How insurance can help a business owner, in practice.

A 50-year-old owns an Ontario manufacturing company. The corporation holds about $1.5 million in retained earnings, held as cash and investments that it doesn’t need for day-to-day operations.

The investment income on those retained earnings is taxed inside the company at a high rate. Above a certain level, that passive income can also reduce the company’s access to the small business tax rate on its operating profit. Taking the money out personally would add a second layer of tax.

The company owns a permanent life insurance policy on the owner and pays the premiums from its retained earnings. The policy’s cash value grows tax-deferred inside the policy, and the death benefit is paid to the company. Part of the proceeds can generally be paid out through the company’s capital dividend account. The owner’s accountant confirms how the rules apply.

Over five years, the company moves about $1 million of its retained earnings into the policy. The passive income the company earns falls, which can help protect its small business tax rate. The cash value builds inside the policy, and the company can borrow against it if it needs cash. At the owner’s death, the death benefit is paid to the company, and part of it can generally reach the family through the capital dividend account.

Two co-owners each hold 50% of an Ontario engineering firm worth about $4 million. Both are in their early fifties, and each has a spouse and children who don’t work in the business.

If one partner died, the survivor would need to buy the other half from the estate, about $2 million. The survivor couldn’t easily raise that, and the family wouldn’t want to become an unplanned business partner.

The partners sign a shareholders’ agreement: if one dies, the company buys back that partner’s shares from the estate. To fund it, the company owns a life insurance policy on each partner and receives the proceeds, then pays the estate for the shares. Part of the proceeds can generally be paid out through the company’s capital dividend account, which can reduce the tax on that payment. Their accountant confirms how it applies.

On the first death, about $2 million of insurance reaches the company. The company buys the deceased partner’s shares from the estate. The family receives about $2 million in cash rather than a stake in a business they don’t run, and the surviving partner owns 100% of the company.

A founder in her late fifties owns 100% of an Alberta logistics company worth about $3 million. Her daughter works in the business. Her son doesn’t, and has built a career elsewhere.

Almost all of her wealth is in the company. If she leaves it to her daughter, there’s little left for her son, and selling or splitting the company would defeat the point.

Her company owns a permanent life insurance policy on her life with a death benefit of about $3 million. Her will leaves the shares to her daughter. On her death, the proceeds are paid to the company and can then be paid to the estate through the company, to fund her son’s share. The share transfer and the tax plan around it are arranged with her accountant and lawyer.

Her daughter receives the shares of a $3 million company. About $3 million of insurance flows through the company to the estate for her son. Both children receive about the same value, and the business stays whole.

A couple in their late fifties owns an Ontario property management company. They plan to stop working in about seven years. Most of their wealth is in the company and their home.

They want dependable income in retirement without being forced to sell the company at a bad moment, and without spending their investments faster than they can afford. They expect to need about $60,000 a year more than their pensions and savings will provide.

In the years before they retire, they fund a permanent life insurance policy on their lives, through the company or personally, as their accountant advises. In retirement, they arrange a bank loan with the policy’s cash value as collateral and use it to add to their income. Money borrowed this way isn’t withdrawn from the policy, so it generally isn’t treated as taxable income. The loan is usually repaid from the death benefit when the second of them dies.

From about age 65, they borrow against the policy each year, sized to cover the income gap. Their investments stay in place and they keep the company. When the second of them dies, the death benefit repays the loan, and what is left goes to their children.

A couple in their early sixties owns an Ontario company worth about $5 million and a family cottage worth about $1 million. Very little of their wealth is in cash or easily sold investments.

When the second spouse dies, the tax deferral between spouses ends. The company shares and the cottage are generally treated as sold at market value, which can create a large tax bill. Their accountant estimates it at about $1.5 million, due before the estate can easily raise the cash. The children might have to sell the cottage or the company.

They set up a permanent life insurance policy that pays when the second of them dies, so the cash arrives when the tax comes due. The policy can be owned personally or by the company, depending on the plan. The proceeds give the estate the money to pay the tax without selling the assets.

When the second spouse dies, the policy pays about $1.5 million. The estate uses it to settle the tax, and the children keep the cottage and the company intact.

The owner of an Alberta software consulting firm is 45. He personally brings in most of the firm’s revenue. He has a mortgage, two young children, and a business loan he personally guaranteed.

If a serious illness or injury kept him from working for a year or more, revenue would drop sharply while payroll, rent and loan payments carried on. His family would depend on their savings.

He puts three kinds of cover in place. Disability insurance replaces part of his income if he can’t work. Business overhead expense coverage helps pay the firm’s fixed costs while he is off. A critical illness policy pays a lump sum on diagnosis of a covered condition. Who pays the premiums changes how the benefits are taxed, so he sets up the structure with his accountant.

If he were unable to work, disability benefits would replace part of his income and overhead coverage would help keep the office open. A critical illness payment of about $300,000 could pay down the loan he guaranteed. The firm has time to recover, or to be sold on reasonable terms.