Why Canadian Small Business Owners Need To Re-Consider How You Are Using Your Capital Dividend Account

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Are you making the most of your corporation’s retained earnings, or are you missing out on tax-saving opportunities using your capital dividend account?

In this episode of Canadian Wealth Secrets, Kyle Pearce tackles a crucial topic for business owners: how to strategically use life insurance within your corporation and its capital dividend account to maximize tax efficiency and grow wealth. With the complexities of corporate taxes and the need for smart estate planning, understanding how to leverage retained earnings can make a significant difference in your financial future. Many business owners unknowingly leave money on the table by not fully utilizing the tax benefits available through corporate-owned life insurance policies.

As inflation and rising taxes continue to impact your bottom line, now is the time to explore strategies that not only protect your assets but also allow for growth and wealth transfer in a tax-efficient manner. This episode dives deep into how to turn your corporation’s retained earnings and the capital dividend account into a powerful tool for building and preserving wealth, offering insights that can help you achieve financial freedom and security.

• Learn how to leverage corporate-owned life insurance to maximize tax savings.
• Discover the benefits of using retained earnings for long-term wealth building and estate planning.
• Gain strategies to minimize your corporate and personal tax burdens while growing your wealth.

Don’t miss this essential episode—tune in now to uncover how you can turn your corporation’s retained earnings into a tax-efficient wealth-building tool.

Resources:

• Like this short, “Wealth Secret Sauce” Episode? Tell us in your rating and review on Apple Podcasts. 
• Dig into our Ultimate Investment Book List
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX.  
• Looking for a new mortgage, renewal, refinance, or HELOC? Reach out to Jon to share some options.

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been… 

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

In this episode of Canadian Wealth Secrets, we explore how Canadian investing strategies like Infinite Banking and Bank on Yourself can turn your corporation’s retained earnings into a powerful retirement tool. By utilizing participating whole life insurance, permanent life insurance, or universal life insurance, you can maximize the benefits of the Capital Dividend Account and death benefit, all while minimizing income taxes. Learn how to take advantage of low tax rates and corporate tax strategies to grow your wealth and secure your financial future

On the Canadian Wealth Secrets Podcast, we routinely discuss Canadian investment portfolios, rates of return, Canadian real estate, incorporated business owners, corporate wealth management, participating whole life insurance, infinite banking, bank on yourself and much more!

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Transcript:

Hey, hey there. Canadian Wealth Secrets Seekers. It’s Kyle here for another Friday edition of Canadian Wealth Secrets Secret Sauce. And today we’re gonna be talking about a question that I get quite a bit because on this show we talk about some unique strategies that we utilize in our own wealth-building journey, both personally and corporately through the use of permanent life insurance policies, specifically permanent whole life insurance policies.

Today I want to unpack a common question people get about insurance in general. This is about the death benefit, in terms of whether it is taxed or not. We talk a lot about permanent insurance, but also term insurance. Let’s talk first on the personal side. On the personal side, you are going to contribute after-tax dollars from your personal pocket. So maybe you earned a certain salary. Let’s say you were in a 40% tax bracket, or maybe it’s a 30% tax bracket on average. So your average tax rate’s 30%, you’re paying with 70 cent dollars because every dollar you earned, you lost 30% to taxes. That leaves you with 70 cents left out of those original hundred cents.

So you’ve already been taxed and then you’re putting it into a premium. Basically, the insurer is going to take that money, they’re gonna try to invest it and grow it and do all the things that they do to try to make money. And if you pass away while that policy’s enforced, they’re gonna pay out a tax-free death benefit. So the government already got their tax on the money you had earned. The same is true inside of a corporation.

So when we’re talking about term insurance, we are paying after corporate tax dollars, which typically on that first $500,000 for our small businesses, our CPCs, you’re going to pay a lower tax rate. Here in Ontario, it’s 12.2% currently, so you’re paying with like 88 cent dollars. So you’re getting a deal here. And the same is true when we go to the permanent side. I can buy a permanent policy personally using after personal tax dollars, typically a higher tax rate in order to buy that policy. I could buy that same policy inside of the corporation on key people like shareholders or, you know, those who are important employees in that business.

So let’s think about this though for our business owners. A question we often get is how does buying insurance inside of a corporation, how is that a tax benefit or is it a tax benefit? And the answer is yes, there is a massive tax benefit. This is both true for a term policy or a permanent policy, a term policy. Again, typically if it’s a term 10 term 20, you’re probably going to cancel it before you pass on. So it’s there for protection purposes, can be there for a buy-sell agreement. It might be there for just protecting your family. It’s better to buy that policy inside your corporation if you have active earned income in there than buying it personally because now you’re pulling money outta the corporation, getting taxed on it, and then putting it into the same policy.

What ends up happening inside of a business is there’s this notional account called the capital dividend account. They call it a CDA, the capital dividend account. And basically what it is, is it’s this account that just tracks how much tax-free dividends you can distribute to shareholders. Now, this would be, you know, in the old school days, you know, before Trudeau raised the current capital gains taxes for corporations, the inclusion rate was 50 50. So 50% of your capital gain was recorded in the CDA that could be removed from the company tax-free to shareholders. Well, the beauty is with a death benefit is that the net death benefit actually allows you to come or allows the shareholder, I should say, to pull that death benefit out tax-free to the shareholders.

