# Retirement saving/investing within a corporation



## peter3980 (Jan 5, 2012)

Hi, I am in a different situation than many folks since I am self employed and incorporated. Before I was incorporated, I was maxing out my RRSPs and have some TFSAs too. 

Now though, it has been pointed out to me that being incorporated, I have the option to pay 15% corporate tax, and then get out $40K tax free for my wife and myself, as dividends paid to shareholders. This means no "earned income" and no RRSP's, and no CPP, but through investing the same money in whole life insurance with a significant investment added to that (equal to maxing out RRSPs), I can grow the money tax free, and then upon retirement, borrow aginst the value of it tax free, and then upon death, the loan is paid out and beneficiaries get anything remaining, tax free.

Sounds like it is a pretty good deal, but I'm also aware that the advice comes from someone who gets commission.

I've done some googling on this, but since this only fits a small percentage of people, I have not found it spelled out in great detail. I can find some other investment folks suggesting this, but I'm wondering if anyone knows of any shortcomings or potential problems with this. It almost sounds too good to be true, and often, if things sound too good to be true, they just might be. What am I missing??

Thanks,
Peter


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## uptoolate (Oct 9, 2011)

Welcome to the forum Peter.

I'll be waiting to see what others post on this because I have been trying to get answers on this one for ages and it seems it is applicable to only a small group of people. It seems that permanent life insurance is generally a pretty bad deal and 'buy term and invest the difference' is widely accepted as the way to go.

Usually 'experts' say that permanent insurance is only appropriate for a very select group and then mainly related to estate planning. The problem is that no one then elaborates on who that group is. Certainly I don't think that anyone who makes a living selling permanent life should be seen as at all impartial as you pointed out. Commissions on these things are HUGE. A good small business accountant with significant tax planning experience is likely the person who could provide the best unbiased answer. Hopefully someone like that will be able to answer your great question.

Thanks again for posting it.


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## bigcake (Apr 3, 2009)

peter3980 said:


> Hi, I am in a different situation than many folks since I am self employed and incorporated. Before I was incorporated, I was maxing out my RRSPs and have some TFSAs too.
> 
> Now though, it has been pointed out to me that being incorporated, I have the option to pay 15% corporate tax, and then get out $40K tax free for my wife and myself, as dividends paid to shareholders. This means no "earned income" and no RRSP's, and no CPP, but through investing the same money in whole life insurance with a significant investment added to that (equal to maxing out RRSPs), I can grow the money tax free, and then upon retirement, borrow aginst the value of it tax free, and then upon death, the loan is paid out and beneficiaries get anything remaining, tax free.
> 
> ...


You might end up paying 38% Federal Tax and 12% provincial Tax as investment income is from inactive business.


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## doctrine (Sep 30, 2011)

The problem I believe is you would be relying on the insurance company for the returns of the whole life insurance plan. If the returns are not there, you will not realize a lot of money. And there is no way that I know of to self direct a whole life insurance plan.


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## Cal (Jun 17, 2009)

It sounds like you have only spoken to your ins rep reguarding this.

I think it would be worth discussing your options with your accountant.


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## peter3980 (Jan 5, 2012)

I have talked to my accountant, who is a CA, and is also my brother-in-law. He suggests I should talk to a financial planner, who is not trying to sell me anything. I have a meeting set with another financial planner, and am telling him skip the "free consultation", I'm not planning to invest with you, I want to to pay for a second opinion.

As for the tax rates, yes, if you simply invest within a corporation, you do end up paying more tax. This is why it appears that it is necessary to do it as an insurance product. As it's being told to me, the insurtance is just a way to facilitate the tax-free investing, which I think cannot be otherwise done. 

On the Whole Life policy they invest in what is called a PAR fund (Participating Account). It invests in equities, bonds real estate etc, and is quite conservative. The returns on it since 2000 are reported to be a high of 9.5% in 2000, and lows of 6.4 and 6.5 in 2008 anbd 2009, and typically in the 8% range. A number of years ago I might have laughed at those kind of returns, but they're actually pretty impressive given what the TSX has done in the last 10 years.

I'm just not sure what the "catch" might be. For example, maybe I have to pay huge premiums when I'm old to keep it alive. 

I know that the guys selling this policy to me could make a lot of money on it, so I have to make sure I do what is best for me. Of course if they managed a regular RRSP they might make a lot off me too, but they suggest this is far better for me in my situation. If it turns out that doing what is best for me just happens to make them rich, I can live with that. 

Thanks for the input, maybe someone who has this going already will read this and chime in. But then again, if it is working and they are happy with it, it is such a hands-off thing that they might not be on this forum!

Peter


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## peter3980 (Jan 5, 2012)

BTW, here is an article that touches on this, not specifically all of this, but some of it.
http://www.theglobeandmail.com/report-on-business/article762806.ece


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## Assetologist (Apr 19, 2009)

Your personal financial system will depend upon the priorities of you goals:

- minimize taxes
- maximize income
- optimize your investments/retirement funds
- maximize your estate for your beneficiaries
- other goals

I, too, am self-employed with a few corporations and take salary (allow RRSP contributions) and dividends.
I looked closely at UL but the idea of paying huge premiums to a middle-person is not worth it in my estimation. 
I prefer to hold personal (rrsp/tfsa/non-reg) and corporate investments over which I retain control.

