The Last Great Tax Shelter
By Jeff Dyck, CFP, CLU, TEP, FEA
VP, Insurance Advisory, WealthCo
Most Canadians are familiar with many types of insurance, from car insurance, house insurance, mortgage insurance, or life and health insurance. This type of insurance is acquired by Canadians, sometimes out of nothing but obligation, to cover known risks. The risk of getting in a car accident, the risk of our house being broken into or damaged in a hail storm or fire, the risk of becoming disabled or being sick and being unable to work, or the risk of dying with debts outstanding.
2023 statistics from the Canadian Life and Health Insurance Association (CLHIA)1 tell us the following:
22 million Canadians own life insurance
The total amount of life insurance coverage owned is $5.5 trillion
Premiums collected by Canadian life insurers were $27 billion
Canadian insurers paid $114 billion in benefits
However, purchasing life insurance to cover known and unknown “risks” is not, when measured by size of insurance policy, why life insurance is acquired. The largest amount of life insurance is bought by the wealthy - the individuals or families that typically have no known traditional risks. From a pure balance sheet perspective, their risks are self-funded. The last thing they need to buy is life insurance. But that’s not why they are buying it in record amounts.
Life insurance and the values growing in the cash value of permanent life insurance policies accumulate tax-free. While the premium is not tax deductible, the asset grows tax-free, the death benefit is paid tax-free, and in the case of corporately owned insurance (such as a Holding Company), the death benefit can be extracted tax free.2
Canada is distinctly absent of tax-shelters. Our home (principal residence) is not taxed on disposition or death. But few of us think of buying a larger home in order to shelter taxable assets. A qualified farming or ranching property can roll tax-free between generations – but if you are not a farming or ranching today or have no experience, this isn’t an option either. Finally, we have our tax-free savings accounts (TFSA). The current maximum contribution to a TFSA is $102,000 for 2025. While an important element to our overall tax-planning, the TFSA is not a game changer.
For Canadians with significant investment assets accumulating in a holding company, consideration should be given to a corporate-owned permanent life insurance policy. Think of this as a super-charged corporate TFSA. The cash value within this type of life insurance policy accumulates tax-free and pays a death benefit that is tax-free. In the context of an overall financial plan, we have seen clients save millions of dollars in tax over their lifetime by using life insurance as an asset class. Not only is tax saved along the way (leaving more money in your pocket), but the tax savings at death are also significant. In many cases, we find that the percentage of the overall estate lost to tax at death is often less than 20%.
But it doesn’t stop there. This isn’t an asset acquired just for someone else’s benefit once you die. It is also an asset available for your use, should the cash value of the insurance policy be needed for a different type of investment, for a gift or for income. This type of insurance isn’t just for the “next generation”, it is for you as well. This powerful option is often misunderstood or simply not presented to many clients.
Most financial institutions see permanent, cash value life insurance for what it is: Undeniably one of the best sources of collateral security that exists. It is guaranteed to provide a payout – either along the way or ultimately at death of the life insured. As such, most major financial institutions and lenders in Canada have business units dedicated to lending against cash value life insurance policies.
While there are more applications of life insurance leveraging than are possible to address in this article, we have worked with all lenders and all types of applications – much to the surprise and satisfaction of our clients.
Life insurance, specifically permanent cash value life insurance, is not just for those that have traditional insurance risks. It is also one of the most powerful asset classes available for wealthy Canadians.
For more information on this topic and whether it is suitable for you, reach out to your financial advisor and your CPA.
Disclaimer: The information in this article is for informational and educational purposes only and is not meant to be construed as financial advise. Please consult with a qualified financial advisor before making any financial decisions.
Ready to reach out?
Share your financial goals with us today, and we’ll match you with a Private Wealth Advisor to provide expert, tailored guidance for your unique financial needs.
