Shared Ownership for business owners.

Shared Ownership Example

A shareholder of a Canadian Corporation takes an annual salary with approximately 20% falling into the maximum income tax bracket. At the end of each year, the company has retained earnings that are not required to grow the business.

Question: How best can the shareholder withdraw these retained earnings from the company for personal use without incurring the maximum personal income tax?
Answer: Assuming the shareholder wishes to grow a pool of tax-sheltered retirement funds, he/she is an excellent candidate for the Shared Ownership plan.

Question: How does it work – in a nutshell?
Answer: The shareholder applies for a Universal Life insurance policy and once approved, assigns the Face Value (the insured amount) to the company and retains the tax-sheltered saving element in his/her name. Official documents are provided by the insurance company.

As the value of the Face Value far exceeds the Cash Value, a majority of the monthly premium / deposit is assigned to the cost of the Face Value in Canada Revenue Agency eyes. However, as the monthly premium / deposit far exceeds the actual cost of the insurance, the difference between the monthly deposit and the cost of insurance flows into the Cash Value, tax free to the shareholder.

This Cash Value or Fund Value grows tax free inside the policy (as per an RSP) and upon retirement, the shareholder can use the policy as collateral for either a Line Of Credit or a series of bank loans for retirement income.

However, unlike an RSP, the retirement income derived by borrowing against the Fund Value in a Universal Life policy is not taxable in most situations.

Important FAQS:

Q: What is the CRA’s position on Shared Ownership Insurance?

A: In all comments rendered, the CRA advises the Shared Ownership is not offensive provided Fair Value is paid for the benefits received by each party. The relevant tax window files are available upon request.

Q: Where does Shared Ownership stand with regard to GAAR?

A: The existence of the insurance contract as an integral part of an estate/succession/risk management plan, and the legal relationships determined under the contract and the agreement, cannot be set aside.

Q. Why hasn’t my accountant mentioned this?

A. Ninety percent of accountants have no understanding of insurance tax law. This is no criticism of your accountant. It is not in their field.

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