Corporate Asset Transfer Plan

How can I transfer wealth built up in my company to my heirs tax effectively?

You have currently invested excess surplus in your company in a passive investment portfolio and wonder if there is a better option for you today and for your heirs in the future.

Earnings from passive investments in a Canadian Controlled Private Corporation (CCPC) are taxed at higher tax rates than business income. Plus, these funds are not removed from your company because they would incur additional tax if distributed to shareholders. So, your investments are effectively “trapped”.

Furthermore, you realize that if you wanted to transfer the wealth accumulated in your company to your heirs, you would have to pay dividend tax on these amounts. In addition, capital gains tax may need to be paid on the full value of your company’s assets (including the portfolio of passive investments) upon your death.

The Corporate Asset Transfer Plan

The Corporate Asset Transfer Plan allows you to transfer passive corporate investments into a tax-exempt life insurance policy to cover your life insurance needs and to benefit from the tax-deferred growth within the policy.1 Then, upon death, the plan allows you to transfer these sums tax efficiently to your heirs. When compared to traditional taxable investment options, this approach can maximize the after-tax value they receive.

With the Corporate Asset Transfer Plan you get:

An immediate increase in the after-tax value of your corporation at death which increases your estate value, through the preferential tax treatment of life insurance.
A conversion of your company’s taxable surplus into non-taxable surplus.
Reductions in future taxable income since assets are transferred into a life insurance policy with tax-deferred accumulation.
A potential reduction of the taxable value of your business for estate purposes.

Plus:

You’re able to access the Cash Value of the plan at any time through cash withdrawals or loans secured by the policy.
You’ll also be able to transfer the insurance proceeds to your heirs outside of your will – reducing charges that result from settling your estate.

It’s a simple way to minimize current tax and maximize the value of the transfer of your “trapped” corporate surplus to your loved ones.

Note: Corporate tax planning can be complex. Before proceeding with this strategy, you should work with your team of financial planners to determine the full impact of this strategy for your specific situation.

For example:

Sam and Sally are both 55 years old and are co-owners of a Canadian privately held corporation (S&S Opco). They have set-up
a holding company (S&S Holdco) that houses $400,000 of corporate surplus that is currently invested in a fixed income portfolio. Sam and Sally would like to eventually transfer at least half of these funds to their children, Bill and Betty, retaining the rest for potential reinvestment back into the business.

Currently, S&S Holdco owns 100% of the shares of S&S Opco. Last year, when they factored-in the tax they paid on the investment income (at a rate of 50%), a 5% net annual return translated into 2.5% net return after-tax!

Sam and Sally are looking for an alternative and are considering the Corporate Asset Transfer Plan.

Based on this projection, if Sam and Sally both passed away by year 30 (when they reach age 85), their heirs would receive almost four times more value using the Corporate Asset Transfer Plan compared to investing the same amount in the fixed income portfolio (i.e. $1,018,261 compared to $266,472).
Using the insurance strategy, capital gains will be minimized and based on the cash value of the policy prior to the death benefit payout. Conversely, without the Corporate Asset Transfer Plan, capital gains tax would be payable on the entire amount of the fixed income portfolio.

The Results

Over a 10 year period, $200,000 of corporate surplus will be reallocated to insurance (net of charges) and will accumulate on a tax-deferred basis in a universal life insurance policy, greatly reducing their corporate tax bill.
At death, and after receipt of the life insurance benefit, the company can pay the proceeds less the Adjusted Cost Basis (ACB) of the policy to Sam and Sally’s estate via tax-free capital dividends. Any amount of the remaining death benefit can be paid as a taxable dividend which benefits from favourable dividend tax rates. This process maximizes the amount that Bill and Betty will receive.