The Investment Holdco: Where Wealth Transfer Fits

Where the capital dividend account does its work.

If you advise on life insurance, the investment Holdco is arguably where the product fits best. The money is already set aside, the owner usually has an accountant, and the tax rules give a death benefit there an advantage over most of the alternatives. What advisors often lack is a simple way to explain why, one a client can follow before going to the accountant for the details.

Here it is: three kinds of money, one theory of integration, and the capital dividend account. Then the numbers, and the assumptions that move them.

An investment holding company usually holds three kinds of money, and they have not all paid the same tax. In round numbers: money that came up from an operating company’s active business income has paid about 12%. Business income above the small business limit has paid about 25%. Investment income earned and taxed inside the Holdco has paid about 50%.

Canada’s tax system is built on integration. Whatever route income takes, by the time it reaches the shareholder the total tax should come to roughly the same amount - call it 50%. So the 12% money and the 25% money still owe the difference. It is paid when the money comes out as a dividend, during life or at death. Until then it sits in the corporation, which is why it is sometimes called trapped surplus.