In family succession plans, it can be difficult to transfer the shares of the family business to the next generation while still taking advantage of the capital gains exemption. This difficulty arises due to an anti-avoidance provision in the Income Tax Act. Life insurance can be used to accomplish the transfer on a tax efficient basis.
Bill and Joan, a married couple, are sole shareholders of XYZ Corporation. They want to retire and sell some of the company shares to their son, Bob, without financially burdening the business. It is difficult, however, for Bob to obtain the funds personally in order to complete the purchase of the shares from his parents.
Universal life insurance can meet the estate planning needs of Bill and Joan and can be used as collateral for Bob’s loan. Through a combination of life insurance and a leverage facility loan, Bob can borrow in a tax effective manner to fund the personal purchase of some of the shares from his parents. This will allow Bill and Joan to take advantage of their capital gains exemption. The strategy also provides enhanced annual cash flows so that, upon the last death of Bob’s parents, the tax-free life insurance proceeds can be used to recover Bob’s initial capital investments.
This a partial excerpt from a PPI Advisory case study. For more information about PPI Advisory advanced tax and estate planning visit ppiadvisory.ca.