July 31, 2018
Taxes may be inevitable, but that doesn’t mean you should give up without a fight. If you have a private corporation, there are options available to help you reduce your tax bill and hang onto more of your hard-earned income.
Here are four strategies for minimizing your tax burden while reaping other important benefits for your family and business:
Tax-deferred retirement income: individual pension plans
An individual pension plan (IPP) is a valuable tax-planning tool that functions like a personalized defined-benefit pension plan. It is a good option if you have employment income from your private corporation, and it can be especially useful if you have maxed out your registered retirement savings plan (RRSP) contributions.
One of the key benefits is that your corporation can make tax-deductible contributions to your IPP, which can then grow on a tax-deferred basis until you start to draw on the plan. Although you will have to pay tax on your IPP income once you start receiving it, you will benefit from the tax-free growth that occurs within the plan. An IPP also allows for significantly higher contributions compared to an RRSP, and in some situations, you can pass on an IPP to your children on a tax-deferred basis (unlike an RRSP). As an added bonus, an IPP offers greater creditor protection compared to an RRSP, thus keeping your retirement savings better protected.
Business protection, personal returns: shared-ownership critical illness insurance
Critical illness (CI) insurance provides valuable protection: if you fall seriously ill and are unable to work, CI insurance can pay out a benefit to help cover your lost income. Adding return of premium (ROP) coverage to the CI policy means that all the premiums that have been paid will be returned if the policy expires or is cancelled after a specified period.
When ownership of such a CI policy is shared between you and your private corporation, the corporation pays the premium for the CI benefit and you pay the premium for the added ROP coverage. If you fall ill, the corporation receives the CI benefit payout. If you remain healthy and the policy is cancelled or expires, you receive the full premiums – both the premiums you paid and the premiums the corporation paid – on a tax-free basis. In the second scenario, this strategy allows you to pull money that is taxed only at the corporate rate out of your corporation.
Tax-advantaged investment growth: corporate-owned life insurance
Purchasing life insurance on your life via a private corporation allows your money to grow with compound interest before taxes are deducted – rather than withdrawing surplus funds from your corporation and investing after-tax dollars. While a corporate-owned life insurance policy is still subject to taxes at the time of your death, this strategy can help maximize the wealth that you are able to pass on to your heirs.
Depending on your age at the time of death, some or all of the death benefit under the life insurance policy can be paid out to your heirs on a tax-free basis. In addition, since the investment component of your life insurance policy will have benefited from tax-free growth up to the time of your death, the cash value of your policy after deducting capital gains tax can still leave your estate well ahead in terms of overall value compared to what you might have achieved by investing after-tax dollars.
Long-term protection, short-term cash flow: immediate financing arrangements
When you die, your children will face a hefty tax bill to access your estate. An immediate financing arrangement (IFA) allows you to shield your heirs from this big tax hit without sacrificing short-term cash flow. With an IFA, you purchase a participating life insurance policy on your life and then obtain a loan or line of credit through a financial institution equal to the value of your annual insurance premiums. Upon your death, the loan is paid off with the proceeds from the insurance policy, and any excess is paid out to the beneficiaries of the policy to cover tax obligations.
The beauty of the IFA is that it allows for tax-free growth of your investment within the insurance policy. At the same time, the line of credit or loan gives you the ability to continue with your ongoing investment or business efforts. And since the interest payments on the loan are tax deductible, you’ll be able to do this in a cost-effective manner.
Holistic planning for a smarter approach to taxes
Taxes are an unavoidable part of your life and business, but with the right strategies, you can keep your tax bill to a minimum. Which strategies are best for you depends on your specific situation and objectives. The key is to ensure that your efforts are part of an overall plan rather than a series of disconnected decisions.
If you are an incorporated business or professional and would like to discuss how a tax-minimization strategy can help, please contact Rubach Wealth to schedule a meeting.
Disclaimer: This article is provided for informational purposes only and does not constitute any form of legal or tax advice. You should consult your lawyer and/or accountant prior to making decisions related to the topics covered in this article. Rubach Wealth can work with you to facilitate such discussions.