Case Study Example 1
Here is a case study scenario showcasing the benefits of a participating dividend-paying life insurance policy for a CPC
Smith Manufacturing Inc. is a successful family-owned business with significant retained earnings. The owners are concerned about the tax implications of passing their wealth to the next generation and want to ensure their financial security while minimizing taxes. Additionally they wish to be focused on securing the final future of owners, Mr. and Mrs. Smith, as they approach retirement while also optimizing the use of their retained earnings.
The Canadian Allied Services highly sophisticated team has helped many Canadian Corporations with this exact scenario. They will customize a specific financial mechanism with the specific needs of their clients in mind.
Challenge & Solution
Smith Manufacturing Inc., an established manufacturing company, is focused on securing the financial future of owners, Mr. and Mrs. Smith, as they approach retirement while also optimizing the use of their retained earnings.
Solution
To achieve their goals, a participating dividend-paying life insurance policy is recommended. The corporation allocates surplus funds to purchase policies on the lives of Mr. and Mrs. Smith.
The policies are meticulously designed to provide an immediate and robust Cash Value and grow through dividends from the insurer's participating account. This unique combination will allow the Smith Manufacturing corporation to access funds for immediate investments while still growing their wealth for their retirement.
Tax Free Cash Value Growth and Dividends
The policy grows tax free in triple rated insurance companies overfunded participating account. These policies offer tax-advantaged cash value growth and dividends. Upon their passing, the tax-free death benefit flows into the Capital Dividend Account (CDA), facilitating efficient wealth transfer.
Financial Leverage and Wealth Growth
The policy's cash value serves as collateral for a loan, with the principal not due until policy maturity. The competitive loan interest can potentially be written off by the corporation. Additionally, the corporation can access retained earnings through a guaranteed fee arrangement agreement. This agreement triggers no tax event to the shareholders, as the corporation treats it as a loan. The loan proceeds, along with the retained earnings, can be dual-stacked by reinvesting them in secure investments for amplified returns.
To reiterate, the policy consistently earns dividends from the insurer, compounding the value of the collateral. Concurrently, corporations can invest the borrowed funds, amplifying wealth growth. This unique dual-growth leverage approach allows for timely access to funds, all while preserving the compounding effect of the dividends.
CPC Benefits
This enhanced scenario showcases how participating dividend-paying life insurance policies can offer Canadian private corporations an array of advantages such as:
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Tax Efficiency: Tax-advantaged cash value growth and
dividends reduce the corporation's tax liability - Wealth Transfer: Tax-free death benefit ensures seamless intergenerational wealth transfer
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Estate Planning: Death benefit provides liquidity for estate taxes
and obligations - CDA Credit: Capital dividend enriches benefits to heirs, tax-free
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Dual Stacking Investments: Collateral loan proceeds and retained
earnings reinvested in secure investments amplify returns - Collateral Loan Advantages Loan principal not due until policy maturity, with competitive loan interest potentially deductible by the corporation
- Retained Earnings Benefits: Access retained earnings tax-efficiently through guaranteed fee arrangement agreement treated as a loan
