It is almost always most tax efficient to hold insurance policies corporately.
A Dollar Saved is Two Dollars Earned
In David Chilton’s book The Wealthy Barber, the character Roy Miller quips “A dollar saved is two dollars earned”. This catchy phrase, adopted and referenced in numerous financial articles, speaks to the fact that for every dollar spent, individuals in the highest tax bracket have to make at least two dollars due to taxation.
Taxes are inevitable, however, incorporated professionals and small business owners have the advantage of being able to pay expenses with lower (corporate rather than personal) after-tax dollars.
With few exceptions, life, critical illness and disability insurance premiums/deposits are not tax deductible. The benefit of paying premiums with after-tax dollars is that when a claim is paid, the beneficiary receives the benefit amount tax-free.
I asked Jim Pelot, B.Comm, CPA-CA, and Co-Founder of Podium Prosperity Group, about owning insurance policies corporately. Jim stated that “The significant spread between the small business tax rate and top personal tax rates for upper quintile Canadians (in Ontario, 12.2% business vs. 50+% personal) creates a significant opportunity and incentive for small business owners to hold insurance policies in their corporations. For example, on a $10,000 per year premium, the annual tax savings is over $4,000 by paying with corporate dollars. This opportunity is supported by the ‘insurable interest’ a corporation has in its owner/manager.”
Jim went on to say that “Certain types of insurance policies may be jointly owned by the shareholder and their corporation. In these cases, with a thoughtful determination of the fair values associated with the premiums and benefits, further tax efficiency may be achieved.”
To summarize, it is almost always most tax efficient to hold insurance policies corporately. The tax efficiency in a corporate setting can significantly enhances the inherent return on investment (ROI).
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Contributed by Susan Walker, CHS
This article is provided for information purposes only. Although the content is believed to be reliable when posted, Podium Prosperity Group cannot guarantee this information is current, accurate or complete and does not assume any liability. The information is not intended to provide any insurance, financial, legal, accounting or taxation advice and should not under any circumstances be relied upon without consultation about your specific situation. The information is subject to modification and updating from time to time without notice.