Ways to re­duce pas­sive in­come

The Prince George Citizen - - News -

When

the NDP was first elected to power in B.C. in 1972, I was just 10 years old but old enough to rec­og­nize that some­thing sig­nif­i­cant was afoot. Long­time BC premier W.A.C. Ben­nett, a crusty old cap­i­tal­ist, had done a great deal for Prince Ge­orge and the province in gen­eral, but even his fa­mous warn­ing that “the so­cial­ist hordes are at the gates,” couldn’t turn the tide back in his favour. Time will tell what sort of in­flu­ence the fed­eral NDP will have on the new Lib­eral mi­nor­ity gov­ern­ment re­cently elected na­tion­ally.

Not long into Justin Trudeau’s first man­date, the fed­eral Lib­eral bud­get had al­ready caused con­sid­er­able con­ster­na­tion. It in­cluded tax­a­tion rules di­rectly im­pact­ing fam­ily busi­ness own­ers hav­ing Cana­dian-con­trolled pri­vate cor­po­ra­tions (CCPC). The for­merly-at­trac­tive small busi­ness de­duc­tion limit was re­duced by $5 for ev­ery $1 of pas­sive in­come above $50,000. As a re­sult of this and other changes, the fam­ily who many years ago had made a choice to ditch that safe job (with a pen­sion) and in­stead grow their own idea, hir­ing oth­ers along the way, had some of their long-term dream bub­ble burst. Now what?

Busi­ness own­ers can re­duce their pas­sive in­come in a few ways, such as:

- In­vest to earn tax-ad­van­taged cap­i­tal gains;

- Es­tab­lish an in­di­vid­ual pen­sion plan (IPP) (ef­fec­tive, but only in very spe­cific cases);

- Through cor­po­rately-owned life in­surance with a tax-ex­empt (within lim­its) in­vest­ment com­po­nent.

Each strat­egy has mer­its but the right sort of cor­po­rate-owned in­surance may have a greater im­pact and the most flex­i­bil­ity of these tax-re­duc­ing ideas. Af­ter a suf­fi­cient pe­riod of pre­mium build-up, you can ac­cess some­thing equiv­a­lent to the funds you tucked away in to the pol­icy with­out los­ing the in­surance ben­e­fit. Mean­while, the funds in­vested in the pol­icy re­duce the cor­po­ra­tion’s (tax­able) pas­sive in­come, and ul­ti­mately cre­ate a gor­geous (tax-free) cap­i­tal div­i­dend in your fam­ily’s cor­po­ra­tion.

Here’s how it works.

First of all, you have to be healthy enough for an in­surance com­pany to take a bet on you. Then you run the num­bers on the pol­icy idea, of­ten in­volv­ing your ac­coun­tant (if he or she is fa­mil­iar with the con­cept). Then, if the num­bers check out, af­ter pre­mium build-up pe­riod, you can ac­cess the funds within the pol­icy be­fore or dur­ing re­tire­ment in three al­ter­na­tive ways:

1) Take a full or par­tial with­drawal of the cash sur­ren­der value;

2) Ob­tain a pol­icy loan, or;

3) As­sign the pol­icy as col­lat­eral to se­cure a bank loan. Some banks (mine in­cluded) will lend up to 100 per cent of the cash value of the pol­icy.

The first two meth­ods could re­sult in a (tax­able) deemed dis­po­si­tions, so be care­ful.

Uti­liz­ing the cash sur­ren­der value as col­lat­eral for a bank loan is, frankly, of­ten a very in­trigu­ing con­cept. It is com­monly re­ferred to as an in­sured re­tire­ment plan (IRP). The IRP shel­ters cap­i­tal growth on a tax-de­ferred ba­sis, pro­vides tax-free sup­ple­men­tal re­tire­ment in­come uti­liz­ing pol­icy val­ues to ob­tain a loan and pro­vides a tax-free death ben­e­fit net of any out­stand­ing col­lat­eral loans.

Cor­po­rately owned, tax-ex­empt life in­surance may help a busi­ness owner re­duce pas­sive in­come with­out sac­ri­fic­ing the tra­di­tional ben­e­fits of the in­surance. It’s a win-win. The gov­ern­ment gets its money and so do you.

– Mark Ryan is an in­surance rep­re­sen­ta­tive with RBC Wealth Man­age­ment Fi­nan­cial Ser­vices Inc. and these are Mark’s views, and not those of RBC Do­min­ion Se­cu­ri­ties. This ar­ti­cle is for in­for­ma­tion pur­poses only. Please con­sult with a pro­fes­sional ad­vi­sor be­fore tak­ing any ac­tion based on in­for­ma­tion in this ar­ti­cle. See Mark’s web­site at: http://dir.rbcin­vest­ments.com/mark.ryan.

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