Incorporating Life Insurance for New CCPC Passive Income Rules
With February’s federal budget receiving Royal Assent on June 21st 2018, Canadian Controlled Private Corporations (CCPCs) will need to plan for the new rules with respect to passive income. Specifically, there is now a $50,000 threshold of passive, taxable income per year and it is tied to the small business deduction. The small business deduction is a reduced tax rate on the first $500,000 of active income for a business. If one crosses this passive income threshold, the deduction limit will be reduced by $5 for every $1 of passive income above $50,000. This will be effective for 2019 tax year onward, so planning needs to be addressed sooner rather than later.
Permanent insurance* is one strategy to be considered in order to keep income below the new threshold. For this to be a viable option, the insurance (usually on the life of the business owner(s)) must have an investment component and therefore fall within the category of Whole Life or Universal Life. Whole life entails participating in the insurer’s profitability and potentially receiving dividends. Universal life has an investment component whereby you can tax shelter a maximum annual amount within the policy, based on CRA guidelines. The insurance is therefore tax-exempt and does not produce annual investment income. This in turn means that it doesn’t affect the small business deduction as noted prior. A business owner is potentially still paying insurance premiums (depending on the current state of the policy, where the insurance could be fully paid) as opposed to income tax on investment growth.
Going forward with the insurance, there are a couple of primary options. You can hold the policy until death, whereby the tax benefit is tax-free, as corporations do (although this is a bit more complex for corporations, with respect to the capital dividend account). One can also withdraw from the policy for retirement by transferring ownership of the policy from their corporation to their personal name (tax implications must be considered), selling their corporate shares, and holding the policy personally going forward. The policy gain would be considered passive income for the year it occurs, and the owner could be taxed on the resulting benefit. The options and specific details therefore need to be weighed on a case-by-case basis by a qualified professional.
For even more details on some of these options, please refer to this article at Advisor.ca.
* Offered through Canaccord Genuity Wealth & Estate Planning Services