One of the advantages of operating your medical practice or business using a corporation is the tax savings that you can have on the payment of your life insurance.
Generally most professional are paying their life insurance personally. To get the funds to pay the premium they earn a dollar, pay up to 53 cents of tax on that dollar and then pay 47 cents toward their insurance.
For example, if your life insurance premium was $4,700 you would need to earn $10,000 to cover the cost.
If you transferred your life insurance into your corporation, it would be the corporation that was paying tax on the income needed to pay your premium. Your corporation tax rate is much lower, 15% in Ontario for 2016. Your corporation would only need to earn $5,529. That is a 44.71 % savings.
An additional tax benefit might be available on the transfer of the insurance into the corporation if the fair market value of the insurance is greater than the tax cost, referred to as the Adjusted Cost Base. This topic will be discussed in a future article.
When you eventually need to collect on the life insurance, the funds are collected by your corporation and the funds can be paid out to the shareholders tax free using something called the Capital Dividend Account.
Before you make the transfer there are a few things you need to consider including:
- The Capital Gain Exemption – insurance could put you or your family offside when trying to claim the capital gain exemption.
- Tax on Death – insurance could affect the amount of tax payable on death due to the effect of the Stop Loss Rules.
- Creditor Protection – the proceeds of your insurance could now be exposed to the creditors of the corporation.
- Effect on your shareholder agreement, if you have other shareholders.
There are additional considerations where you are transferring a permanent (Whole Life or Universal Life) insurance product that will be dealt with in a future article.
Professional advice should be obtained before making any changes to your current structure.