Thanks for putting the time to formulate such an awesome answer.

As for the link, it appears the website is having server issues, rather than it being an issue with the link itself. Hopefully it will be working again in a day or so.

It’s too bad the link isn’t working, because despite you excellent points, it raises some an intriguing strategy.

By the way, the link in your post does not work.

Ed

The first issue with investing in a universal life insurance policy is: Do you need life insurance for life? Unless you actually have a need for insurance for your entire life of the amount of the UL policy, why would you invest there?

Remember that, in addition to the amount you invest in the UL, you also have to pay for the life insurance.

Very few people have a permanent life insurance need – at least not for more than the cost of a funeral and taxes on death (which is usually not a lot). People with a reasonable amount of investments should be able to pay this with little difficutlty.

The main reasons for a permanent need for insurance are owning a cottage and having business partners other than your spouse.

Remember:

1. Investments in a UL policy go up and down, just like regular mutual funds.
2. If you sell them, you pay tax, just like regular mutual funds.
3. Your investments grow with little tax, just like with a tax-efficient mutual fund.
4. You can have principal guarantee on the investments in a UL, but you can have the same guarantee with a regular segregaged fund.

Investments in a UL are generally only more tax-efficient than a tax-efficient mutual fund AFTER YOU DIE.

In your case, if you have other shareholders in your company (other than your wife), you might have a permanent need. Then investing in a UL might make sense.

However, there are also disadvantages of investing in a UL, especially that they usually have higher fees, you have to pay for the insurance, and you can only buy investments from that insurance company.

Since our focus is primarly on investments, we would much rather be able to invest wherever we want and avoid the extra costs.

Ed

You may want to read Tim Cestnick’s story in the Globe and Mail
http://www.theglobeandmail.com/news/opinions/columnists/tim-cestnick/five-reasons-to-be-nice-to-your-insurance-agent/article1227775/

He covers a number of points about life insurance.

Brian

The problem wtith your idea of tax efficent mutual funds is one the they may go down in value just in time when the owner needs the money. Assuming that the person has money in the holding company has beneficiaries (family members) life insurance is ideal.

Ed you may want to re read “Using Universal Life Insurance with Corporations”
I wrote awhile back.

With respect to whole life if it is set up correctly, over time it can be better than UL. Since this is a big topic I will get into more detail after my holidays (mid August)

Brian

wrt your last response, I was wondering how you or anyone on here feels about universal life insurance that is kept in the corporation, with the strategy of taking a personal loan out against it as a way to access the money without paying income tax.

Like this: http://www.johnchow.com/using-life-insurance-to-shelter-income/

The issue with most business owners relates to tax-efficient ways of withdrawing cash from their corporation, not growing investments tax sheltered in the corporation.

Growing investments tax-shetered is easily done with tax-efficient mutual funds or long term holding of equity investments, without the cost of life insurance, tax on insurance policy premiums, and general high costs and limited investment opportunities in insurance policies.

Insurance policies also generally have the same tax consequences as regular investments when cashing in investments during your life. The tax savings are generally only realized if you leave the money there until after you die – which is a rather severe condition. This income tax saving is also generally off-set by the tax on the insurance premiums.

Whole life policies are particulalrly vexing, since you generally do not get both the cash value and the face value of the policy – it is one or the other.

Life insurance policies are generally not worth considering unless you already have a permanent insurance need for the policy.

Ed

Your rental corporation in an RRSP concept sounds interesting, but has some issues and is generally not the way to approach rental income. CRA has designed the tax rules generally to eliminate the advantages.

Owning a private corporation in an RRSP is very complex and costly, requiring regular independent valuation of the shares. You should expect at least $1,000/year costs of an accountant and fees from your RRSP administrator.

You can avoid all this by investing your RRSP into a public real estate company or mutual fund, of which there are many.

Having your rentals in a corporation can run you into several issues:

1. Refundable Part I tax on investment income in a corporation. Generally, investment income of any type is taxed at the highest possible rate in a corporation.
2. If the main business of your corporation is rental, then the rental income and future capital gain on sale can all be deemed “active business income” and subject to full taxation (instead of capital gains).

