If you’re a business owner, chances are you’re already thinking about tax efficiency. But there are two common items that many entrepreneurs still hold personally, when it may make far more sense to own them corporately.
In this post, we’ll cover how shifting personal debt and life insurance into your corporation can lead to significant long-term savings and tax advantages.
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1. Move Personal Debt into Your Corporation
Most business owners carry at least some personal debt, whether it’s a mortgage, a car loan, or a line of credit. But here’s the catch: interest on personal debt isn’t tax deductible.
One solution? A strategy called the debt swap.
How It Works:
- Your corporation borrows the money
- You pull that money out tax-free via a shareholder loan
- You use those funds to pay off your personal debt
Now, the debt remains the same in terms of amount, but it’s held inside the corporation, where interest payments become tax deductible.
Example:
- $500,000 loan at 4% interest
- Over 10 years, this strategy could save you $20,000 in taxes
If you don’t currently have a shareholder loan set up, this strategy may still be possible, but you’ll need to crunch the numbers to confirm whether the savings outweigh the costs in your specific situation.
2. Own Life Insurance Through Your Corporation
The second common mistake? Holding life insurance policies personally.
When you pay life insurance premiums from your personal account, you’re doing so with after-tax dollars. But if your corporation owns the policy, you can pay those same premiums with before-tax dollars, making it far more efficient.
Example:
- Annual premium: $3,000
- Personally: You’d need to withdraw $4,285 from your corporation (assuming 30% tax)
- Corporately: You simply pay $3,000, no personal tax required
This difference adds up year after year.
You may be wondering: If the life insurance payout goes to the corporation, will my beneficiaries be taxed when they take the money out?
The answer: Not necessarily.
When a life insurance benefit is paid to a corporation, a corresponding credit is created in the Capital Dividend Account (CDA), which allows your heirs to withdraw that amount tax-free.
- Term Life Policies: Typically result in a CDA credit equal to the full death benefit
- Permanent Life Policies: May have a delay or gap early on, but the CDA credit grows over time and often matches the death benefit later in life
Final Thoughts
If you’re carrying personal debt or paying for life insurance from your personal account, it’s worth reviewing whether those should be held in your corporation instead.
With strategies like the debt swap and corporate-owned life insurance, you can reduce your tax burden today — and potentially pass on more to your family tomorrow.
