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Buying and Investing Inside Universal Life and Permanent Life Insurance Policies  – Tips for Potential and Current Policyholders

tax imageDo you own an incorporated business or holding company? Are you a wealthy Canadian looking for additional tax-sheltering opportunities? Are you someone who is looking for investment opportunities with some potential creditor protection and preferred tax status? What if you have more money in your holding company than you will ever spend in your life and are looking for a way to both reduce both your final tax bill, as well as the cost to your heirs and estate of getting this money out of your company? If you can answer yes to any of these questions, or have already done so and presently own permanent life insurance, I suggest diverting a few moments from the dreams of spring and read on.

Sadly, by the time you read this humble offering, any permanent policies you purchase in the future will not be as attractive as those issued before the end of 2016 – as I have written about previously, a host of changes to the tax rules will water down some of the potential tax savings and effectively eliminate some of the more exotic tax planning strategies. On the other hand, permanent life insurance can still offer an embarrassing amount of tax minimization and estate maximization benefits when the right product is matched with the right client. The next few pages will outline for those of you who already own permanent insurance as well as those of you who might benefit some of the reasons why permanent life insurance might be worth considering. The companion article to this piece outlines some of the ways of reducing risk when investing inside permanent insurance policies, in addition to ways of heading future problems off at the past before mere disappointment turns to financial despair. As is the case when owning an investment portfolio, an insurance policy must be managed carefully and potentially rebalanced in order to produce the best results.

Many thanks to my friend and life insurance pro, Lee Brooks, BBA, CFP at View360 Insurance Advisory, for his help on this series of articles, particularly for his advice in the first article of this series and his coming input on investment options inside life insurance policies.

Life Insurance– the Tax Benefits

The most obvious, most common and probably the best use of life insurance is to protect your family from economic catastrophe if you die ahead of schedule. In instances like this, such as when you have a young family and the size of your bar tab exceeds your home equity, term insurance is generally the way to go. In situations like this, your need is not permanent – as your children grow and your mortgage shrinks, the economic impact of your unexpected demise will hopefully decrease, as should the size of your insurance policy designed to cover off this risk. Moreover, as money may be tight and there are many other things clamoring for your financial attention, such as debt repayment and retirement funding, buying cost-effective term coverage allows you to get the amount of coverage you need while still hopefully having enough money left to address these other concerns and perhaps even vacation on a tri-annual basis.

Moreover, for most of us, there will come a happy day when you and your family have enough dollars in the bank so that no one will need sell the family heirlooms to make ends meet if you suddenly passed into the great beyond. Or, alternatively, perhaps the day comes when you decide that your children are now old enough to be responsible for their own financial future and you now wish to spend the money you’ve previously committed to life insuranceon violin lessons or on your wine collection. In either instance, that might be the time to cancel your insurance as it is no longer needed. Thus, why buy permanent insurance at considerably higher prices when insuring only a temporary need?

On the other hand, some people realize one or more of the following:

  • They will never be able to spend everything they own, particularly inside of their holding companies, and want to look at tax effective ways to maximize their estates;
  • They wish to leave behind a minimum legacy for their family or at least enough money to pay their final taxes without having to sell the family cabin, the family business or other legacy assets;

  • They want to ensure there is enough money to provide a fair inheritance to all of their heirs and need extra assets to ensure that they can pass along the family business, farm or house to some children while still providing enough for their other offspring; or

  • They hate paying tax and want to know about other ways of funding some of their retirement rather than tax coffers;

Permanent life insurance can meet these needs in the right circumstances. As most of us know, it provides a tax-free payout at death to provide instant liquidity to pay final tax bills or guarantee a minimum estate. Some of the subtler benefits are as follows:

  • Universal Life Insurance Policies (“UL”) offer an investment component that can increase the payout at death. This investment account is funded by extra contributions that accumulate inside the policy. You can allocate how the money is invested among many different choices, similar to how you can decide which investments to own inside an RRSP or TFSA. Any gains remain essentially tax-free if they stay inside the policy and are added to the tax-free payout at death.

