Wealth concept
Your company's surplus: take it out tax-free one day
Surplus accumulated in a holding company is taxed twice before reaching your heirs: once inside the company, once when paid out. Corporate-owned life insurance, combined with the capital dividend account, turns that surplus into tax-free capital.
- Premiums paid with lower-taxed dollars
- Death benefit credited to the capital dividend account
- Paid to heirs with no tax
Connect with a partner financial security advisor.
A holding company pays about 12.2% tax on its first active income but over 50% on passive investment income — then the shareholder is taxed again when a dividend is paid. At death, the shares are deemed disposed of: tax hits, and the estate still has to get the money out of the company. Many families lose 40% to 60% of accumulated surplus this way.
The solution
- 1
The company buys and pays
The holding company owns and is beneficiary of permanent life insurance on the shareholder (or joint last-to-die on the couple). Premiums are paid with dollars taxed at the lower corporate rate.
- 2
Growth sheltered from passive income tax
Amounts growing inside the policy are not taxed annually in the company and do not erode the small business deduction, unlike passive investments.
- 3
The capital dividend account
At death, the death benefit minus the policy's adjusted cost basis is credited to the CDA. The company can then pay heirs a tax-free capital dividend.
- 4
Integrated post-mortem planning
The concept coordinates with the estate freeze, the will and share redemption strategies to avoid double taxation on the shares.
A 58-year-old entrepreneur holds $2M of surplus in his holding company that he will not need for retirement. Rather than leaving it in passive investments taxed above 50%, the company pays $100,000 a year for 10 years into participating life insurance. At his death at 85, a death benefit above $3M is paid to the company, most of it credited to the CDA and distributed to the children tax-free — versus an estimated net inheritance below $2M had the surplus stayed invested.
Illustrative: results depend on age, health, dividend scale, corporate taxation and province. Joint analysis with your accountant is required.
Who it is for
- Shareholders of holding or operating companies with recurring surplus
- Incorporated professionals (physicians, dentists, pharmacists, lawyers) who have maximized personal plans
- Owners who have done or plan an estate freeze
- Shareholder couples aiming to transfer to children
Is your surplus sitting idle in the company?
A partner advisor quantifies with your accountant what it would be worth to your heirs, with and without the concept.
Passive investments in the company vs corporate-owned insurance
Common mistakes
- 01
Insuring the shareholder personally with company money
Paying a taxable dividend to fund a personal premium costs 40% more than having the company pay directly.
- 02
Forgetting the transfer clause in case of sale
A corporate policy without an exit plan becomes a tax headache when the business is sold.
- 03
Choosing the amount without quantifying tax at death
The right amount covers at least the deferred tax on shares and surplus; it cannot be guessed.
Points to consider
- The policy's adjusted cost basis reduces the CDA credit in early years; it declines over time.
- Corporate ownership complicates a business sale: plan the policy transfer clause.
- Tax rules on passive income and the CDA may change.
- Requires a cash value that does not jeopardize the capital gains exemption, if applicable.
The concepts presented are for information only. They rely on current Canadian and Quebec tax legislation, which may change. Sommet Protection gives no financial, tax or legal advice: the analysis is done by a partner financial security advisor, together with your professionals.
Frequently asked questions
What is the capital dividend account, concretely?
A notional tax account (not a bank account) tracking non-taxable amounts received by a private company: the non-taxable half of capital gains, life insurance death benefits net of cost basis. Amounts in it can be paid to shareholders tax-free.
Why not simply withdraw the surplus now?
Because a taxable dividend at 40% or more destroys part of the capital before it is even invested. The concept exists precisely to avoid that step.
What if I sell the company?
The policy can be transferred to the shareholder or another group company, with tax consequences to plan. This is planned from the start.
Transfer more, pay less: the guide to wealth life insurance in Quebec
What owners of companies, real estate and substantial portfolios should know before their next estate review.
Read the guide- 7 chapters
- 1. The bill nobody plans for
- 2. Four ways to pay — only one at a discount
- 3. The estate bond: turning an investment into an inheritance
- 4. Holding company: the most rewarding case
- 5. Equalization, planned giving and trusts: the lesser-known uses
- 6. Choosing between participating and universal
- 7. The mistakes that cost the most
The concepts
Estate bond
Turn taxable investments into a tax-free inheritance.
Learn more →Universal life for wealth
Permanent protection plus a tax-sheltered investment account, under your control.
Learn more →Participating life
A guaranteed capital that grows every year, without managing investments.
Learn more →Joint last-to-die
Fund the tax at the second death, at the best cost.
Learn more →Estate equalization
Leave the cottage or business to one child without shortchanging the others.
Learn more →Planned giving with insurance
Leave a major legacy to a cause, for a fraction of the cost, with a tax credit.
Learn more →Insured retirement strategy
Accumulate tax-sheltered, then borrow against the policy in retirement.
Learn more →
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