Dr. Brown and Dr. Smith are both 50-year-old physicians earning $750,000 annually. They are married with children, carry no debt, and each own a home valued at $2.5 million. Both have accumulated $500,000 in RRSPs and $1.2 million in corporate investments. Each saves $250,000 per year within their corporation and earns an average annual return of 6%. Both plan to retire at age 70 and therefore plan on saving for 20 years.
The only difference between these two physicians is how they invest their corporate funds.
Dr. Brown focuses exclusively on asset accumulation. He invests $250,000 a year into a traditional portfolio of stocks and bonds earning an average return of 6%. He does this for 20 years. He does not believe life insurance plays a role in his financial plan, stating that his spouse and children will “have enough.” From an income protection perspective, he is correct in that his existing assets eliminate the need for life insurance for that purpose. Despite discussions around estate and tax planning, Dr. Brown remains confident that his family will be sufficiently provided for and sees no need to incorporate insurance into his strategy.
Dr. Smith also invests $250,000 a year but takes a more diversified planning approach. He allocates $150,000 to the same corporate investments earning an average return of 6%, and directs the remaining $100,000 into a participating whole life insurance policy as part of a long-term planning strategy. He too invests for 20 years. Although he also no longer requires life insurance for income protection, Dr. Smith recognizes that his assets will exceed what is needed for a comfortable retirement and therefore prioritizes tax efficiency, estate planning, and long-term wealth preservation in addition to asset accumulation. Furthermore, Dr. Smith likes the fact that he can enjoy the small business deduction longer as he has lower passive income in his corporation.
At age 70…
- Dr. Brown will have $8.7M in corporate investments and $2.9M in his RSP.
- Dr. Smith will have $6.3M in corporate investments and $2.9M in his RSP. Dr. Smiths’ life insurance policy (where he invested $100K a year), has cash value of $3.2M and a death benefit of $5.5M.
How can Dr. Smith utilize his life insurance during retirement?
If Dr. Smith needs cash outside his investments, he can access the cash value of his insurance policy ($3.2M) by taking a collateral loan. This loan can be available at an interest rate as low as prime, and if the loan is structured as an investment loan, the interest may be tax-deductible.
How has investing inside his life insurance also reduced Dr. Smiths tax during his saving years?
By growing assets inside his life insurance on a tax-free basis, Dr. Smith has allocated fewer funds to traditional corporate investments. This lowers the amount of passive income earned within his corporation. Since passive income is generated from corporate investments, keeping it below key thresholds helps preserve the small business deduction. For example, if passive income increases from $50,000 to $150,000, corporate taxable income would rise by $125,000 due to the loss of the small business deduction. This is another benefit of Dr. Smith’s overall planning.
Both have the identical retirement income from RRIFs and corporate investment withdrawals
– So who is better off when they pass away? –
At age 85 (life expectancy)….
- Dr. Brown will have $9.4M in corporate investments and $2.6M in his RRIF.
- Dr. Smith will have $5.2M in corporate investments, $2,6M in his RRIF. Dr. Smiths’ life insurance policy (where he invested $100K a year), has cash value of $6.6M and a death benefit of $8.2M.
To determine who is ultimately “better off,” it is necessary to examine how their assets are treated upon the death of both spouses, when the funds held within their corporations are distributed to their estates or heirs. In general, asset are taxed as follows in 2026:
- Registered assets (RRSP/RRIF) – The value of the RRSP/RRIF is taxed as income. The highest marginal tax rate is 53.53%
- Non-Registered Investments – Gains are subject to capital gains tax of 26.76%
- Vacation property/cottage – Gains are subject to capital gains tax of 26.76%
- TFSA – The value flows tax free.
- Primary residence – The family home flows tax free.
For the purposes of this analysis, we will focus exclusively on assets held within the corporation. Generally, when the owner of the corporation dies (you) and is survived by their spouse, the shares can be transferred to a spouse or spousal trust tax-free. When you and your spouse both pass, there are several areas of taxation that apply.
- Capital gain on the disposition of shares of the corporation. The corporation was setup with a share value of $1. The deemed value of the corporation at the time of death is at least the fair market value of these investments. This value will be taxed as a capital gain as the shares are deemed to have been disposed.
- Capital gains on the sale of investments owned by the corporation. Investment gains will be taxed when the investments are sold.
- Dividend tax on distribution of assets to the next generation. When the investments are sold and assets distributed, the distribution is a taxable dividend.
THE RESULTS?
Dr. Brown focused exclusively on asset accumulation and did not engage in advanced tax or estate planning. As a result, 72% of his assets were ultimately lost to tax.
In contrast, Dr. Smith implemented planning strategies early, including the use of permanent life insurance as part of his estate plan. Furthermore, during his accumulation years, Dr. Smith enjoyed a larger portion of the small business deduction as his corporate passive income was lower then Dr. Brown. At the time of his passing, only 17% of his estate was lost to tax leaving a substantially larger legacy for his spouse, children, charitable interests, and other beneficiaries. The difference in outcomes for their heirs is significant.
Who are you?
The amount of tax payable will ultimately depend on the type of post-mortem planning that is done and whether or not there are planning tools available at the time you and your spouse pass away. Loss carry back planning, pipeline planning, a transfer of shares and liquidation of assets or a combination of these strategies may be useful if they are available at the time you and your spouse pass away. One tool that is guaranteed, not subject to tax and flows to your corporation tax-free is permanent life insurance. The impact to your estate can be significant.
Contact me to discuss my insurance
Elliott Levine is the President of Levine Financial Group in Toronto
We Save Physicians Money on their Insurance
416-512-3303 I info@levinefinancialgroup.com
This article is for discussion purposes only.