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The Corporate Insured Retirement Plan (Corporate IRP)

Category 2: Satisfy wants

Have you saved enough for a secure retirement?

Saving more now is much better than running out of money later. If you have a private corporation, you likely have most of your savings there. This usually results in hefty taxes on your passive investment income with additional tax if you take salary or dividends. A corporately-owned Insured Retirement Plan provides a proven solution — one of the advantages you get with life insurance. You use permanent life insurance with a cash value to supplement your retirement income later and reduce your tax bills now.

Note: You can use the strategy personally as well. The structure is very similar. For more details contact us.

There are other names: Insured Retirement Program (also IRP) and Insured Retirement Strategy (IRS).

Tax-effective ways to save for retirement

You have different conventional ways to save for retirement such as RRSPs and TFSAs.

An Insured Retirement Plan lets you diversify your investments and save more than registered plans allow. You also get special advantages:

  • Tax-sheltered growth
  • Tax-free access via tax-free loans (see insurance leveraging to spend)
  • Flexibility in when and how much you borrow
  • Option to add the loan interest to the loan balance (“capitalize the loan interest”)
  • Loan repayment at death from the tax-free death benefit

We’ll explore the drawbacks further down.

A detailed look at the benefits of a Corporate Insured Retirement Plan (IRP)

  1. You get life insurance in a cash-effective way in a private corporation. Premiums come from after-tax dollars. Owning insurance in a low-taxed environment saves you money. Since your first $500,000 of Active Business Income is only taxed at 12.2% in Ontario, you are using “88 cent dollars” to fund your insurance (in addition to your retained earnings). This is a big saving compared to owning life insurance personally because personal tax rates are so much higher.
  2. You can potentially fund your retirement and cover any estate expenses with one solution, providing peace of mind and simplicity.
  3. Investment growth inside your policy will not trigger a clawback on your small business deduction under 2018 passive investment income tax rules. That protects you from the 26.50% tax rate above the small business deduction.
  4. You have an opportunity to grow money inside your corporation in one of the very few remaining tax-deferred vehicles.
  5. You’re under no obligation to start taking retirement income. If you choose not to, your beneficiaries win because there will be no loan balance to pay off before they receive the death benefit. That means more for them.
  6. Leveraging your corporately-owned policy doesn’t affect the cash value, which always gives you the option to collapse the Corporate Insured Retirement Plan by cancelling your insurance policy and using the cash value to pay off the loan (some tax may occur when cancelling).
  7. Loan interest can be capitalized (added to the loan balance). The death benefit can pay off the loan and the accumulated interest. The death benefit minus the Adjusted Cost Basis creates a credit to the Capital Dividend Account, which allows tax-free capital dividends to shareholders.

The five steps to set up a Corporate Insured Retirement Plan

1. Get your life insurance

Find out how much permanent coverage you need from your financial planner, tax planner or Taxevity. Buy this in your corporation using a design with high later cash values. You now have an envelope for tax-sheltered investment growth.

2. Maximize your deposits

Make deposits as large and fast as the tax rules allow. Retained earnings are the ideal source. 

3. Watch Your Savings Grow

There’s no tax on the passive investment income. This allows compound growth — what Einstein called a miracle of the universe. If you need access, take a loan (may make the interest and part of the premium tax-deductible)

4. Get Tax-Free Income

Borrow against your cash value. Let the loan interest accumulate and have the balance paid by the tax-free death benefit. A guarantee fee may apply when a corporate asset is used for personal benefit.

5. Enjoy Your Retirement

Take the amount of income you require. Unlike an RRSP/RRIF or Individual Pension Plan, you’re not forced to take taxable income. 

What are the risks of getting a Corporate Insured Retirement Plan?

The CIRP does require investment growth and a long-term loan, so some potential issues are:

  1. Default risk: if you can’t repay the loan when the lender requires you to (which may be before death if they deem you to no longer meet their loan requirements), the lender may choose to go after assets other than your policy first
  2. Funding risk: if planned funding is interrupted, the policy may not function well or may lapse
  3. Tax risk: CRA’s tax decisions may impact how IRPs are perceived
  4. Additional collateral requirement risk: can you provide additional collateral if the policy doesn’t perform as expected after you’ve started taking out loans?
  5. Interest rate risk: if prime rates go back up, the projected loan structure may not work, and additional collateral or partial repayment may be required unless the policy investments increase as well
  6. Investment risk: if future investment returns are much lower than projected, the policy may lapse, reduce possible loan income, or trigger additional collateral requirements or partial repayments
  7. Interest vs. returns risk: the gap between your policy return and loan interest rates may widen over time, which can be a risk if the loan rate is the faster-growing force. The loan balance may overtake the cash surrender value much more quickly than anticipated. This risk can be mitigated by making conservative investment assumptions. The projected loan rate is usually 1%-3% above the projected return rate.
  8. Business practice risk: the lender may decide not to leverage life insurance in the future, cutting off a stream of income. Setting up a new loan arrangement with a more flexible institution may incur additional fees.
  9. Loan requirement risk: the lender may change their lending requirements (such as the maximum CSV-to-loan ratio), or your financial health may deteriorate to the point where you no longer meet them. Remember, the lender considers many factors in approving and continuing a loan arrangement. Setting up a new loan arrangement with a more flexible institution may incur additional fees and higher loan rates.
  10. Retirement Compensation Arrangement (RCA) risk: if it is deemed that a policy was only acquired corporately to fund your retirement, it may be treated as an RCA which was tax implications. This can generally be circumvented by documenting a need for the base coverage, with the loan arrangement as a secondary benefit.

Many of these risks can be mitigated by having conservative assumptions when initially producing a proposal for the policy and when applying for the line of credit.

Is an insured retirement strategy right for you?

We’re available to help you decide if an Insured Retirement Plan — corporately-owned or personally-owned — is right for you.

Tags: corporate ownership, personal ownership, retirement planning, strategies