  • Participating Whole Life Insurance Policies (“PAR”) pay policyholders dividends in many cases once the policies have been in force long enough based on a variety of factors. They also allow extra contributions that can earn extra dividends. If the dividends are kept inside the policy, they also remain essentially tax-free and add to the tax-free payout at death. Unlike UL policies, however, policyholders do not control how the money is invested. It is instead invested by the insurance company.

  • If a policy is owned by a company, only its’ cash value is considered when determining the capital gain owing on company shares at the shareholder’s death. In other words, if a policy promises a payout out $1.4 million but has a cash value of only $400,000, then only the $400,000 value would be added to the value of any other assets owned by the company when determining the value of the shareholder’s company shares at his death, even though the company will still get a cheque for $1.4 million in short order.

  • Continuing from the previous example, not only does the company get the $1.4 million dollar cheque tax-free; our tax system will also let the company pay out a significant portion of the $1.4 million from the company tax-free as a “capital dividend”. In other words, it helps minimize any additional taxes that would be paid by the estate or heirs that normally occur when paying dividends from companies.

  • These capital dividend payments from a company can also be used to further reduce the shareholder’s final tax bill or the future tax bill of a surviving spouse who inherits the shares if the capital dividends are used to redeem and cancel out shares formerly owned by the deceased. These payments cancel out at least some of the capital gains bill that would otherwise be owing (to simplify things). Thus, not only does owning insurance in the company save money by reducing the value of the company at death for capital gains purposes; it can even cancel out some of the remaining gain with the help of a savvy tax professional.

  • Insurance policies can be used as collateral for loans. Some clients use corporately-owned insurance policies as collateral for personal loans (although it is probably wise to pay the company a guarantor fee to do so). Thus, rather than having remove money from a company to pay for your retirement at potentially ruinous tax rates, you might be able to merely pay interest on a bank loan secured by your policy. Although the loan balance will probably continue to grow, so will hopefully the value of your insurance policy. Many policies may not even require payment during your life, knowing that they will be paid in full at your death when the company gets the death benefit tax-free. Even better, even though the bank will scoop some of the death benefit at that time, your company will still get credit for the portion paid to the bank when calculating how much money it can pay out to your heirs as a tax-free death benefit. Of course, if you never need to borrow against the policy to fund your retirement, your heirs will still benefit from the other tax advantages linked to insurance policies already mentioned.


When I talk to clients about life insurance, I seldom tell clients that they “need” permanent life insurance. In my view, life insurance is only “needed” to protect the financially dependent until they are able to fend for themselves. Generally, by the time my clients are well into retirement, this need has either vanished or the money required to keep buying life insurance would be better spent on other things, like their own retirement or, if they really love insurance, on health-related products like Long Term Care coverage.

On the other hand, even though permanent life insurance may not be “needed” in the same way as a term policy decided to ensure your child has enough money for university if you are not around to cut the cheques personally, they can be wonderfully effective tools for reducing a variety of other risks, retirement funding, protecting legacy assets like cabins and businesses, while also maximizing the after-tax size of your estate.

Despite these tantalizing words, however it is important to think of permanent insurance policies as power tools rather than holy water. If used correctly and regularly maintained, they can do wonderful things, but they are not the solution for all of life’s ills. Moreover, just like a chain saw or electric drill, if you use the wrong tool for the job or fail to regularly maintain and service, owning a permanent life insurance policy can certainly go very, very wrong.   Stay tuned for next time, when I talk about what you can do to manage your existing and future permanent insurance policies to take some risk off the table and to learn about new investment offerings inside insurance policies intended to help you do just that.


Estate Planning Basics

Check out my latest article on estate planning as seen in The Costco Connection.

Estate Planning Basics

Proposed Changes to Small Business Taxation – Levelling the Playing Field?



In my last article, I outlined some of potential changes to the rules set by the Federal Government regarding the following issues that will affect small business owners, including:

  • How they can spread dividend income from their companies to different family members in order to lower their overall tax bill as a family;
  • How they can increase their tax relief upon selling their companies down the road by having different family members own shares of the company in a trust or under age 18;
  • How money retained in the company that is invested in passive investments rather than plowed back into the business will be taxed in the future.

The basic premise behind these changes is that the Federal Liberal government wants to level the playing field between the tax bill an employee pays on income and subsequent investment gains outside of registered plans and what a company owner and all shareholders and family members not working for the company or heavily invested in it would pay collectively up front and in the future on money not invested back into their business.

