The corporate retirement strategy with SunUniversalLife II
Help protect the value of your company and maintain access to cash
Being a business owner comes with unique risks. A steady increase in the value of your business can result in significant tax bills. Corporations are taxed at the top rate on passive income from corporate assets and the passive income doesn’t qualify for the small business deduction. Capital gains taxes may apply when these assets are sold or reallocated, reducing corporate assets.
Meet William. William, age 45, is the sole shareholder of a successful Canadian-controlled private corporation that generates annual corporate surplus of just over $50,000. He expects the corporation will owe sizable capital gains taxes on his death due to the steady increase in the value of the corporation’s shares and investment assets. He and his advisor determine he needs $1,500,000 of permanent life insurance to help protect the value of his corporation. While William expects to have enough money to cover his living expenses during retirement, he’d also like to have the potential for additional income. Additionally, he wants to build a pool of corporate assets to provide future liquidity if needed.
The challenge: William wants flexibility to access corporate investment assets while reducing the tax bite on these assets.
- While the corporation’s annual income is generally stable, the timing of that income is inconsistent. William’s looking to diversify his assets while achieving stable and predictable returns.
- William wants to reduce taxes on his corporation’s invested surplus.
- William expects the corporation will owe sizable capital gains taxes on his death. He wants to ensure the value of the corporation is protected for his children.
The solution: SunUniversalLife II and the Corporate Retirement Strategy (corporate borrowing).
There are many reasons business owners purchase permanent life insurance: key person protection, funding buy-sell agreements or maximizing corporate assets for their beneficiaries. Permanent life insurance like SunUniversalLife II also helps to provide cash accumulation opportunities on a tax-preferred basis, as well as access to multiple investment options. This includes access to the Sun Life Diversified Account that provides smoothed returns while maintaining the flexibility of universal life. The Corporate Retirement Strategy (CRS) demonstrates how a corporation can have valuable life insurance protection and the opportunity to access policy values tax-free immediately or in the future.
How it works – A corporation owns, pays premiums for and is the beneficiary of a tax-exempt life insurance policy on the life of a shareholder. When the policy has accumulated cash values, the corporation can pledge it as collateral in exchange for tax-free loan amounts from a third party lender. The corporation can then pay a taxable dividend to William. If the corporation uses the loan proceeds directly to earn income from a business or property, the loan interest may be tax deductible.
At death, the tax-free death benefit first pays the outstanding loan plus accumulated interest. The corporation may post the entire death benefit to its capital dividend account (CDA), minus an amount equal to the policy’s adjusted cost basis. An amount equal to the CDA can be paid to the shareholder’s estate as a CRS tax-free capital dividend. Any dividend amount in excess of the CDA balance can be paid as a taxable dividend.
William’s corporation purchases a $1,000,000 SunUniversalLife II life insurance policy. A corporate surplus of $50,000 is transferred to the policy each year for the next 15 years.
|Annual payments||$50,000 for 15 years||$50,000 for 15 years|
|Income (after tax)||$16,000||$16,000|
|Pre-tax estate value (age 79)||$2,648,067||$1,127,673|
|Loan amount (age 79)||$768,739||-|
|Net estate value (age 79)||$1,879,826||$814,402|
Assumptions: Male non-smoker, age 48. $1,000,000 SunUniversalLife II with investment bonus and face amount plus fund. 2018 Sun Life Diversified Account growth rate: 4%. Alternate investment growth rate: 5%. Bank loan interest rate: 4%. William's marginal tax rate is 50%. Dividend tax rate: 40%
The result: CRS using SunUniversalLife II gave him an advantage of $820,224.
SunUniversalLife II provides life insurance protection, a wide investment selection including the Sun Life Diversified Account and allows the corporation to build a portfolio as aggressive or conservative as it needs. The corporate surplus can grow on a tax-preferred basis within the SunUniversalLife II plan. At William’s death, proceeds create a credit to the corporation’s capital dividend account, helping to significantly increase the net estate value available for his children.
Transferring corporate surplus to the SunUniversalLife II policy helps reduce taxes the corporation pays on investment income. William can use the after-tax dividend income of $16,000 from the corporation to supplement his retirement income at age 65 for 15 years. William’s estate receives $1,879,826 after the loan balance is repaid. This is an advantage of $1,065,424 over the net estate value provided by the alternate investment.
This information is being presented with the understanding that it is intended for information purposes only. Unless specifically stated, the values and rates presented are not guaranteed. No one should act upon the examples/information without a thorough examination of the legal/tax situation with their own professional advisors, after the facts of the specific case are considered.
Sun Life Assurance Company of Canada is a member of the Sun Life Financial group of companies.
© Sun Life Assurance Company of Canada, 2018.