What to Do With Excess Cash in Your Corporation: Options for Canadian Business Owners
Building a successful business can eventually create a good problem to have: more cash accumulating inside your corporation than the business needs for its day-to-day operations.
Maybe you've built a substantial operating reserve. Perhaps the business consistently generates more profit than you need personally. Or you may simply be wondering whether leaving a growing amount of cash sitting inside the corporation is the best long-term strategy.
There isn't one answer that works for every business owner.
Excess corporate cash can be reinvested in the business, invested through the corporation, distributed personally or allocated toward longer-term strategies such as corporate-owned permanent life insurance.
The right approach depends on what you ultimately want the money to accomplish.
How much cash does your business actually need?
Before deciding what to do with excess corporate cash, it's important to determine how much is truly excess.
Businesses need liquidity.
Operating expenses, payroll, taxes, debt payments, unexpected expenses and future opportunities can all require readily available capital.
A growing business may also have an excellent use for additional cash. Hiring employees, purchasing equipment, acquiring another business or expanding into a new market could potentially create more value than moving the money into a long-term financial strategy.
The first question therefore isn't necessarily, "Where should I invest this money?"
It's:
How much capital does my business realistically need to keep available?
Once that amount has been established, you can begin thinking about what to do with the remaining capital.
Option 1: Keep the money in cash
Sometimes the simplest answer is the right one.
Maintaining cash inside the corporation provides flexibility and immediate access to capital.
For a business expecting an acquisition, expansion, major purchase or uncertain period ahead, liquidity can be extremely valuable.
The downside is that large amounts of cash may produce relatively little return, particularly over long periods.
Cash is useful for liquidity. It may be less effective as a long-term wealth-building strategy.
Option 2: Reinvest in the business
For many successful entrepreneurs, their own company has historically been their best-performing asset.
Excess cash could potentially be used to:
- Hire additional employees
- Expand operations
- Purchase equipment
- Develop new products or services
- Acquire another business
- Reduce business debt
- Enter new markets
If additional capital can produce attractive returns inside the operating business, reinvestment may be the logical choice.
But mature businesses can eventually reach a point where the owner doesn't need or want to reinvest every additional dollar.
That's when other strategies become increasingly relevant.
Option 3: Invest through the corporation
A corporation can generally invest excess capital in assets such as stocks, bonds, GICs and investment funds.
This provides business owners with the opportunity to put surplus corporate capital to work without immediately withdrawing it personally.
However, investment income earned inside a Canadian-controlled private corporation can receive different tax treatment than active business income.
As passive investment assets grow, there can also be broader corporate tax considerations, including potential effects on access to the small business deduction.
That doesn't mean business owners should avoid corporate investments.
It means the tax treatment of corporate investing should be considered alongside the expected return, risk, liquidity and long-term purpose of the money.
Option 4: Pay the money to yourself
Another option is simply moving some of the money out of the corporation.
Depending on the circumstances, a business owner may receive compensation through salary, dividends or a combination of the two.
Once the money is personally available, it can be used for lifestyle expenses, debt repayment, personal investments or other objectives.
Of course, moving money from a corporation to an individual can create personal tax consequences.
For an owner who doesn't actually need the money personally, withdrawing a large amount simply to reinvest it outside the corporation may not always be the preferred approach.
This is one reason successful owners often begin looking for longer-term strategies for capital they expect to leave inside their corporate structure.
Option 5: Consider corporate-owned participating whole life insurance
For some business owners, corporate-owned participating whole life insurance can become another option for a portion of long-term corporate capital.
The corporation purchases and owns the policy, pays the premiums and is generally named as the beneficiary.
The policy provides permanent life insurance on the business owner or other insured individual and can build cash surrender value over time.
Participating whole life policies may also receive policyholder dividends. Dividends are not guaranteed and can vary based on the experience of the insurer's participating account.
This strategy is fundamentally different from simply holding cash or purchasing a conventional investment.
The purpose is to combine permanent insurance protection with long-term policy values and estate planning.
Why might a business owner consider whole life insurance?
Imagine a corporation that generates consistent profits and has already accumulated significantly more capital than it needs for operations.
The owner doesn't need all of that money personally and expects a meaningful portion of the corporate wealth to eventually form part of their estate.
At that point, the question changes.
Instead of asking:
"How do I maximize the return on every dollar?"
the owner may begin asking:
"How much of this money will I actually spend during my lifetime, and what is the most effective way to eventually transfer the rest?"