The information released by the government goes to great lengths in explaining their take on why they think the suggested changes are “fair”. A lot of their math is based purely on a straight comparison of an employee making a set salary and a company earning that same amount in profits. But are the proposed changes fair to company owners or even a fair comparison? In the end, this is one of those questions that is based more on values and principles rather than math and high finance. Each of us will come to our own conclusions, but, here are some considerations that I don’t think have brought to the table. For the discussion to follow, I will be comparing an employee earning $200,000 per year to a company generating that much in profits that are taxed as income in the hands of a single shareholder, as will be common under the proposed rules.

What About Employee Benefits? 

Most employees have a benefit package that includes extended health and medical, disability, pension plans or Group RRSPs as part of their compensation that is essentially not taxed. Sure, they get a deduction on some of these expenses but, at the end of the day, it’s far better to get a tax-free benefit than to have a tax-deductible expense. As a result, if proposed changes do not take this into account, it is arguable that company owners will actually do worse under the new rules than their salaried compatriots since they won’t have these benefits or have to pay for them themselves with personal or corporate dollars so that to be left with $200,000 in taxable income, they would have had to earn perhaps 20% more than this in order to pay and deduct the benefits that salaried employees get as a matter of course or do without.

CPP, EI, WCB and other Employee Benefits 

In addition to the traditional benefits package offered to most employees, there are also other government-mandated benefits that employees receive. In particular, a company must pay about 5% per dollar in salary per employee into their Canada Pension Plan up about $2,500 per person, as well as Employment Insurance and WCB Benefits. Although the employers do benefit by paying into WCB by ensuring that they can’t be sued by workers injured on the job, the employees benefit by knowing that they have coverage if injured on the job regardless of who is at fault. Ultimately, I would suggest that any comparison between salaried employees and company owners needs to also factor in these hidden taxes. Even if a one-person company, which might mean not having to pay for WCB benefits and EI, business owners still need to pay both the employer portion of their CPP pension as well the equal portion both they and employees pay into the plan. Again, although these expenses are deductible but it is still far better to get things for free than merely at slight discount. In the end, if these extra costs are viewed as taxes, then business owners earning $200,000 in salary after the dust settles are actually paying more to the government than employees. For a business with many employees, the business owner may have paid far more in taxes when the total bill paid by the company for all employees is added to the income tax deducted from the remaining $200,000 paid to him in salary. As an added insult, the owner is most likely not to qualify for EI if the business ever goes belly up.

Earnings History 

By the time many smaller businesses earn the $200,000 per year in profits noted in my example, they have probably had to endure many lean years along the way to get to that point, compared to employees. In particular, many professionals with their own shops may make significantly less for many years than employees with similar qualifications before catching up and potentially surpassing them. Until then, the salaried employees have hopefully been able to pay down debts and both invest and compound investment gains towards their retirement. In other words, many business owners are stuck playing catch up compared to their salaried friends. Not only would it help them to be able to income-split profits from their business during the lean years with their spouses and older family members, income splitting and the ability to stockpile extra profits inside their companies when they finally do get their businesses in high gear allows them to start catching up quicker. The new proposals would make it harder for starting businesses to survive during the lean times by preventing him from sharing profits with other family members and make it far harder to catch up when business is booming.

Risk – Reward 

As suggested in the last paragraph, starting a business usually means accepting several years of tough times before the ship hopefully rights itself and all the hard work becomes worth it. Unfortunately, most businesses fail, which can mean financial ruin for the whole family. Hopefully, if the business really takes off, the business owner can make far more money than his salaried colleagues, along with the other lifestyle benefits that comes with working for yourself. For those business owners who merely catch up to salaried employees in income level, such as in the example I’ve provided, they’ve taken on far more risk than their salaried friends yet reaped none of the rewards. The ability to use the current tax rules to make their money go further is one way of rewarding company owners for taking on those risks. Ultimately, if you accept the premise that it’s good for the economy to encourage people to create their own jobs and even hire other people to work for them, then there has to be enough in it for these entrepreneurs to make it worth their while to roll the dice. Changing the tax system as the government proposes removes some of the biggest incentives to hanging out your own shingle. It is even arguable these changes are equal to changing the rules of the game half-way in for many businesses and may cause some business owners to regret ever starting their own business or to even trade in their companies for salaried jobs. People have budgeted for retirement, taken out mortgages or decided to start families based how much they could expect to have after paying taxes based on what their family as a whole receives from businesses after taxes and on how much their corporate investments can generate and pay out after taxes. The proposed new tax rules change all these calculations and will probably have the biggest impact on smaller businesses rather upon the higher net worth company owners who will probably have their tax bills increase more than their poorer colleagues but are also far more able to afford it.

