By city

Infinite Banking in Drummondville

Drummondville rebuilt itself twice around small manufacturing. Many owners here are now approaching sixty without having settled whether the company goes to a child or to a buyer.

The city that rebuilt itself

Drummondville occupies both banks of the Saint-Francois River in central Quebec, halfway between Montreal and Quebec City. The Village quebecois d'antan reconstructs nineteenth-century rural life along the water, and the Mondial des cultures has been held there each summer since 1982. The city lost much of its textile industry through the 1980s and 1990s and rebuilt on a broader base of small and mid-sized manufacturers.

What matters financially is the ownership structure: many family businesses, often across two generations, whose owners are now approaching retirement.

The succession question decides everything else

This is the page's central point, and it comes before any discussion of product.

Selling the business to a third party and transferring it to a child do not raise the same tax questions, and the optimal structure for one can damage the other. Surplus accumulated in the corporation builds cash value, which is generally not an asset used in an active business and therefore works against qualifying for the lifetime capital gains exemption on a future share sale.

Those two objectives conflict rather than stack. If you do not yet know which of the two scenarios you will live, say so to your accountant rather than letting a practitioner assume. The honest answer in that case is often to wait until the direction is decided, and waiting is not a failure: it is what stops you funding a structure for ten years that will serve you badly.

What the corporation can and cannot do at death

Where a corporation owns the policy, a credit arises in the Capital Dividend Account at death, calculated under subsection 89(1). The figure is not the death benefit: it is the death benefit less the policy's adjusted cost basis, and only that credited amount can be paid out to shareholders as a capital dividend.

Two things follow that owners here are rarely told. The credit is a single event, not a standing balance to draw on, and it must be paid out correctly or the advantage is lost. And the shareholders' agreement has to match: if the share redemption at death is structured on one basis and the credit arises on another, the money lands in the wrong hands and someone litigates it. Have a lawyer read the agreement and the policy side by side, before either is signed.

Income that arrives in lumps, not months

A textile city that rebuilt on lighter manufacturing did so on contracts, and contract work pays in lumps. An owner draws what the company can spare, which is a different number every quarter and sometimes zero.

Two rules follow. Never size a base premium against a draw you took in a strong quarter, and never let the company fund a premium it might need for a machine. A business carrying operating debt, or one that may need every dollar for equipment in the next few years, has a use for that money which returns more than a policy will in the same period.

The two Quebec rules and where it does not fit

A designation naming a married or civil-union spouse is presumed irrevocable in Quebec unless declared otherwise, and an irrevocable designation can restrict the ability to request a loan or assign the policy as collateral. Exemption from seizure depends on the class of beneficiary and on the circumstances, is never absolute, and disappears if the policy is assigned as security for a loan.

Cash surrender value is typically below cumulative premiums for many years and commonly for more than a decade, so an early exit is a loss. Nothing on this page is advice. No assessment has been made of anyone reading it, and the author is not a neutral party: he is licensed to sell the contracts this strategy uses and is paid a commission when one is placed. Ask for the illustration in French, which is your right under the Charter of the French Language, read the guaranteed column first, check the licence in the AMF register, and take the answers to an accountant and a notary of your own choosing.

One closing word on the order in which to build the team, because that is where small businesses get badly served. Do not start with the insurance practitioner. Start with the accountant who already knows your structure and have two numbers calculated: what the deemed disposition would cost your estate today, and where you stand against the qualified small business corporation tests. Those two numbers determine whether there is anything to fund. Only then does the insurance conversation make sense.