Introduction
Paying off a mortgage faster is a goal for many physicians in Canada. As an incorporated doctor, you have the advantage of using corporate funds strategically to achieve this financial milestone. One effective tax-efficient strategy involves leveraging a Split Dollar Critical Illness (SDCI) insurance policy. This approach allows you to access corporate funds tax-free to pay off your mortgage within 15 years, while also providing financial security in case of a critical illness.
This guide explores how the SDCI strategy works, its financial benefits, and who it is best suited for.
1. Understanding Split Dollar Critical Illness (SDCI) Insurance
What is an SDCI Policy?
An SDCI policy is a critical illness (CI) insurance plan structured in a way that both the Medical Professional Corporation (MPC) and the physician share the ownership and premium payments.
- The corporation owns the critical illness insurance policy, which provides a tax-free payout if the physician experiences a critical illness (e.g., stroke, heart attack, cancer).
- The physician personally owns the return of premium (ROP) rider, which ensures that if no critical illness occurs, the premiums paid can be refunded tax-free after 15 years.
Why Split Ownership?
By splitting ownership between the corporation and the physician, this strategy allows the physician to retrieve corporate funds tax-free after 15 years, making it a powerful mortgage repayment tool.
2. How the Strategy Works
Step-by-Step Breakdown
- The Corporation:
- Owns the critical illness insurance policy.
- Owns the return of premium at death rider (ensuring refunds in case of early passing).
- Pays the critical illness insurance premiums (e.g., $35,000 annually).
- The Individual (Physician):
- Owns the return of premium (ROP) at the end of the term.
- Personally pays for the ROP rider.
- Financial Outcome Over 15 Years:
- The corporation pays $35,000 per year for 15 years.
- After 15 years, the physician cancels the policy and exercises the return of premium (ROP) rider.
- The physician receives a tax-free payout of $525,000 ($35,000 x 15 years).
- Additional Benefits:
- If the physician becomes disabled during the payment period, premium payments are paused.
- If the physician develops a critical illness, the corporation receives a large tax-free payout, providing additional financial security.
- If no illness occurs, the physician still receives the full tax-free refund of premiums at year 15.
3. Why This Strategy is a Smart Financial Move
1. Tax-Efficient Access to Corporate Funds
- Normally, withdrawing $525,000 from an MPC requires $1,050,000 in corporate funds, since nearly 50% would go to taxes.
- This strategy bypasses the tax burden, allowing physicians to access the full amount tax-free.
2. Guaranteed Return Equivalent to 9.3% Growth
- To generate $1,050,000 in a corporate investment account over 15 years, the MPC would need to earn 9.3% annually—a high-risk target in volatile markets.
- This strategy provides a guaranteed, risk-free return equivalent to 9.3% per year without market fluctuations.
3. Protection Against Critical Illness
- If a critical illness occurs, the corporation receives a large lump sum payout tax-free, providing financial security during medical treatment.
- If no illness occurs, the physician still receives the full return of premiums tax-free.
4. Is This Strategy Right for You?
This tax-saving approach is best suited for:
Incorporated physicians with a stable Medical Professional Corporation (MPC).
Doctors who prioritize tax-efficient mortgage repayment.
Those with at least $60,000+ in annual corporate savings to comfortably fund the policy.
Physicians who already have a liquid investment portfolio and are seeking guaranteed returns.
5. Key Takeaways
Access corporate funds tax-free to pay off a mortgage in 15 years.
Avoid the 50% corporate withdrawal tax, maximizing cash flow.
Achieve a risk-free return equivalent to 9.3% annually.
Receive critical illness coverage, ensuring financial security.
Ideal for incorporated doctors with strong corporate savings.
Conclusion
For incorporated physicians in Canada, using an SDCI policy provides a unique opportunity to pay off a mortgage faster while optimizing corporate tax efficiency.
Rather than withdrawing funds and facing high taxes, this strategy ensures full access to corporate money tax-free, guaranteed financial returns, and added security against critical illness. Tax Partners specializes in advanced tax and financial planning for Canadian physicians. Contact us today to explore how this strategy can work for you.
This article is written for educational purposes.
Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at info@taxpartners.ca, or by visiting our website at www.taxpartners.ca.
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