By Robert G. Kepes, Morris Kepes Winters

Special to the Financial Independence Hub

The March 22, 2016 federal budget closed two tax-planning strategies that involved the use of life insurance and private companies. Here is the first one:

Capital Dividend Account (CDA) Planning

The death benefit from an exempt life insurance policy is tax-free, and the same principle holds true if a private company is the beneficiary of the policy. The life insurance proceeds are added to the CDA of the private company when they can later be paid as a tax-free capital dividend to the shareholder. However, if the company is both the owner and beneficiary of the policy, then the amount that goes into the CDA is only the amount in excess of the adjusted cost base (ACB) of the policy.

For example, if the death benefit is $1 million and the ACB is $100,000, then only $900,000 is available for the CDA. Only $900,000 can be paid out tax-free, while the other $100,000 would be paid as a taxable dividend to the shareholder.

It follows that if the policy owner is not also the corporate beneficiary, then there is no reduction to the beneficiary’s CDA. A common planning strategy was to have ownership of the life policy in a parent holding company with the subsidiary company the beneficiary. This was done especially if the subsidiary was operating an active business and the owner did not want the policy to be an asset of the business that could be attacked by creditors.

Upon the death of the insured, the full death benefit of $1 million would go into the subsidiary’s CDA and be available to be paid out tax-free. Continue Reading…