Tax Free Corp Savings
Creating Tax-Free Savings Inside a Corporation
- Business Owner earning $2.5 million annually in a Canadian corporation
- Actively operating business, eligible for theSmall Business Deduction (SBD)
- Corporate retains earnings and invests surplus capital
- Annual passive investment income: $300,000
Hidden Tax Traps on Corporate Savings
At first glance, reinvesting surplus corporate earnings seems efficient—but here’s what really happens when passive income exceeds $50,000:
High Tax on Passive Income
- Passive investment income (interest, dividends, capital gains) inside a corporation is taxed at up to 50.2%
- That means nearlyt half of their investment growth is lost to tax
Small Business Deduction Grind Down
- Once passive income exceeds $50,000, the business loses access to the SBD
- That means higher tax on your first $500K of active business income
- At $150,000+ in passive income, the SBD is completely eliminated
In this case, with $300,000 in passive income, the SBD is fully clawed back, and active income is now taxed at the general rate (26.5% in Ontario)
🔍 What It Looks Like:
| Income Type | Tax Rate with SBD | Tax Rate without SBD |
|---|---|---|
| First $500K (Active) | ~12.2% | 26.5% |
| Over $500K (Active) | 26.5% | 26.5% |
| Passive Income | ~50.2% | ~50.2% |
🧾 Tax impact of losing SBD:
On the first $500,000 of active income alone, the business now pays $71,500 more in tax annually.
Build Tax-Free Savings Inside the Corporation
Rather than continuing to grow heavily taxed passive investments, the business owner decides to restructure and deploy capital into tax-exempt corporate solutions.
- Tax-free growth
- Tax-free access while living
- Tax-free transfer to heirs via the CDA
Use Corporate-Owned Participating Life Insurance
- A portion of surplus earnings is redirected into a corporately owned whole life or universal life insurance policy
- Inside the policy, investments grow tax-free
- Upon death, the death benefit is paid to the corporation, and the Capital Dividend Account (CDA) is credited
- This allows the proceeds to be paid out to heirs tax-free is credited
- 🧠 Comparable taxable investments would need to grow at ~12–14% annually to match the after-tax benefit of the insurance—consistently, for decades.
Restore Tax Efficiency
- Less passive income = potential to restore access to the Small Business Deduction
- Tax savings: $71,500/year
- Purify the Corporation (if needed)
- If planning a future sale, excess passive assets are moved in a HoldCo to help preserve LCGE eligibility on operating company shares
Structured Planning
- Policy loans or collateral loans can access cash value during the owner’s lifetime without triggering tax
- Estate freeze + family trust may be layered in to split future growth
📊 The Results: Tax-Efficient Growth + Tax-Free Wealth Transfer
| Investment Strategy | Annual Tax on Growth | Tax-Free Access | Estate Impacts |
|---|---|---|---|
| Passive investment account | ~50.2% | ❌ | Taxable value in estate |
| Corporate-owned life insurance | $0 | ✅ (loan or CDA payout) | Tax-free payout via CDA |
📉 Tax savings from restoring SBD access: $71,500/year
🛡️ Tax-exempt growth: $500K–$2M+ over time
💰 Tax-free legacy payout: $5M+ depending on policy structure
🧠 Comparable taxable return needed: 12–14%/year just to break even
Structure Beats Strategy
This business owner didn’t change how much they were saving.
They changed where and how they were saving.
By using:
- Tax rules already in place
- Proper structures (HoldCos, CDA, insurance)
- Proven processes
They turned tax-heavy income into tax-free savings—and a future gift to their family that CRA can’t touch.
💬 Want to see what tax-free savings could look like inside your corporation? Let’s build a customized plan.