Navigating Income Taxes for High Earners
The Cost of Prosperity? Exorbitant Taxes for Successful Entrepreneurs
Diego* is an owner of a North Vancouver architectural firm valued at $7 million. He loves to indulge in the finer things in life, often retreating to his lavish Bowen Island home and hosting friends for leisurely boat rides. To support this lifestyle, his company pays him around $600,000 a year. But this income faces a hefty personal tax bill of approximately $272,000 a year. With a lifestyle as luxurious as the homes he designs, Diego dreads the prospect of losing almost half his income to taxes.
What are his options?
Option A:
Status Quo
Keep his income at $600,000 and just pay $272,000 in taxes. This choice not only imposes a significant tax burden on Diego, it also reduces his financial flexibility and spending potential. He doesn’t want this.
Option B:
Reduce Income
Reduce his income in order to reduce his tax bill. For instance, if he takes home $300,000, he will pay around $122,000 in taxes. Given Diego’s preferred lifestyle, however, this is not a viable option. It also doesn’t change the fact that he still pays almost half of his income in taxes.
Option C:
Whole Life Insurance as Equity
Take the $600,000 and put it into a Whole Life Insurance policy with immediate cash value. This gives Diego the equity to take out a $600,000 loan. Not only will he have access to the full amount, it will only cost him about $36,000 in interest a year.
Option C is the obvious winner.
How did our client save around $240,000/year in income taxes?
Diego then used this policy as guaranteed equity to secure a loan or line of credit for $600,000 from a bank He’s essentially borrowing from himself and cash value.. This gave him full access to the loan amount.
Loans are not income, so Diego did not need to pay income taxes on the borrowed amount. Instead, he only needed to pay the interest (which for $600,000 at 6% annually, amounts to $36,000). So Whole Life Insurance helped Diego save around $240,000 in taxes annually.
A Powerful Tool for High Earners
* Case study is based on real clients. Names have been changed for privacy.