Good luck


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## Plugging Along (Jan 3, 2011)

My quick and random response is as a whole family unit (my siblings and parents), and our family have looked into this from an estate planning standpoint. Through our FP's, CA's, and lawyer, we found the Whole Term Insurance only made sense if we were going to have over a $1 MIL that we wanted to pass down. It actually seemed to be a little more than that, but that seemed to be the min amount. For amounts less than this, it didnt seem worth it.

We found that an formal trust was better in terms of passing on the inheritance, but there was a large adminstrative costs. 

In terms of corporations (we all have at least one, some many more), then the question of taking an income and getting the RRSP, and CPP vs dividends, and other methods all varied for each of us depending on our personal scenarios. Even for mine & spouses, we have a combined strategy of dividends, and salary and that mix changes each year depending on our life situation.


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## dotnet_nerd (Jul 1, 2009)

Hi Peter. I am in exactly the same position as you.

I draw money out of my corp during the year and journal it under the 'loans to shareholders' account.

At the end of the fiscal year I declare a dividend for an amount exactly equal to the total draws so it zeroes out. I split the div between my wife and myself, as we are both shareholders. Then I send the T5's to the gubmint. We declare the T5 dividend income on our personal tax returns.

(It's not a good idea to carry a shareholder loan balance year over year. Not if you want to keep CRA off your back.)

I do all my investing in my own trading account in my name, not the company's.


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## brocko (Apr 20, 2009)

The beauty of life insurance is the many uses of it. Makes you wonder though if the returns the insurance guy says they are getting just on your proposed plan why they are losing their shirts on everyone else? If the vehicle they are using is Universal Life be aware any interest rates shown to you are going to reflect on what happened not whats going to happen. Just google "universal life" to look at the discussions on interest rate assumptions.ASk for written interest rate guarantees, you won"t get it though. In any event your not paying the agent anything so do not get hung up on the remuneration aspect, If your buying from a brand name carrier you have guarantees and do not have to worry about it not being paid out.They have lawyers too and won't sell anything that won"t fly in tax court if all your cards are put on the table for them to consider. Finally I am guessing its a huge face amount of insurance and I am also guessing that your insurable? If your insurable and you have no issues with the premium then it might be something to consider. I am not in the life insurance business so take my comments with a grain of salt. Good luck!


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## peter3980 (Jan 5, 2012)

The big question mark to me at this stage is what will be the cost of the whole life policy. When I have read about this whole idea, often one thing I read is that it makes sense "if you have insurance needs". I currently have all the insurance I need. Leaving money for the kids might be nice, but the fact is, I'm 45 and am not counting on my parents to leave me a big lump of cash. Similarly, I hope my 3 kids are not living their lives counting on me giving them a pile of money some day. I don't plan to work extra long just to give them more money. 

My only interests are saving for retirement in the smartest way I can. The guy who's putting me onto this says that for someone like me, RRSPs are the worst option. IF he's right that this is the case for me, I need to make some changes.

Thanks for the input,
Peter


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## peter3980 (Jan 5, 2012)

Here is another good link. I was given this article a while back. Looking at it again, I see that in this the author is not pushing the whole life option nearly as much as just the investing within the corporation part, but he does say that a "business owner MAY CONSIDER using corporate-owned life insurance"
https://www.cibc.com/ca/features/rethink-rrsps.html

Peter


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## Atlasjq (Sep 13, 2011)

Hey Peter that is a great article and something I've been looking for. The explanation is very detailed and is very useful to me. Thanks for posting it!


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## uptoolate (Oct 9, 2011)

RRSPs are the worst option? I would be suspicious of that. I have yet to meet the financial advisor or insurance person that can show me the numbers to justify this statement. I have had several of them make it though. My trusted accountant doesn't agree with this and has never steered me wrong. Under the 'all the eggs in one basket' caveat, it has always seemed reasonable to me to take some salary out of the corp to get the RRSP contribution room as well as making the CPP contribution. I think that the CPP will be pretty certain in the future though rules are likely going to continue to change a bit. The 12k a year (double that if you employ your spouse) from CPP may not seem like much but I suspect it will be nice to have. 

The predictions the insurance people give are just that, predictions, and although they always look great on paper there are several issues with them. One of the biggest I have is that they are always talking about amounts using today's dollars 30 years down the road so it looks much more impressive than it is. If you look at most whole life and UL policies way down the road once they become self funding (if they ever do!) then you usually see that returns are no better than inflation and this was always very telling to me. My biggest concern about the products is that they are so opaque and even the company guys can't really explain them to me well enough to make me comfortable. Honestly, the other concern I have about them is that every time I have questions about the policy I wind up in a meeting with 3 advisors and 2 or 3 guys from the insurance company. This could just be great service but it makes me nervous that they bring these kind of numbers to bear on a single product. Tells me that they are going to make a ton. Question is, if they are going to make a ton, how am I going to make out?


