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Buy Sell Insurance
It is difficult to purchase the shares of a deceased shareholder with after tax dollars. Although this interest would be tax deductible, it still leaves the principal to be paid with after tax dollars. Paying this out of future profits still requires payments with after tax dollars and necessitates dealing with the deceased’s family or estate during this protracted period.
If the company had a large bank loan at time of death, the combined debt burden of the survivors to the deceased’s estate and the bank could be overwhelming. The bank may in fact call the company loan as it is normal practice for banks to make the shareholders joint and severally liable for such loans.
Death of one shareholder may cause the bank to be reluctant in loaning money to purchase the deceased’s shares, and may require the survivors to provide additional security, to replace the security which was provided by the deceased shareholder.
By contrast, the premiums for BUY SELL INSURANCE are relatively small compared to the cost of borrowing, or being faced with a bank requiring additional security.
What happens to facilitate the share purchase when one shareholder dies? One option is for the corporation to redeem and cancel the shares of the deceased. The life insurance proceeds are paid to the company tax free as beneficiary. BUY SELL INSURANCE payments create a Capital Dividend Account. The amount in excess of the adjusted cost base of the policy is credited to the Capital Dividend Account. The adjusted cost base of the policy is generally small and is equal to the premiums paid less the pure cost of insurance.
The corporation purchases for cancellation the estate’s shares. For tax purposes this results in a dividend to the estate. The Capital Dividend Account created by life insurance proceeds makes it possible for the corporation to treat the dividend to the estate as a tax free capital dividend.
There are old rules, grand fathered rules and new rules thus professional advice is needed from normally a lawyer, accountant and financial advisor of which can be reached at Wise Financial Group Inc. toll free 1-877-779-4731 or via email info@companybenefits.ca.