Corporate asset transfers (CAT) provide a unique investment opportunity that meets the needs of both business professionals looking to grow their corporation with a tax-advantaged strategy and those who require life insurance or wish to grow the value of their estate. Instead of normal life insurance investment plans which are often taxed, your corporation will hold onto business assets that are transferable to heirs in the future.
A life insurance policy funded and managed by your business allows it to grow tax-exempt up to a certain point. The growth in this strategy does not incur taxation from refundable dividend tax-on-hand (RDTOH), either. Upon the shareholder’s death, his or her assets would be distributed amongst their estate or other shareholders as per the deceased’s wishes from a capital dividend account.
When executed correctly, enacting this plan can make a world of difference for your family members. You’ll be able to provide a larger benefit for their use while saving taxes .
Suppose you’re 40 years old and own an established business that makes $25,000 in excess of its yearly overhead. You have a few options in how you handle that money.
If you deposit all of that money every year for 20 years under ideal circumstances, the assets you would have accumulated up to that point would be in excess of $1.8 million. This is assuming it’s untaxed.
The reality of the situation is this accumulation of wealth will be taxed heavily by both the federal and provincial tax commissions.
When you couple this with the taxation your successors undergo once the investments have been liquidated, your estate will only actually see about $1 million of your initial investment.
To achieve the same amount of growth in usable assets for your plan’s survivors, investments must have a much larger rate of return than a corporate asset transfer strategy in the form of life insurance, posing a higher risk to you as an investor. You also have a higher contribution ceiling when working with a corporate asset transfer plan over typical investment instruments, giving you a better opportunity to amass enough retirement and estate funding to help you and your family live comfortably.
The differences in payout and taxes can be succinctly described in the following diagram:
While corporate asset transfers don’t fit every investor’s needs, it has the potential to do a lot of good for not only your successors but your company as well. Your funds will grow in a tax-sheltered life insurance plan set up by your corporation then be distributed to your estate without the risk of additional taxation. However, it’s important to realize this strategy doesn’t have to be your only option. For more information on how to approach your estate planning goals, consult our insurance team and tax advisors for plan overviews and other useful information.