As a general rule, rent is not tax-preferred income, like dividends or capital gains. Rental properties are taxed at low rates while you have a large mortgage, but once the mortgage is small, the rent income is fully taxable each year, just like interest.

Therefore, the goal with rentals is usually to keep the mortgage as high as possible and blead out cash. An interest only mortgage is best in most cases, so that you never pay down the mortgage.

If you have the rental in a corporation, the goal is usually to withdraw all the net rental income from your corporation each year in order to avoid the additional refundable tax on investment income.

Because of the refundable tax on investment income and the risk of being declared active business income, the reasons for holding rental properties in a corporation usually relate more to control, liability and legal issues, not to tax issues.

Ed

The family trust concept to sprinkle dividends and split other income to kids was commonly used, but has been completely wiped out by the “Kiddie Tax”. Now there are essentially no benefits at all of dividend sprinkling or a family trust until your kids are 18+.

The most effective strategy when you have kids under 18 is probably with the use of an EPSP (Employee Profit Sharing Plan). You can make your kids employees of the corporation and then pay them a profit share in addition to fair pay. They must be legitimate employees, but you can pay them somewhat more than a reasonable amount for work actually done.

Professional advice is required to structure this properly, but an EPSP will have benefits while your kids are under 18, while dividend sprinkling and family trusts are useless until your kids reach 18. The EPSP generally has most of the benefits of family trusts, but in a different way even for kids over 18 and other adult family members.

Ed

My company is owned through a family trust and myself, my wife and our children are the beneficiaries. As such, I do not directly own my company: I am the trustee of the trust that owns it (and as trustee, I control the company, and have wisely chosen myself to run it!). Dividends issued from the corporation flow through to the trust and then I can choose any method of distribution I wish (noting that minors get nailed with the highest tax rate). It works very well and offers a lot of flexibility, but there is more overhead and administrative costs, so there has to be enough corporate income to make it worthwhile.

Can you please add some explanation to your comment about another idea using the corporation to finance equipment. Your post is cryptic but interesting, so any more details would be great.

Don’t you think that my thoughts “Using Universal Life Insurance with Corporations” may be better for growing money tax sheltered and protecting the net worth in this case?

I have another idea (instead of UL which is using participating Whole Life with paid-up cash values and dividendsyes it is a mouthful!) It is more conservative than the UL using GIC’s. The other idea is using this as a tool for the corporation to finance equipment instead of the local bank. It (whole life) is misunderstood and needs some time to explain.

I am out of town at the end of July and back mid august drop me a line if you are interested.

Brian

“Paying dividends to minors doesn’t work as a tax planning tool.

CRA calculates a special ‘Tax on Split Income” on dividends to minors from privately held corporations, separate from the normal tax calculation. This special tax calculation uses the highest marginal tax rates, and does not take into account any personal tax credits.

For example, if the corp paid a $2,000 dividend to a child under 18, they would owe $617 of tax (even if they had no other income), a tax rate of 31%.

If you or your spouse received the same dividend, your tax rate would be less than 31%, unless your other income was in excess of $123,000.”

He is usually bang on with his info and advice and usually researches my questions with CRA before advising me.

Looks like this option is a no-go until my kids are 18

Thx

You should just follow your gut – weigh your pros and cons. Your financial advisor can only help you with providing the information – but not to tell you what to do.

Good Luck!

Does this sound like it would work?

Does anyone have any additional info on the Kiddie tax … It is the first time I have heard of it.

I own two corps… one with a value of ~$750K including the building (bldg cost was 97K but recently appraised for $340)

2nd corp is a work in progress with negative retained earnings of ~$150K

I plan to sell both corps with building in a 5-8 yr window if buyers can be found

I have a spouse and 3 kids (7,10,13) and was planning to set up dividend sprinkling within the next few months.

How does setting up a family trust take additional advantage in my situation?

Which should I do?

The majority of my advisors out there only ever some of the answers… I
have an excellent CA a decent lawyer and a knowlegable Financial advisor but none can tell me which direction to go 100%

Thanks !