- The Story
Sean*, a business owner, faced a unique financial challenge after his divorce. With his ex-wife retaining the matrimonial home, he needed to secure a $500,000 down payment for a new principal residence. However, he was already making significant withdrawals from his holding corporation to cover his lifestyle and alimony expenses. Taking additional salary or dividends would not only increase his tax liabilities but also trigger higher alimony payments. Seeking a strategic way to access funds efficiently while maintaining financial flexibility, Sean turned to Stone Owl for a tailored solution.
Developing a tax-efficient financing plan
Sean’s financial situation required a structured approach that optimized corporate asset utilization while minimizing tax burdens. Our solution combined a shareholder loan, high cash value life insurance, and an Immediate Financing Arrangement (IFA) to achieve his objectives. The key steps included:
Rather than withdrawing taxable salary or dividends, Sean took a $500,000 shareholder loan from his Holdco. Structured with a formal agreement and a two-year repayment plan, this approach allowed him to access funds tax-free in the short term while complying with CRA rules.
Holdco purchased a whole life insurance policy with Sean as the insured. This provided tax-sheltered growth within the corporation while creating an asset that could later be leveraged for liquidity.
Using the corporate-owned life insurance policy, John entered into an IFA. Through this strategy: 1) The corporation paid the insurance premiums. 2) A lender provided a secured loan against the cash value of the policy. 3) Sean borrowed against this credit line to fund his down payment while maintaining liquidity and tax efficiency.
To repay the shareholder loan within two years, Sean could use corporate earnings, future personal cash flow, or funds from the IFA. Additionally, depending on fund usage, interest on the IFA loan could be tax-deductible, further enhancing tax efficiency.
A closer look at tax efficiency and corporate asset growth
By implementing this structured approach, Sean successfully avoided unnecessary tax liabilities while ensuring continued growth of his corporate assets. The life insurance policy continued to compound in value, providing long-term benefits beyond just the immediate financing needs. Moreover, the IFA provided additional liquidity, giving Sean flexibility for future funding requirements without compromising his corporate financial structure.
The power of strategic financial planning
Through a proactive and innovative financing strategy, Stone Owl helped Sean navigate the complexities of accessing corporate funds without negative tax implications. By leveraging a combination of corporate-owned insurance, tax-efficient borrowing, and structured repayment, Sean secured his down payment while preserving his financial flexibility.
Today, Sean stands as a prime example of how business owners can optimize their corporate assets to meet personal financial goals efficiently. His case underscores the importance of strategic financial planning in achieving both short-term needs and long-term wealth preservation.
* We take our clients’ confidentiality seriously. While we’ve changed their names, the results are real.
