DFK Tax Newsletter


Winter 2021 Edition - February 16, 2021 - Pat MacIsaac, CPA, Senior Accountant, Don Wolsey, CPA, CA, CFP, Partner, Flaim Wolsey Hall, Halifax, NS, DFK Affiliate Firm

Corporate Ownership of Life Insurance Policy

Pat MacIsaac, CPA, Senior Accountant
Don Wolsey, CPA, CA, CFP, Partner 
Flaim Wolsey Hall, Halifax, NS, DFK Affiliate Firm

There are several advantages to owning a life insurance policy within a corporation that not only provide positive tax implications in the present but also minimize future risk and tax costs. Corporate-owned life insurance policies can provide liquidity and build wealth for owner-manager businesses and are useful tax and estate planning tools.  Note that when a life insurance policy is owned by a corporation, the shareholder should not be designated as a beneficiary of any proceeds to avoid shareholder benefit issues.


The first advantage of corporate-owned life insurance is that the “cost” of the premiums is lower than when personally-owned.  Generally, life insurance premiums are not tax deductible and are paid from the policy owner’s after-tax income whether owned personally or corporately.  Depending on the provincial jurisdiction, personal income tax rates can exceed the small busines tax rate by 41.37% or the general corporate income tax rate by 27.03%.  This means that, from an economic standpoint, the corporation can pay the premiums using approximately 37% - 47% less pre-tax income, which represents a substantial savings over time.

The table below illustrates the differences in pre-tax income required to fund $10,000 of annual life insurance premiums for a resident of Ontario. 

  Personally-owned – income taxed at highest personal rate Corporate-owned – income taxed at the small business rate Corporate-owned – income taxed at the general corporate rate
Annual Premiums $10,000 $10,000 $10,000
Tax Rate 53.53% 12.2% 26.5%
Required Pre-tax Income to Pay Premium (Premiums / 1 – Tax Rate) $21,519 $11,389 $13,605
Insurance Premium “Cost” Reduction 0% 47% 37%

Another advantage of corporate-owned life insurance arises upon the death of the life insured when insurance proceeds are received by a corporate beneficiary.  When this occurs the difference between the insurance proceeds and the policy’s adjusted cost basis (“ACB”) is added to the corporation’s Capital Dividend Account (“CDA”). The corporation can then pay a non-taxable dividend from its CDA balance to its remaining shareholder(s) which can be used in post-mortem planning to minimize the tax liability upon death of the life insured. The payment of the non-taxable dividend to the estate or other shareholders provides significant tax savings as the highest marginal rate on dividends in Ontario is 39.34% for eligible dividends and 47.74% for non-eligible dividends.

Corporate-owned life insurance can also provide estate equalization in situations where one or more family members owning shares of a company do not wish to be involved in the business upon the death of the life insured, and at least one family member plans to continue on in the business. In these cases, the insurance proceeds can be used to buy out non-active family members by structuring the payouts such that these individuals receive equal value relative to the individuals who remain active in the corporation.

Additionally, tax-exempt permanent life insurance policies can be a tool to mitigate some of the negative impacts of the Adjusted Aggregate Investment Income (“AAII”) regime that may limit a company’s ability to access to the small business deduction.  Consider looking at these types of policies as another investment class rather than just for the life insurance component.  Generally speaking, a tax-exempt permanent life insurance policy is one that provides insurance for the entire lifetime of the insured, but premiums are only payable for 20 years and not over a lifetime.   This results in the annual premiums for permanent insurance being significantly higher than those for term insurance.  The excess of the premium paid over the current year cost of insurance is reinvested within the policy.  Any growth reinvested inside of the policy is not subject to income taxes and is excluded from AAII.  The life insurance premium paid reduces the amount of surplus cash invested in traditional stocks and bonds.  If the annual premiums were instead invested in a non-registered investment portfolio inside of the company, the investment income earned would be subject to higher annual taxation and would be included in the company’s AAII. 

The life insurance proceeds received may also be used in the following ways:

• Repaying any existing corporate debt instead of immediately paying non-taxable CDA dividends to the estate or other shareholders. This would not affect the addition of the credit to the CDA and would still allow the company to distribute future earnings as non-taxable dividends to the shareholders.

• Funding the buy-sell arrangement portion of the shareholders’ agreement. By using life insurance proceeds to help fund the sale of the deceased’s shares to the surviving business partners, it reduces the amount of additional financing needed to purchase the deceased’s shares and also may reduce the deceased’s tax consequences on death.


While there are many advantages of corporate-owned life insurance policies, there are some important disadvantages to consider and plan for when possible.

The primary disadvantage is the risk of the insurance proceeds being subject to claims of the creditors of the policy holder. When a life insurance policy is owned personally and the beneficiary is an immediate family member, the policy is generally exempt from seizure by the policy owner’s creditors. However, if it is owned by a corporation, the corporation’s creditors can seize the policy to pay off existing corporate debt rather than being able to pay the funds out to shareholders or beneficiaries. 

Another potential downside is the loss of financial flexibility.  The payment of the annual life insurance premium is a financial commitment. If a company experiences financial difficulties, then it may have difficulty paying the premium, especially if the annual premium is large. 

Since a life insurance policy is a passive asset for the purposes of the Qualified Small Business Corporation (“QSBC”) shares test, there needs to be consideration as to whether the policy would put the corporation offside for this test. This would affect the ability of the shareholder to claim the lifetime capital gains exemption (“LCGE”) on the disposition of the corporation’s shares and would prevent them from using the LCGE to reduce or eliminate tax on the disposition of qualifying shares. The policy will generally be valued at its cash surrender value, so it is important to keep this in mind when considering the QBSC tests and valuation of the company.

Finally, the ownership of a life insurance policy within a corporation can create difficulties and potential adverse complications during the sale or reorganization of the corporation. The transfer of a policy from the corporate owner to a new owner (e.g. the insured or another company owned by the insured) may trigger a policy gain on the difference between the policy value and the ACB. That policy gain would be taxable to the corporation as ordinary investment income. Since a life insurance policy does not qualify under the tax-free rollover rules of Income Tax Act Section 85, the policy gain cannot be deferred on a transfer of the policy to another corporation.

 It is important to analyze each situation carefully to ensure that the advantages of corporate-owned life insurance outweigh the disadvantages.