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As a business owner, you may be facing difficult decisions about your business needs – you also want to make sure you protect your business.
Effective business planning is more than just planning for your money - it’s planning for your life and the security of your company.
No matter how well a business is maintained, sometimes the unexpected still happens. From your physical office space to your employees and key staff, there’s a lot to manage on a daily basis. At Tim Hazlett Financial, we are focused on addressing the unique needs of small and large business owners, offering flexible solutions that will grow with our customers’ businesses.
Advanced Wealth Strategies for Business Owners and Incorporated Professionals
The Federal government has clarified the new rules on passive investment income for Canadian controlled private corporations (CCPCs). The hardest hit are business owners and incorporated professionals such as doctors, lawyers, and accountants.
Corporations with more than $50,000 of annual passive income will now lose all or part of their Small Business Deduction and then get highly taxed for every dollar of excess passive income.
5 Effective Strategies to Lower or Eliminate Passive Income
Your corporation can deposit significant corporate funds for the shareholders’ benefit, based on actuarial calculations and past years of service. If you own your business, an IPP can save even more tax, because the IPP contributions your business makes, plus any administrative costs, are tax-deductible, reducing passive income, in turn lowering tax. In the first year of your plan, depending on your specific circumstances, your business may be able to contribute a large, tax-deductible lump sum to account for net “past services” that have accumulated with your business. This means that an IPP can still be a powerful solution up to age 71. Going forward, use the IPP to save up to 65% more annually than currently allowed with an RRSP. Unlike RRSP and RRIF’s which are fully taxable on the second spouse’s death, an IPP can transfer to an adult child, that works for the corporation, tax-deferred in certain scenarios. IPP’s enjoy a higher level of creditor protection than RRSP’s and RRIF’s..
Shared Ownership Insurance Policies refers to a concept where more than one party owns an interest in an insurance policy. There has been growing interest in applying this strategy to a Critical Illness policy. Although the CI policy does not have cash value, there is usually an option to have a Return of premium (ROP) in the following situations: This strategy combines important insurance protection with the ability to obtain funds from the corporation tax effectively while reducing corporate funds subject to passive investment income. CI covers more than 2 dozen conditions like heart attack, cancer, stroke, bypass surgery, and can pay up to $2 million in a tax-free, lump sum 30 days after diagnosis of a covered condition. The optional Return of Premium (ROP) rider allows you to get back all premiums paid just for staying healthy. The company pays the CI premiums and the insured and owner or shareholder pays the much smaller ROP portion. The key is ensuring the split is correct. Anytime after 15 years, the insured can get back all the premiums from the insurance company, including amounts paid by the corporation. The equivalent investment rate of return typically runs from 15% to 30% annually with no stock market exposure or interest rate risk.
Use corporate money that would otherwise be subject to passive income rules to acquire permanent participating life insurance. This strategy uses lower taxed corporate dollars instead of highly taxed personal dollars to acquire the policy. Future cash value growth within the policy is tax-exempt. The life insurance death benefit proceeds less the adjusted cost basis will be paid out to heirs tax-free through the Capital Dividend Account (CDA). Cash values can be withdrawn tax-effectively as a ‘pension’ using an Insured Retirement Program, see below.
An amazing solution to get access to the cash value inside the “CSV” Cash Surrender Value, of the permanent life insurance policy, inside the owner’s corporation. The owner will apply for a series of loans (lines of credit), from a bank secured by the cash value, the loans are tax free. The beauty of the loans with Manulife Bank, is the interest is capitalized, meaning it doesn’t have to be paid back up to and including the date the life insured’s death. This allows the large amount of death benefit to be paid out through the corporation’s capital dividend account, largely tax free, depending on the adjusted cost basis of the insurance contract at the time, allowing the loan to be paid in full, the remainder being paid largely tax free to the owners loved ones.
Tax-effective leveraging strategies allow you to acquire large life insurance policies needed for estate taxes without tying up your own funds to pay the premiums. The policy’s cash value is used as collateral to secure a loan with a Canadian chartered bank, and the borrowed funds are reinvested in your business, real estate or investment portfolio. IFA policyholders pay only the interest cost on the borrowed premiums. The loan can be paid off at anytime during your lifetime or from the ultimate insurance death benefit with the balance for taxes and heirs. Along the way, the interest paid is fully tax-deductible, and the real after-tax interest cost on a $100,000 insurance premium amounts to just a few thousand dollars in the current rate environment. This strategy is particularly appropriate for real estate investors and business owners with large unfunded capital gains tax liabilities.
Please see below for videos that hopefully explain these strategies more clearly. Thanks for you attention!
Advantages of Individual Pension Plans (IPP) for Incorporated Business Owners and Professionals.
Top 3 Financial Concerns of Business Owners & Professionals, My Experience
Tim speaks to client's top 3 questions and concerns.
Market Update: The Canadian Dollar
Philip Petursson, Chief Investment Strategist provides his view on the Canadian dollar