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Corp Pipeline

Creating a Tax-Free Corporate Pipeline with Life Insurance

  • Business Owner built significant wealth inside their Canadian private corporation:
  • Total corporate assets: $12M (real estate, equities)
  • Embedded capital gains: $7M
  • Facing a significant tax liability at death—approximately $1.75M+ (assuming 25% effective tax rate on gains)
  • Age at policy purchase: 55 (policy held for 30 years)

The Estate Tax Problem

Upon the owner’s death, the estate faced a major challenge:
  • $7M in unrealized gains triggered taxes at death (~25% average tax rate = ~$1.75M+ in taxes).
  • Forced asset sales were required, potentially at unfavorable valuations, just to pay CRA.
  • The family was set to lose significant wealth built over a lifetime.

Corporate-Owned Life Insurance (COLI)

At age 55, anticipating these future challenges, the owner had purchased a corporate-owned permanent life insurance policy with a $5M death benefit.

  • The policy provided tax-exempt growth within the corporate structure.
  • As the policy built cash value, the owner was able to collateralize the policy, borrowing funds to reinvest back into the business or other investments—this leveraged their money without interrupting the policy’s internal growth.
  • Eventually, the policy’s cash value growth became significant enough that the annual premiums became effectively cost neutral, with only after-tax interest payments on borrowed amounts due.

How It Played Out at Death

At the owner’s death (30 years later):
  • Policy death benefit paid $5M directly to the corporation.
  • The corporation repaid the policy loan ( $3M loan outstanding )
  • Remaining $2M cash remained, available immediately for tax-free payout.
Critically, this insurance payout generated a credit to the Capital Dividend Account (CDA)—which allows tax-free dividends to shareholders.
  • Total CDA credit generated: ful $5M (the entire policy death benefit).
  • After paying back the loan, $2M cash remained, available immediately for tax-free payout.
  • An additional $3M of CDA room remained, enabling the corporation to move out another $3M tax-free to the family by strategically selling other corporate assets.

🧾 Summary of Financial Impact:

Without Insurance Planning With COLI & CDA Planning
Forced asset sales at death Cash immediately available
~$1.75M+ in taxes owed Taxes covered; assets intact
Estate value severely reduced Estate value preserved
No CDA credits $5M tax-free via CDA

Total tax-free extraction enabled: $5 million

Immediate liquidity from life insurance: $2 million cash available
 Additional tax-free CDA room remaining: $3 million

Estate benefit: Family and shareholders avoid asset fire sales and significant tax erosion—preserving the business owner’s life work and legacy.

More Control, Less Tax, Greater Legacy

This business owner didn’t just buy insurance—they created a tax-free pipeline, enabling their family to efficiently and strategically access corporate wealth without the devastating tax bite.

Proper planning means your wealth stays where it belongs—with your family, your business, and your legacy—not with CRA.

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💬 Thinking about creating your own corporate pipeline? Let’s talk about building a tax-free transition strategy for your situation.

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