Compare three ways to fund a shareholders' buy-sell agreement, and see where the capital dividend account (CDA) changes the math.
Each owns an equal, equally-valued stake in the corporation.
The buyout obligation when that owner dies (the manual's Bob/Calvin/Dylan example uses $1,000,000 each).
Owners span ages 42–58.
Premiums are paid with after-tax dollars, so the payer's tax rate drives the true cost.
Buyout / death
—
value of a deceased owner's stake
Policies to run
—
criss-cross vs corporate
Corporate saving
—
lower pre-tax funding cost / yr
CDA credit / death
—
tax-free capital dividend
How it works
How this works. A buy-sell agreement guarantees a buyer and a price for a
deceased owner's shares, but it only works if the buyer has the cash. Insurance is the most
secure funding. Criss-cross has each owner personally insure every other owner
(that's N×(N−1) policies), paid with expensive after-tax personal dollars and priced by each
life's age. Corporate-owned structures put one policy per owner inside the
company: fewer policies, premiums paid at the lower corporate rate, and the death benefit is
credited to the capital dividend account (CDA) so it can be passed to survivors
as a tax-free capital dividend. A cross-purchase uses that dividend to clear a
promissory note; a share redemption has the company buy back and cancel the
shares directly.
Educational illustration of standard Canadian insurance concepts. Figures are illustrative, not an insurer’s rates.
Illustration only, not a quote or advice. Figures are simplified for education and do not
reflect any specific insurer's rates. Consult a licensed advisor.