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2018 Federal Budget Update – Life Insurance Shines

The last two federal budgets presented by the Liberal government were an attempt to make taxes “fair.” Several of the tax measures specifically targeted private corporations.

Currently, Canadian Controlled Private Corporations (CCPCs) may qualify for a small business tax deduction—a deduction that reduces the tax rate on business income under $500,001 to 12% (combined federal and provincial rate). This was designed for business owners to pay less tax and have more capital to reinvest in their business and for rainy days.

The Liberal government does not want business owners to invest in passive investments (e.g., real estate, stocks, bonds, cash), which brings us to the recent federal budget announcements on corporate passive investments, targeting business owners and professionals who are using their corporations to save for retirement or for pure investment purposes.

Here’s where we ended up:

  • Companies are still allowed to have passive investments with no additional tax on investment income
  • If your company, or one of your associated companies, earns investment income exceeding $50,000 per year (determined through a new concept of “adjusted aggregate investment income”), the small business deduction is reduced
  • It’s a straight-line reduction of the $500,000 limit when investment income is greater than $50,000 per year, reducing to $0 when investment income reaches $150,000
  • At $150,000 of investment income, the small business deduction is eliminated, and all income is taxed at the general rate of 27%
  • The deduction varies from year to year based on that year’s investment income
  • The cost of losing the full deduction means $75,000 of additional tax on the first $500,000 of business income
  • There is a deferral of $175,000 of tax on this income as compared to paying it out as a personal salary

What does this mean for you? 

For starters, you’ll think twice about having passive investments inside your company. The taxation on passive investment amounts to a “just don’t do it” tax policy.

Where do we go from here?

Life Insurance is the “go to” option as recommended by tax lawyers and accountants alike. Exempt Life Insurance policies do not create investment income and, therefore, will not impact your small business deduction. We recommend Joint Last To Die permanent insurance policies in most case for this purpose.

  • If you’ve already set up a Life Insurance policy to accumulate cash, within your corporation, congratulations! You did the right thing.
  • If you have not set up a Life Insurance policy to accumulate cash within your corporation, then it’s time to consider it.

Other considerations:

  • Give serious consideration to leveraging your corporate owned Life Insurance policy and investing to loan proceeds in a personal investment.
  • Consider a Split Dollar or shared ownership Critical Illness policy as it accrues value but does not generate passive investment income.
  • Investigate whether a Retirement Compensation Arrangement (RCA) or an Individual Pension Plan (IPP) makes sense for you. They are attractive under the new tax regime and higher tax rates.

We can help you figure out which options work for you. Give us a call!

Contact Us

Phone: 604-924-9152
Toll Free: 888-783-5402
Email:
[email protected]

270-2255 Dollarton Highway
North Vancouver BC
V7H 3B1

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