Brain Drain 

One of my biggest worries about the impending changes is that they may drive many highly educated and talented people to leave the country to work in places with either lower taxes or more liberal income-splitting rules. The worry about doctors leaving for the U.S. is probably the most obvious example. Not only can physicians make significantly more down south – they can also jointly file taxes with their spouses and calculate their tax bills as a couple rather than looking at both of them separately. The current tax system in Canada offers enough of a benefit package to doctors currently practicing in Canada, along with all the other wonderful things that go along with living in Canada, for those self-employed doctors who live in the Great White North, or obviously they would not be here. Time will tell whether the effects of this tax hike. Obviously, many doctors will still stay on this side of the 49th parallel but some will not. Losing highly trained professionals to the south is certainly not in anyone’s best interests, except perhaps that of those migrating professionals.

Time Investment 

In addition to the time it takes to grow a business from an acorn to a tree, many business owners also have to invest incredible amounts of time along the way to both gets things up and running and to remain afloat. As I’ve learned the hard way, running your business can be like having several jobs at once – marketer, accountant, office manager and administrator in addition to your actual duties as a professional or executive, performing many of these ancillary tasks essentially for free, as they don’t generate business income. Accordingly, if the business owner has to spend more time per week in order to generate the same income as an employee who doesn’t have the same additional duties, is it fair that the business owner who earns the same amount in profits as the employee is left with less money after taxes under the new rules? Of course, this presupposes that all business owners have to work harder than employees, which is certainly not the case. Thus, of all the arguments I’ve expressed, I find this one the least convincing but it is worth considering all the same.

Economic Benefit 

The Federal Government will eventually have to answer the question of whether it is better for Canada as whole to have fewer entrepreneurs and business owners, but collect more tax dollars from these closely-held companies and their families or to collect fewer dollars for each combination of private company and shareholders’ families but to have more of them. The answer to this question should depend in part on how much our economy would benefit from keeping the status quo vs. changing the rules, and as a consequence, how much extra revenue the government would ultimately receive from the extra jobs a more entrepreneurial business climate provides. I cannot begin to answer that question, but the investment-focused part of me notes that the return to the economy of a single extra person who decides to roll the dice and start her own business because of the potential benefits offered under the current rules could conceivably generate 100’s of jobs down the road if all goes well would easily offset all lost taxes not collected from the business owner and her family, as well as many others. Even if she only employed 3 or 4 outside employees at a time at her peak, I would still expect our economy as a whole would still be the better for it.

Plugging Loopholes? 

I read an excellent article written in one of our national papers by Tim Cestnick a few weeks ago that expressed his take on the proposed changes. In it, he spells out the measures that are already part of our tax system to prevent income-splitting with minor children and to tax corporations on their passive assets, such as the tax rate on investment income in British Columbia of almost 50% on passive investment income and how business owners are incentivized to pay out investment gains from their companies by a refundable tax on part of this amount that the company gets back when it pays out taxable dividends to its shareholders.

In other words, although there are still huge tax benefits to company owners who retain business earnings inside their companies, our tax system already seems to be well aware of these benefits and is set up so business owners can take advantage of them. Although the proposed tax changes designed to prevent converting income to capital gains could properly be called closing a loophole, I cannot characterize most of the other changes in the same way, particularly those regarding how tax investment income will be taxed inside a company.

