So you finally closed that big real estate deal and are left with significant funds in your corporation. You have now moved onto to evaluating various investment options, looking at a place to invest your funds or perhaps you may even have large personal financial commitments.
In this post, we will briefly explore a few tax planning strategies that can be used for either structuring your investments or taking funds out of your corporation in a tax advantageous manner.
Critical Illness Insurance (“CI”)
Where a corporation has excess funds, consideration can be given to acquiring CI on the shareholder. Not only does CI have the benefit of proving much-needed funds in the event that the shareholder gets sick, it can also be utilized as a method to extract corporate funds using what is known as a split dollar CI policy. By utilizing a return of premium (“ROP”) rider, in certain situations it will allow, all premiums paid to fund the policy to be returned in the event that the insured does not make a claim during a specified period of time. By having a ROP rider in place with a split dollar CI policy, it is possible for an individual to extract funds from the corporation by way of the ROP while having insurance coverage in case of a sickness.
Life insurance has long been a cornerstone of estate planning and has been an effective tool to efficiently plan for taxes on death and provide for stable investment returns. Recently, life insurance has had the added benefit of minimizing the impact of the new corporate investment rules, which grind down a corporation’s small business deduction (“SBD”). Life Insurance can also be used in advanced tax strategies to help minimize tax burden on death, extract corporate surpluses and to provide for a non-taxable environment to house investments. There has been considerable usage of Canadian compliant private placement life insurance policies (“PPLI”), which can act as an investment vehicle providing significant tax savings and asset protection. PPLI have the benefit of being more cost efficient than the Canadian universal life insurance policies (“UL”) while providing more flexibility to hold a far more diverse investment portfolio.
Capital Dividend Account
If the real estate deal resulted in capital gain, 50% of the gain will be exempted from taxes and be added to the capital dividend account (“CDA”). The CDA can be extracted from the corporation by Canadian resident shareholders without incurring any additional personal taxes.
If the real estate deal was funded using personal funds, which were advanced to the corporation over the years, those funds can be extracted on tax-free basis. If after-tax personal funds were used to invest in your corporation, those funds can now simply be withdrawn as a repayment of the original loan.
Since there are many components to consider, you should always plan a real estate transaction properly so its cash flow is not wasted on avoidable taxes. Implementing a proper plan before the closing will go a long way to help minimize your tax bill. We recommend that you speak with your Zeifmans advisor before closing a deal to ensure taxes are minimized and compliance matters are properly dealt with.