That's where permanent life insurance can become particularly interesting.
A participating whole life policy can create a permanent death benefit while also developing policy values during the owner's lifetime.
The Capital Dividend Account can be an important part of the strategy
Corporate-owned life insurance also has an important estate-planning feature.
When an insured business owner dies and the corporation receives the life insurance proceeds, an amount generally equal to the death benefit less the policy's adjusted cost basis immediately before death may be credited to the corporation's Capital Dividend Account, subject to the applicable tax rules.
The Capital Dividend Account, or CDA, can potentially allow amounts to be distributed from a private corporation to Canadian-resident shareholders as tax-free capital dividends when the requirements are satisfied.
For business owners expecting to leave substantial corporate assets behind, this can make permanent life insurance particularly relevant to estate planning.
What about access to the policy's cash value?
One common concern is liquidity.
Business owners are often reluctant to commit significant amounts of capital to something they believe they will never be able to access again.
Permanent life insurance can develop cash surrender value that may provide access to liquidity during the insured person's lifetime.
Depending on the circumstances, this may involve withdrawals, policy loans or borrowing from a third-party lender using the policy as collateral.
Each approach has different consequences and should be evaluated carefully.
For certain business owners with larger insurance strategies and significant financial resources, leveraged strategies such as an Immediate Financing Arrangement may also be considered.
These strategies involve additional borrowing, interest-rate, collateral and tax considerations and are not appropriate simply because someone owns a corporation.
An example: $25,000 of annual excess cash flow
Consider an incorporated business owner whose company can comfortably retain an additional $25,000 every year after operating expenses, taxes, reserves and planned business investments.
There are several things the owner could do with that money.
They could keep it in cash.
They could add it to the corporation's investment portfolio.
They could withdraw it personally.
They could reinvest it into the business.
Or, if there is a permanent insurance and estate-planning need, they could explore allocating some of that cash flow toward a corporate-owned participating whole life policy.
The correct answer may even be a combination of several strategies.
The objective isn't to put every available corporate dollar into life insurance. It's to determine whether permanent insurance deserves a place alongside the owner's other corporate assets.
What if your corporation already has significant investments?
The conversation can become even more relevant when a business owner has already accumulated a substantial corporate investment portfolio.
At that stage, the owner may want to consider not only investment returns but also diversification, future taxation, liquidity and how those assets will eventually reach their family or other beneficiaries.
Permanent insurance can potentially provide an additional asset with characteristics that are very different from traditional investments.
Whether that improves the overall strategy depends on the owner's circumstances.
Think about the destination of the money
One of the most useful questions a successful business owner can ask is:
What is this money ultimately for?
Some of it may fund your lifestyle.
Some may fund retirement.
Some may be reinvested into the company.
Some may eventually be given to children, other family members or charities.
And some may simply remain inside your corporate structure for the rest of your life.
Once the destination becomes clearer, it becomes easier to determine which strategies deserve consideration.
There doesn't have to be one solution
Excess corporate cash doesn't have to go into a single strategy.
A business owner might maintain substantial cash reserves, invest through the corporation, continue reinvesting in the operating business and allocate a portion of long-term capital toward permanent life insurance.
The allocation can change as the business and owner's circumstances evolve.
The important part is moving from simply accumulating cash to having an intentional plan for what that capital is eventually supposed to accomplish.
Where corporate-owned life insurance fits
Corporate-owned participating whole life insurance isn't designed to replace a business owner's operating capital or every other investment.
It is primarily a long-term insurance and estate-planning strategy.
For the right owner, however, it can provide permanent insurance protection, growing policy values and a potentially valuable mechanism for transferring wealth from a corporation to the next generation.
If your corporation has accumulated more capital than the business requires, it may be worth comparing permanent insurance with the other options available to you.
LifeSimple can help Canadian business owners explore how corporate-owned permanent life insurance may fit alongside their existing business, investment and estate strategies.
Corporate investment, insurance and estate strategies can have significant tax and legal implications. Tax treatment depends on individual circumstances and may change. Business owners should obtain advice from qualified tax and legal professionals regarding their specific corporate structure and tax situation.
Related Guides
• Understand the CDA and Corporate Owned Life Insurance in Canada
• Key Person Life Insurance in Canada explained
• Learn about using Life Insurance within a Canadian Corporation
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