Although the government may ultimately decide that the current system provides an unfair advantage to business owners, I would submit that it is fair more accurate to describe the majority of the new rules as a change in tax policy rather than changes designed to thwart people from abusing the current rules. It seems rather harsh to so significantly increase the tax burden for business owners while at the same time seeming to vilify them as a bunch of fat cats taking who are perverting the tax system at the expense of everyone else. Although the government should be free to do what it believes in the best interests of all Canadians, I would suggest that trying to portray business owners as essentially wealthy freeloaders is simply not fair accurate, or helpful, except in potentially drumming up support from the non-business community to support or justify these changes.


Although the government has done a good job in spelling out their rationale for changing the tax rules for small businesses, there is another side to the story. This article has outlined some of the reasons against making wholesale changes to the current system and also questions the premise that the proposed changes as currently suggested are entirely fair. In the end, this is one of those questions that depends on how you view the world and your personal values. Regardless of whether you are for or against the tax revisions, I would suggest that the situation is not as simple as it may appear at first glance.

Proposed Tax Changes to Small Businesses


Tax cartoon

Proposed Changes to Corporate Taxation

For those of you who keep up with political, personal finance and business issues and own shares in a private company, you may have started a slow burn. Early this month, the Federal Finance Minister, Bill Morneau released the details of his proposed changes to the taxation of small businesses. More specifically, he has introduced measures designed to reduce the income-splitting of business income and retained earnings among family members and is also looking at measures to increase the tax bill on investments taxed within private companies. This has been presented as measures to close “loopholes” so that business owners pay their “fair share”, but many others argue that most of these so-called “loopholes” are nothing of the sort; instead, they were conscious tax policy decisions made by previous governments in order to provide incentives for entrepreneurs who take the risk of hanging out their own shingle and provide jobs for others to take on the massive risks of stepping out on their own.

Regardless of your personal take on the situation, the potential changes, depending on how they are finally enacted, can potentially pose major potential problems for business owners, particularly:

  • Those who already have a sizeable amount of investment holdings in their corporations, most noticeably those who may have already retired and are relying upon the income generated from these assets and the current rules as to how this is to be taxed;
  • Families who rely on the ability to share business income among various family members to make ends meet when the other family members are not actively working in the business;
  • Individuals who have set up family trusts that own growth shares in the active business in order to tap into trust beneficiary’s additional lifetime capital gains exemptions to reduce the tax bill when the family business is sold or upon the death of the current generation of owners.

The Proposed Changes

Here are the major suggested changes in a nutshell, although I will not talk about another measure designed to eliminate a technique used to convert income to capital gains:

Measures to Reduce Income-Splitting

Previously, families could income-split who paid the tax on dividends paid out by the company among adult family members by having children own different classes of shares or having a discretionary family trust own such shares, which was often the preferred solution as it provided more protection and control to the business owners. Both these techniques allowed the business owner to allocate dividends each year amongst the various family members to get the best overall tax result. Many business owners used this opportunity to pay university costs for their children, provide them with extra money to make their way in the world or to potentially help their own parents in their retirement. The proposed rules suggest the following changes:

  • Extending the “kiddie tax” rules that effectively prevented business owners from paying dividends to those under 18 to any connected person by taxing the money at the highest rate, unless it can be shown that the amounts paid were reasonable based on the receiver’s contribution to the business, either through their labours or through their cash investment. The dividends paid would have to be “reasonable” in light of those factors, with stricter rules applied to those under 25;
  • In some situations, income paid to a family member would already be taxed at the highest rate, but any subsequent profits would be taxed at that person’s marginal tax rate. Now any “second generation” income and so on will continue to be taxed at the highest rates;

No Lifetime Capital Gains Exemption until 18 and on Assets Held in a Trust

It has long been a staple of small business succession planning to hold shares in a family trust controlled by mom and dad that owns growth shares in the company that names other family members as beneficiaries and ultimately provides mom and dad with the discretion on how to divvy up the shares and distribute any dividends earned on the shares along the way among the trust beneficiaries. This strategy capped mom and dad’s own capital gains bill since their own shares often no longer continued to grow, with the future growth earmarked exclusively towards the shares owned in the trust. It also allowed the family to pay significantly less tax upon sale of the business, since the gain on the shares owned in the trust could be taxed in the hands of trust beneficiaries, each of whom could shelter an $800,000 plus in capital gains.

