Case Study Example 2
The following case study scenario showcases the importance of mitigating key person risk for Canadian private corporations.
Tech Innovators Ltd., a notable technology firm, acknowledges the risk posed by the sudden absence of its founder and CEO, Mr. Anderson. The company also seeks to optimize the use of its retained earnings.
The Canadian Allied Services highly sophisticated team has helped many Canadian Corporations with key person risk mitigation. They will customize a specific financial mechanism with the specific needs of their clients in mind.
Challenge & Solution
Tech Innovators Ltd., a notable technology firm, acknowledges the risk posed by the sudden absence of its founder and CEO, Mr. Anderson. The company also seeks to optimize the use of its retained earnings.
Solution
The corporation secures participating dividend-paying life insurance policies on Mr. Anderson's life to mitigate key person risk. In the event of his passing, these policies offer a tax-free death benefit. The funds can sustain operations and ensure business continuity. Additionally, the policy's cash value serves as collateral for a loan, with the principal due only at policy maturity. The competitive loan interest can potentially be written off by the corporation. Furthermore, the corporation can access retained earnings through a guaranteed fee arrangement agreement, triggering no tax event to the shareholders. The loan proceeds, along with the retained earnings, can be dual-stacked by reinvesting them in secure investments to enhance returns.
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. In the event of Mr. Anderson's passing, the tax-free death benefit flows into the Capital Dividend Account (CDA), facilitating tax-free dividends to the remaining shareholders.
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. This offers immediate financial options; reinvesting loan proceeds in secure investments to enhance returns. 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.
CPC Benefits
This enhanced scenario showcases how participating dividend-paying life insurance policies can offer Canadian private corporations an array of advantages such as:
- Key Person Protection: Policy safeguards against disruption due to loss of a key executive
- Business Continuity: Tax-free payout ensures uninterrupted operations during transitions
- Funding Buy-Sell Agreements: Death benefit shareholder agreements
- Dual Stacking Investments: 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
