Growing and Retaining Passive Income in our Private Corporations
Published in January 2019 by Don Anderson
This article is intended for tax-focused business owners, and accounting professionals, to show how Legato can help Canadian corporations keep more of their annual income while complying with all of the tax rules of our country.
In 2018, the Canadian government enacted tax legislation governing Canadian-controlled private corporations (CCPCs), which includes incorporated professionals. Their new limits start to claw back the lower, small business tax rate if the annual passive investments earn more than a total of $50,000 in a tax year. For successful companies, and particularly incorporated professionals, this change has reduced their ability to invest for the future and save for retirement.
Fortunately, the taxation rules that affect corporately-owned Legato plans have not changed. Those rules continue to allow the annual returns of investments made inside each Legato policy to grow tax-free and to remain outside the corporation's annual passive income total, as long as the total investment inside the policy stays within the clearly defined tax-exemption limit.
This CCPC Tax Planning Report, written by CIBC's Tax & Estate Planning Advisors Jamie Golombek & Debbie Pearl-Weinberg, reviews the new tax rules, the potential financial impact on long term savings of losing the small business deduction, and highlights what can be done. They support our approach with statements like these:
" As long as the income from the investments underlying the life insurance policy is not included in the corporation’s income on an annual basis, it shouldn’t be included in the (adjusted aggregate investment income) AAII. This will be the case for permanent life insurance policies qualifying as tax-exempt policies. That means permanent, exempt life insurance may be an alternative investment solution for business owners to consider where there is a life insurance need as well as a concern that the corporation’s AAII could limit access to the SBD".
To ensure that the income from the investments inside a Legato plan does not need to be counted towards the corporation's annual passive income, the plan would be designed and managed so that the annual returns of the policy investment stay within the tax-exempt limit stated in the policy information (1).
By effectively managing the tax benefits of life insurance policy design here in Canada, we can help business owners keep more of their corporate earnings. Let us know if you or your accountant would like to understand this capability further. You could enjoy a more prosperous future.
Don Anderson
Legato
(1) If a life insurance policy does not qualify as an exempt policy, then the amount included in the corporation’s income annually in respect of the policy will be included in adjusted aggregate investment income (AAII).
Please keep in mind that the information contained herein does not represent tax or legal advice and is for information purposes only. Appropriate professional advice is required before relying on any information contained herein, whether used for planning, tax filings or otherwise.
In 2018, the Canadian government enacted tax legislation governing Canadian-controlled private corporations (CCPCs), which includes incorporated professionals. Their new limits start to claw back the lower, small business tax rate if the annual passive investments earn more than a total of $50,000 in a tax year. For successful companies, and particularly incorporated professionals, this change has reduced their ability to invest for the future and save for retirement.
Fortunately, the taxation rules that affect corporately-owned Legato plans have not changed. Those rules continue to allow the annual returns of investments made inside each Legato policy to grow tax-free and to remain outside the corporation's annual passive income total, as long as the total investment inside the policy stays within the clearly defined tax-exemption limit.
This CCPC Tax Planning Report, written by CIBC's Tax & Estate Planning Advisors Jamie Golombek & Debbie Pearl-Weinberg, reviews the new tax rules, the potential financial impact on long term savings of losing the small business deduction, and highlights what can be done. They support our approach with statements like these:
" As long as the income from the investments underlying the life insurance policy is not included in the corporation’s income on an annual basis, it shouldn’t be included in the (adjusted aggregate investment income) AAII. This will be the case for permanent life insurance policies qualifying as tax-exempt policies. That means permanent, exempt life insurance may be an alternative investment solution for business owners to consider where there is a life insurance need as well as a concern that the corporation’s AAII could limit access to the SBD".
To ensure that the income from the investments inside a Legato plan does not need to be counted towards the corporation's annual passive income, the plan would be designed and managed so that the annual returns of the policy investment stay within the tax-exempt limit stated in the policy information (1).
By effectively managing the tax benefits of life insurance policy design here in Canada, we can help business owners keep more of their corporate earnings. Let us know if you or your accountant would like to understand this capability further. You could enjoy a more prosperous future.
Don Anderson
Legato
(1) If a life insurance policy does not qualify as an exempt policy, then the amount included in the corporation’s income annually in respect of the policy will be included in adjusted aggregate investment income (AAII).
Please keep in mind that the information contained herein does not represent tax or legal advice and is for information purposes only. Appropriate professional advice is required before relying on any information contained herein, whether used for planning, tax filings or otherwise.