Going forward, any gains that accrue on shares in a trust won’t be eligible for this tax relief. Furthermore, even if a child under 18 owned shares directly, they wouldn’t be able to tap into the exemptions.

Extra Tax on Corporate Investment Dollars

Until now, business owners have set aside extra profits they haven’t need to reinvest in the business or to fund their current lifestyle towards their own retirement and to increase any legacy they leave behind for their own children. Since the first $500,000 in business profits at this point is only taxed at 13% in B.C. at this point, there was often a lot more money left to invest inside the company that if this extra money was paid out of the company immediately and taxed personally. There would still be additional taxes paid on the money when it was eventually paid out of the company, but deferring the day of reckoning and earning income and growth between now and then often provided huge benefits to the family. As an added bonus, if mom and dad were in a lower tax bracket when the investment money was paid out to them, or if they were able to income-split the money among other family members, they would save additional dollars.

This was particularly effective when the investments inside the company earned dividends from Canadian companies that were eligible for the enhanced dividend tax credit. In some provinces, this meant that perhaps $50,000 in eligible dividends could be earned tax-free in the hands of beneficiaries with no other sources of income. Even for taxpayers in higher tax brackets, they would still get an extra benefit if they were in a lower bracket than when the company had the original choice of paying it to them personally to them in the first place.

On the other hand, our current tax system already taxes this passive income when inside the company at rates that are higher than the highest personal tax rates so that any income earned inside the company will already be taxed at a higher rates than if earned personally. It also has a refundable tax mechanism in place where extra tax is collected and held by the government until the company pays out taxable dividends to shareholders. In other words, our tax system has already addressed this “problem”.

The government hasn’t decided on how to change the system but the two main tax proposals are to eliminate any refunds on investment income earned from dollars that were originally taxed at the lowest small business rates or to charge a refundable tax on money taxed at the lowest rates that is invested rather than paid out or plowed back into the company.

Potential Countermeasures


Since the proposed measures would go a long way to eliminating successful corporate income-splitting, many Canadians may instead look at incomes-splitting technique that don’t use corporate dollars. At this point, this would probably involve lending money to a trust at low interest rates so that all subsequent investment dollars can be income-split among the various family members. I have written about this technique previously and predict that it will be used more frequently going forward. As this technique isn’t reserved for just business owners, this technique will hopefully not be targeted by the government. In any event, for many individuals, the potential savings over even one or two years can pay for the setup costs many times over, even if the government eventually closes down this opportunity. Accordingly, now might be the time to take a good second look at this strategy.

For those of you with existing family trusts that you’re using for income-splitting, it appears that the new rules would first apply in 2018. Accordingly, I would suggest taking full benefit of the existing rules while you can, making sure that any dividends are taxed on your 2017 return rather than that for 2018. I would suggest following up with your accountant on this sooner rather than later and perhaps paying out more in dividends than might otherwise be the case. Even if you might not save as much money in taxes on the increased payments, if this money is subsequently invested by the lower-income recipient at his or her rates, there could be significant savings down the road by putting this extra money in their hands now.

If you have shares in an active business inside your trust, you may wish to consider flowing those shares out to adult beneficiaries before the end of the year so that any growth going forward on those shares will continue to be eligible for the lifetime capital gains exemption. On the other hand, if the trust merely owns shares in a holding company, then there is no need to roll the shares out of the trust, since the gains on those shares weren’t going to receive any exemption in any event. Although this trust may no longer be useful for income-splitting, it still can be an extremely useful way of reducing capital gains on the death of the original business owner, since only the tax on the shares in his or her hands will be taxed at that point.

On the other hand, there is also going to be a one-time opportunity to realize existing exemptions on shares in 2018, which means that if the shares in trust are already worth more than can be sheltered under the beneficiaries’ collective small business exemptions, then it might make more sense to use this exemption and keep the shares in the trust so you can continue to control the shares and keep them out of the hands of children in shaky marriages, with creditor problems or involved in businesses subject to lawsuits, or just to keep your options open. Unfortunately, there is probably a significant accountant bill that may come along with valuing the company for this purpose and taking advantage of the election option.

