Corporate Shared Ownership of Critical Illness Insurance: A Simple Guide for Canadian Business Owners
Running a business means planning for the unexpected. One big worry is if an employee gets sick. This is where Critical Illness Insurance (CII) can help. CII pays when someone is diagnosed with a serious illness like cancer, a heart attack, or a stroke or 26 other sub conditions that could lead to the big 3. For business owners, a particularly effective approach is to use Corporate Shared Ownership Insurance (CSO-CII) which helps both the business and the person who is insured if they are diagnosed with a critical illness.
What is Critical Illness Insurance?
Critical Illness Insurance pays a lump sum of money after surviving for 30 days, if you get sick with cancer, a heart attack, or a stroke. This money can help pay for treatments, recovery, and can also keep the business running smoothly while the insured key person is focused on their recovery.
How Does Corporate Shared Ownership Work?
Corporate Shared Ownership means the business and the insured individual (typically a key employee or owner) share the insurance and the payments. The business pays for the main part of the insurance and the Return of Premium on Death (ROPD), and the insured individual pays for an extra part called Return of Premium on Cancellation or Expiry (ROPC/E).
An Example: Bobs OpCo LTD and Bob
Let’s say Bobs OpCo Ltd. buys CII for Bob, the manager and owner of the company. The insurance pays $250,000 if Bob gets sick. The yearly base premiums cost $5,587.50. With the ROPC/E benefit, it goes up to $8,910.00. If Bob stays healthy for 15 years, Bob has the opportunity to cancel the policy and take 100% of the corporate dollars spent on the insurance personally, tax free.
How Bobs OpCo Ltd. and Bob Benefit
Bobs OpCo Ltd. buys the CII for Bob with the ROPC/E benefit. They pay $8,910.00 each year. If Bob stays healthy for 15 years, they can cancel the insurance and get back the $133,650.00 of total premiums paid.
Here are the numbers broken down:
Yearly Premium Cost: $8,910.00 (Base: $5,587.50 + ROPC/E: $3,322.50)
Total Cost Over 15 Years: $133,650.00
Return of Premium: $133,650.00 (tax-free if no there are no claims made)
Benefits of Corporate Shared Ownership
Corporate Shared Ownership offers several benefits that can save money and provide financial security for both the business and the insured person. Here are some key advantages:
1. Save Money on Taxes
The business pays for the insurance, taxed at a lower rate than personal income.
2. Get Money Back:
If Bob becomes ill or passes away, the business reclaims the money it paid.
If Bob stays healthy, the return happens after 15 years, if no claims are made.
3. Good Financial Planning:
CSO-CII is like forced savings for the future. Many business owners put their profits back into the business. The ROPC/E benefit is a way to save money outside the business as well.
Possible Tax Outcomes
The tax outcomes of Corporate Shared Ownership can vary depending on the ownership structure and how the policy is managed. Here are some possible scenarios:
1. Bobs OpCo Owns the Policy:
Bobs OpCo contributes $8,910.00 each year.
After 15 years, Bobs OpCo receives $133,650.00 back, tax-free.
If the business distributes these funds to Bob as a dividend, Bob will be required to pay taxes on it.
2. Bob Owns the Policy:
Bob contributes $8,910.00 each year with his own money.
After 15 years, Bob receives $133,650.00 back, tax-free.
This is less tax-efficient because Bob’s tax rate is higher.
3. Shared Ownership:
Bobs OpCo and Bob jointly contribute to the premium payments.
The portion of the premium related to Bob’s payments is taxed annually at his marginal tax rate.
The portion related to Bobs OpCo payments is taxed if used within the business if a benefit payment is claimed.
The Takeaway
Corporate Shared Ownership of Critical Illness Insurance can help Canadian businesses, and their owners protect themselves and save money. It’s important to plan carefully and work with a tax advisor and insurance specialist to get the most benefit out of a shared CII policy. Using CSO-CII, can help keep the business running smoothly and makes sure your money is saved wisely.
