There are many reasons why an individual might purchase a life
insurance policy - and owning life insurance is fundamental to a
stable financial plan - but are you holding your policy in the most
tax efficient manner?
Many professionals are not aware that a professional corporation
can be the beneficiary and owner of a life insurance policy; this
could be a significant advantage in your favour since your
professional corporation is afforded a much lower tax rate on its
income than you are personally. The lower tax rate means less gross
income is required when the premiums are paid by your professional
corporation. This can be best illustrated through the following
Suppose Joanne's monthly life insurance premiums are $500
and she pays income tax at the highest marginal tax rate. If she
owns the policy personally, she will have to earn $991 in order to
have sufficient "after-tax dollars" to cover the monthly
premium. By comparison, if the life insurance policy is owned by
her professional corporation and the corporation pays the monthly
premiums, the corporation will only have to earn $592 to pay the
monthly premium. By having the corporation own the life insurance
policy and pay the premiums, Joanne will have an extra $4,800 of
cash in her professional corporation each year.
If a corporation owns a life insurance policy and the insured
individual dies, the life insurance proceeds paid are received
tax-free by the corporation. These funds are then treated as part
of a special account that can be paid out to a shareholder of the
If you currently own a life insurance policy, consideration
should be given to transferring the ownership to your professional
corporation and making it the beneficiary. Although the additional
cash that may be realized on a corporate-owned life insurance
policy is appealing, there are some traps that must be considered
before the policy is transferred.
Potential Tax Liability on the Transfer of Your Life Insurance
to Your Corporation
The transfer of your life insurance policy to your professional
corporation is considered a disposition and could be subject to
income tax. If the cash surrender value (CSV) exceeds the adjusted
cost base of your life insurance policy, you are required to pay
tax on the difference. Term life insurance policies do not have a
CSV, and therefore, would not trigger any tax on a transfer.
However, permanent, universal life or whole life insurance policies
often do have a CSV and therefore may result in a tax liability.
Likewise, a future transfer of the policy out of the corporation
could also result in tax consequences. Your insurance broker will
be able to provide you with the CSV and adjusted cost base of your
Lack of Creditor Protection
Where the life insurance policy is owned by a corporation, the
policy's CSV is susceptible to any claims made by a creditor of
the corporation. For example, if the professional and his or her
professional corporation are sued and there is not sufficient
professional liability insurance to cover the claim, the creditor
may be able to encroach on the assets of the professional
corporation, including the CSV of the life insurance policy. Again,
there is no concern if the policy is a term life insurance policy
since these policies do not have a CSV.
Potential Loss of Capital Gains Exemption
In some instances, health care professionals who incorporate are
eventually able to sell the shares of their professional
corporation (generally, not applicable to medical professionals
such as doctors). On the sale of the professional corporation's
shares, shareholders are currently able to shelter currently up to
$813,600 of gains by utilizing the individual's lifetime
capital gains exemption. If this is applicable to you, you should
be careful what type of life insurance policy you transfer to your
professional corporation. Transferring a term life insurance policy
to your professional corporation will not pose any concern;
however, a permanent, universal life or whole life insurance
policy, which builds up its CSV over time within the professional
corporation, may prevent the shareholders of the corporation from
utilizing their capital gains exemptions on an eventual sale.
There are many factors to be considered when deciding if
transferring your life insurance policy to your professional
corporation is right for you.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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