situation and wish to provide a solid financial future for their children or grandchildren. We believe there's no better way to do this than by using intergenerational wealth transfer strategies. This allows you to transfer your assets to your kids or grandkids without incurring taxes on the gains.
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● A parent or grandparent purchases participating life insurance (such as an iA PAR) or any other permanent life insurance product that has a surrender value for their children or grandchildren.
● To free the policy from payment, the subscriber will pay the premiums in 10 or 20 years. The subscriber may also make excess premium contributions, creating a tax-free surrender value over the years.
● When the child or grandchild reaches adulthood, the parent or one of the grandparents can assign ownership of the full paid-up life insurance policy to that person. Under subsection 148(8) of the Income Tax Act (ITA), this transfer will have no tax consequences.
● The child or grandchild may also benefit from the surrender value accumulated in the life insurance policy to undertake certain expenses or benefits from later growth.
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. The remaining balance is paid to the named beneficiaries.
To learn more:
Immediate financing arrangement – Implementation Guide (PDF)file_download
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At Paslawski Capital Management, we believe the power of knowledge, skill and experience is what makes a successful business. That's why we've partnered with PPI. PPI's highly credentialed team of accountants, lawyers and actuaries can collaborate with our client's advisors in a research and support role. They offer advanced tax and estate planning, in-depth knowledge and experience, and customized solutions for complex client needs that demand sophisticated planning and strategies.