Getting Money Out of Your Corporation—Tax Free

Michael Brewitt |
Categories
Business Owners

Getting Money Out of Your Corporation—Tax Free

*Using Whole Life Insurance to Transfer Corporate Wealth Efficiently*

 

If you're a successful business owner, chances are your corporation has built up a healthy amount of retained earnings over the years. But as you look ahead to retirement or estate planning, a key question comes up: How do you get those funds out of the company without triggering a massive tax bill? One powerful solution? A whole life insurance strategy called Corporate Asset Transfer.

 

The Problem: Tax on the Way Out

 

When you take money out of your corporation personally – through salary, dividends, or shareholder withdrawals – you pay personal tax, often at high marginal rates. That makes it costly to move wealth from your business into your personal hands or estate.

 

The Solution: Use Insurance to Unlock Tax-Free Transfers

 

Here’s how the strategy works:

1. The corporation purchases a whole life insurance policy on the owner (you), and pays the premiums using corporate after-tax dollars. 2. The corporation is both the owner and the beneficiary of the policy. 3. Over time, the policy builds tax-sheltered cash value, and guarantees a growing tax-free death benefit. 4. When the insured person passes away, the death benefit is paid to the corporation tax-free. 5. Most of that death benefit (minus the policy’s adjusted cost basis) is then credited to the company’s Capital Dividend Account (CDA). 6. The corporation can now pay that amount out tax-free to the estate or shareholders – no personal tax, no dividend tax, no probate.

 

What If You Sell the Corporation?

If you plan to sell your operating company, you still have options. Many business owners move the insurance policy – and the retained earnings – into a holding company before the sale. This separates your long-term assets from your active business and preserves the strategy. That way, you can still benefit from the tax-free death benefit and CDA payout, even after selling the business. Planning ahead is key.

 

Why It Works

The CDA is a special notional account in Canadian tax law. It allows certain amounts – like life insurance proceeds – to be paid out of a corporation tax-free. That means instead of losing nearly half to personal tax, you’ve created a tax-free pipeline to extract surplus from your company and pass it on.

 

Added Benefits

- Tax-sheltered growth within the policy during your lifetime - Option to access cash value while alive through policy loans or collateral lending - Keeps passive income off your books, protecting the small business deduction - Strengthens estate planning and succession strategies

 

Who Is This For?

This strategy is best suited for:

- Incorporated professionals and business owners - Age 35–75 and in good health - Companies with retained earnings they don’t need for daily operations - Owners looking to leave a legacy, reduce taxes, and enhance estate value

 

Let’s Explore If This Fits You

Every business owner’s needs are different. If you're holding wealth inside your corporation and want a smarter, more tax-efficient way to transfer it to your family, let’s talk. There’s no pressure – just a conversation about what works best for your situation.