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## Homerhomer (Oct 18, 2010)

peter3980 said:


> The big question mark to me at this stage is what will be the cost of the whole life policy. When I have read about this whole idea, often one thing I read is that it makes sense "if you have insurance needs". I currently have all the insurance I need. Leaving money for the kids might be nice, but the fact is, I'm 45 and am not counting on my parents to leave me a big lump of cash. Similarly, I hope my 3 kids are not living their lives counting on me giving them a pile of money some day. I don't plan to work extra long just to give them more money.
> 
> My only interests are saving for retirement in the smartest way I can. The guy who's putting me onto this says that for someone like me, RRSPs are the worst option. IF he's right that this is the case for me, I need to make some changes.
> 
> ...


Peter, I think you are answering your own question regarding insurance, if your goal is to enjoy the money when you are still here then the insurance, the costs associated with it, maybe the least beneficial option for you.

As for the smartest ways of the retirement savings I find that most articles (cibc not excluding) are little bias, and I think that many try to convince others that one way is better than the other, yet the truth is one glove doesn't fit all, and quite often combination of some or all option (wages, rrsp, dividends, keeping money in the corporation) can produce the best results.

For example the author doesn't touch on the costs associated with running a holding corporation, if you have savings inside the corporation you don't want loose it in a lawsuit, hence you set up a holding corporation, and accountants, lawyers, bookkeepers and so on are not free, for a smaller investment portfolio does it make sense to pay all those fees each year to maintain it?

There is also no mention of personal tax deductions or credits based on employment income, try to deduct the child care expenses for example from your dividends, or how easy it will be to get a mortgage on your house if you have no earned income.

I like how he presented the integration issues and some variances, probably the simplest explanation I have ever seen, but imo there is way more to it than simply keeping the money in the corporation.


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## peter3980 (Jan 5, 2012)

Uptoolate, sounds like you are in a similar boat as me and ahead of me in this a bit too. I'm also concerned about having 2 guys come out to multiple meetings. Either they make a lot off this or they are doing this out of the kindness of their hearts. Anyone ever see what they earn on a whole life policy? I don't hire the services of anyone else without knowing what I'm paying them, why should this be different? Of course, IF they get me the best money in the end I guess its OK.

Also, in the Manulife PAR Fund that I have details on, they have weathered the current financial storm quite well for a big conservative fund. As of June 2011 they were 18% Equities, 20% Mortgages, 16% Real Estate and 46% Bonds and Short Term Securites. I'm no financial expert, but it seems to me there might not be great cash to be made currently in Real Estate or Mortgages, and wonder if averages in the 8% range are still really possible in the years to come, since we seem to be in uncharted waters. Then again the future is uncertain regardless of when I put my money I guess. Any thoughts on that?? 

Peter


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## Homerhomer (Oct 18, 2010)

uptoolate said:


> My trusted accountant doesn't agree with this and has never steered me wrong. Under the 'all the eggs in one basket' caveat, it has always seemed reasonable to me to take some salary out of the corp to get the RRSP contribution room as well as making the CPP contribution. I think that the CPP will be pretty certain in the future though rules are likely going to continue to change a bit. The 12k a year (double that if you employ your spouse) from CPP may not seem like much but I suspect it will be nice to have.


I agree with your accountant.


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## peter3980 (Jan 5, 2012)

For the record, I met with a different finacial planner today, and he was not big on the whole life option. He says that unless I have a lot of extra cash to put into it and/or need the insurance, it is not the best route. He also said that with a $400,000 policy he'd guess the guy selling it to me would get about 45K (presumably over time). ALSO, I started examining the spreadsheet printout he gave me and re-creating the numbers, and examining all the assumptions. They were showing me an incredibly simplistic model with some assumptions that no financial planner should make (like an average tax rate of 45% on my RRSP withdrawls, and fogetting about the 15% corp tax before the whole life policy is paid). So, I'm not exactly hanging on that guy's every word any more.....

Looks like there are lots of different financial routes to explore. Holding co's, capital dividend acounts, etc. etc. While there are some benefits to being incorporated, it certainly make it a lot more complicated. Looks like time for lots of reading and consulting the pros.

Peter


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## uptoolate (Oct 9, 2011)

The good news is that you don't have to be in a rush to get the policy. Whether it is this year or next doesn't matter that much (unless you have a pressing need for insurance and you don't want to wind up with this and a term policy). One of the Manulife actuaries told me that the sweet spot for these policies is about 10 years of funding though it can be in the 7 or 8 year range if you put the maximum allowable in above the basic. I think more people are going with universal life than whole life now if they do pick permanent insurance. It seems that there is no way you should be going with one of these products if you haven't fully funded your available RRSP, TFSA and, if applicable, RESP. If you do eventually go with it, I would definitely not be so aggressive in funding it that you don't wind up with a substantial amount of money still inside your corporation. 

Ironically, when I talked to the FA and insurance people about this product I really wanted the product for estate planning and not for insurance purposes. Sadly, it doesn't work that way!  

As far as how much they make in commission, I have heard that it can be up to the entire first year's premium. Obviously it's hard to get the bottom line but the salesfolk's behaviour suggest that it is a bunch.


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