Corporate Investing

Ultimately, we will need to see which tax option the government selects before proceeding. If the government increases taxation inside holding companies or decreases the refundable portion of the existing tax (which adds up to basically the same thing), then more tax-savvy investments inside the company may make more sense. This would include investments that pay a “return of capital” that is tax-free to the company until either all the original investment has been paid out or until the investment is sold. Such investments include corporate class mutual funds or many private equity investments. Although the return of capital payments would be taxed when paid out of the company to the shareholders, the return of capital feature allows the shareholder to reinvest any money not needed that year inside the company without any extra tax and provides a lot more flexibility when deciding how much to pay out each year.

I also see a larger role for life insurance inside companies, since growth in them is tax-free and a substantial portion of the tax-free death benefit paid to the company can also be paid out tax-free to heirs at the business owner’s death. In other words, since it may no longer be possible to get the money out of the company cheaply during life and because it may be taxed more harshly inside the company along the way, funding life insurance to minimize taxes now and reduce the after-tax size of your estate later may become a lot more popular a strategy, particularly for those upset about increases to the highest tax rate and with concerns about future increases. As an added bonus, there are some techniques currently being used that allow business owners to use the insurance money to fund their retirements while continuing to provide tax savings.

If the new tax measures don’t change how existing money is taxed inside the company but hold back part of any money invested in the company that was originally taxed at the small business rate as a refundable tax, return of capital investments would continue to be an important piece of the puzzle. I also see more business owners looking at individual pension plans in that situation, so that the extra money that would otherwise be invested will instead be paid into a pension for the shareholder instead of being subject to a refundable tax or paid out immediately to the business owner when in a high tax rate.

I also see more business owners contributing to RRSPs in order to avoid the worst of the high tax brackets. If this is the case, some of the RRSP planning strategies I’ve written about earlier, such as the “Spousal Spin” where the business owner makes Spousal RRSP contributions to a low income spouse that are eventually withdrawn and taxed at the spouse’s rates becoming more popular.

Family Trusts

I still see the use of family trusts for business shares as an important tool for the right family. For a family with an active business with adult children that can be trusted to own shares directly, it can still be used to minimize the tax bill on the sale of an active business. Having those children and their spouses sign prenuptial, cohabitation or marriage agreements should be at the top of most parents’ to-do list, however, as there is more risk of things going wrong when the shares are directly in your children’s hands than inside a family trust that you control.

For families with holding companies, although family trusts won’t be used for income-splitting during life, they can be used to minimize taxes at death as outlined earlier, while preserving control for mom and dad until then. I also expect that “wasting freezes” whereby mom and dad sell some of their shares back to the company each year in exchange for dividends will become a more popular strategy, since they may no longer be able to income-split with their children effectively during life, which might mean either keeping more money in the company along the way or paying out more dividends to themselves. The wasting freeze strategy reduces the tax bill for mom and dad on death, since the shares repurchased by the company are redeemed along the way and are taxed only as dividends, even if those shares have unrealized capital gains.

Finally, I see more families using trusts for investment assets owned in open accounts outside their companies, since income-splitting is still possible using these funds if done correctly. Thus, many business owners forced to take more money than they would otherwise need into their own hands each year may start a program of gifting or loaning that money to trusts they control so that they can income-split the subsequent investment gains that they are no longer able to income-split inside the company.

Final Thoughts

Unless there is a change in government or enough push back from the various stakeholders opposed to these changes, it looks like change is in the wind. If you don’t want to go down without a fight, the government is seeking input from the public and many professional organizations and industry groups will be vociferously voicing their objections. Although it is my hope that the likely changes, other than the reduced opportunity to income-split and future increases in corporate taxation, won’t apply to money already inside companies, we will need to wait and see. At this point, I remain hopeful.

Regarding the other changes, I recommend talking to your accountant sooner rather than later, and discussing how to take final advantage of the current income-splitting opportunities available in 2017 and what to do if your trust owns shares that are currently eligible for the lifetime capital gains exemption. If you do transfer the shares to beneficiaries and wind up the trust as a result of that advice, getting your children to sign marriage agreements with their current and future spouses should also be on your “to do” list.

Finally, I suggest looking into other income-splitting tactics with your financial advisor or accountant. Just because the government is closing down one opportunity doesn’t mean that there aren’t other ways of reducing taxes!