This is a good topic for this week. I recently had a new client who was offside on this one.
When I looked at their prior year’s financial statements and compared them with the corporation’s tax returns, I noticed that the premiums they had paid for their shareholders’ life and disability insurance weren’t added back to net income. That means, basically, that the corporation was deducting them as an expense. As well, there was no benefit assigned to the shareholder.
This means that, when and if the disability insurance pays out, the proceeds will be taxable. This is bad – particularly at a time when the shareholders’ income would be greatly reduced anyway.
In most situations, the right way to do this is to confer a benefit to the shareholder so that they are essentially paying the premiums. (You also need to coordinate this information with your insurance carrier)
This way, when you need the payout, it will be tax free.
As with anything tax, it’s complicated and there are some rules I don’t have time to go into here. So if you need more information or help with this, Email or call to speak with me personally!
A special shout-out to Joel Murray of Sun-Life for the fact-checking on this file for me. Joel is one of the smartest people I know and I highly recommend him for financial planning!