Shared Ownership in a Critical Illness Policy

01/14/2020   |   Dentistry, Dentistry, Financial Planning

A solution for incorporated Dentists to obtain both sickness benefits and tax savings

Shared Ownership refers to the situation in which more than one party owns an interest in an insurance policy. With the recent changes to the taxation of professional corporations, we have seen a lot of interest in using this strategy with Critical Illness (CI) policies.
Although a CI policy does not have cash value, a Tax-Free Return of premium (ROP) is available in the following situations:
• On death – If the insured dies without a CI claim;
• On Termination – If the policy reaches termination age without a CI claim;
• On Surrender – If the policy is surrendered without a CI claim (minimum 15 years).

How it works
The corporation and dentist establish a “Shared Ownership Agreement” that specifies that:
• The corporation will own, pay for and be the beneficiary of the CI coverage on the dentist;
• The dentist will own and pay for the Return of Premium options

How is this approach beneficial?
1. If the dentist is diagnosed with a critical illness, a significant tax-free lump-sum sickness benefit (typically $250,000 to $1,000,000) is paid into the professional corporation. These funds can be used to offset lost income, pay for medical treatment or for any other purpose.

2. If the dentist passes away without triggering a CI claim, the premiums are refunded, tax-free, to the estate of the dentist.

3. If the dentist makes no claim, after 15 years the policy can be surrendered. We call this a “healthiness benefit” (as opposed to a sickness benefit). On surrender, a tax-free refund of 100% of premiums is paid to the dentist. In many cases this means $100,000 or more can come out of the corporation tax free, saving significant income tax to the dentist.

4. By moving corporate cash into the policy, some passive investment income is avoided, reducing the risk of additional taxes relating to the grind-down of the small business deduction.

Who does this work best for?
Incorporated dentists: with at least $5000 per year of available cash-flow; who are under age 50; who are more than 15 years from planned retirement, and; are insurable (aka reasonably healthy).

Are there risks?
Yes, primarily that Finance/CRA could decide that this approach is not appropriate and could dictate that the refund be split in proportion to the payment of premiums.

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