So if you are the only shareholder of that business right now, and you buy a permanent or a term policy, but let’s talk permanent here for a second. You buy a permanent insurance policy on your own life. The company owns the policy, not you personally and not your spouse and not your spouse. It’s not your kids. It’s not, you know, a charity. It’s the company that benefits here. So what ends up happening is you’re using corporate after-tax corporate dollars, right? So maybe it’s 88 cent dollars or, you know, depending if it, if it’s a company that’s, you know, earning much higher than 500,000 in profit per year might be, um, you know, using around 74% or 74 cent dollars depending, right? Um, those dollars are going into the policy. And then when you pass on the net death benefit, well actually the whole death benefit’s gonna go to the company and then the net death benefit is going to be able to come out.

Now, why I say the net death benefit is that basically what you have is those original retained earnings dollars are still due to be taxed. However, over time there’s a cost of insurance that you get to essentially deduct against those retained earnings. So the longer you go, the closer to the average age of death, or the average age of death for, you know, an individual goes, the more likely it is that you’re gonna pay actually a zero tax on any of that, uh, retained earnings that you originally had put into this policy.

But if, let’s say I put a hundred thousand dollars in, let’s pull up a scenario here for our YouTubers up on the screen. Here it is. Um, we’ve got a scenario here where we’re looking at a policy that can be overfunded to a hundred thousand dollars. The minimum that can be funded is about $37,000 per year. This person could put a hundred thousand in. If they put a hundred thousand in in year one of this policy and they pass away in year one, it could be the very next day after it goes in force, the death benefit’s gonna be about 1.8 million and about 1.7 million is going to be credited to the capital dividend account. So that means what is happening is $98,957 of the premium that actually went into the policy is still due to be taxed. And there’s a little bit missing from that a hundred thousand. And that’s the actual cost of insurance that you can essentially deduct off of the money you had put into this policy. And the rest of the death benefit that like 1.743, you know, million dollars is allowed to be taken out tax-free by shareholders.

Now, it doesn’t have to be taken out in that year. It can be taken out whenever you choose or whenever the new shareholder chooses. So if now if the shareholder is your spouse or if it’s a child or whoever those shares are passed onto, the shareholder can now take all of it at once out tax-free. They can take a portion out this year or a portion out next year. They can do whatever they choose with it.

So as we go on, if I look at this particular policy, and we get to, you know, this person was 45 when they put this policy in force. If they did this, they contributed a hundred thousand for 10 years. So they put a million dollars of retained earnings into this particular policy and, you know, it continues to grow over time, over time. And let’s say they live to, uh, age 80 here, uh, hopefully it’s longer, right? We’re not, you know, any, any ill will here. But if we go to age 80, uh, this person contributed for 10 years, but this is 35 years after they started the policy. The policy is now, uh, has a cash value of 3.75 million or so, and the total death benefits just north of 5 million. And you’ll notice that at age 80 almost all of the death benefit is gonna come out through the CDA tax-free.

So you’re gonna see over here the CDA is 5,022,000 or so, and the total death benefit was 5,086,000. So really only $64,000 of the original $1 million that was put in in retained earnings is still due to be taxed by shareholders whenever they take that money out. The other five plus million dollars that is in the corporate accounts now can be taken all out by shareholders as a tax-free dividend, or they can take out little chunks along the way. So the capital dividend account is something to help you track what is allowed to come out tax-free. And you get to declare what money is coming out and whether it is, uh, from the capital dividend account, meaning it’s tax-free, or whether you want to be taxed.

Now, I’m not sure why you’d wanna be taxed, but if let’s say you’re in a really low tax year or a really low tax bracket and you know you want to take out $50,000 just to kind of take advantage of a low tax bracket for that particular year, anything above that you might choose to say take out as a tax-free dividend through the CDA and use that deduction.

So this is one of the many ways that business owners can not only help for estate planning to deal with these retained earnings, but of course while in the company we could be leveraging that cash value for asset purchases, essentially creating more tax problem for themselves. It’s a good problem, right? When you have more tax issues, that means you have more assets, you have more income, and these types of policies are how you mitigate those issues both now and in the future. Of course, as those policies get much larger, there’s other leveraging strategies that we can explore in a compliant way to ensure that you are minimizing your personal taxes as well as you engage in this particular process.

So that is this week’s secret sauce episode is how we can use the magic of insurance to help us deal with retained earnings inside of a corporation. Those low corporate income tax dollars on active income

 are only helpful to you while the dollars are inside your corporation. When you pull them out as income, you now just become like everyone else and you’re in the regular old T four game of moving up the tax brackets. So how do we do this more efficiently so we can grow and compound our wealth inside our corporate structures while also giving an exit strategy for those retained earnings to either yourself through leverage strategies, or to a future shareholder for legacy through the capital dividend account? That is your secret sauce for today.

If you are not exploring insurance strategies as an incorporated business owner, then you are leaving a massive, massive tax opportunity for yourself on the table. Reach out to us anytime over at canadianwealthsecrets.com/discovery and we will sit down with you, analyze your situation, and see how we can help you make sure you take the tax target off of your corporate retained earnings.

Take care.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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