Corporate-owned life insurance

Ken Greig - Apr 05, 2022

Business owners have two options when choosing how to own a life insurance policy on their lives: corporate or personal.

Why choose corporate ownership?

Using low-tax corporate dollars to pay the insurance costs is a significant incentive for corporate ownership, but there are other considerations with corporate-owned life insurance. A significant advantage of a corporate-owned life insurance policy is the annual savings achieved from the corporation paying insurance costs with dollars that were taxed at a lower active business rate. 

Life insurance costs are generally not tax-deductible. As a result, less pre-tax dollars are needed when the policy is held corporately versus personally since personal tax rates are generally higher than corporate tax rates on active business income. 

For example, Tracy owns a Canadian corporation and considers purchasing a life insurance policy with an annual premium of $10,000. Tracy’s personal marginal tax rate on regular income is 50% and her corporation’s small business tax rate is 15%. If Tracy purchases the policy personally, her corporation will have to earn and then pay $20,000 to her to have $10,000 after-tax to pay the annual premium. In contrast, if Tracy’s corporation owns and funds the life insurance policy, it would only have to earn $11,765 before taxes to fund the $10,000 annual premium. This results in savings of $8,235 per year. 

Apart from tax savings, there are other reasons why a corporation would own a life insurance policy. For example, it may need insurance for key person coverage, funding for a shareholder buyout, or insuring a bank loan. When structuring a corporate-owned life insurance policy, the corporate policy owner should also be the beneficiary of the policy (in most cases). If a shareholder is the beneficiary of the policy, the amount of annual premium paid by the corporation would likely be considered a taxable shareholder benefit. 

Taxable shareholder benefits are taxed as ordinary income and not deductible by the corporation. How life insurance proceeds are distributed tax-free from the corporate owner, in many cases, the net estate value derived from a corporate-owned life insurance policy is the same compared to where the policy is owned personally. This is the result of the corporation’s capital dividend account (“CDA”). 

The CDA credit allows the life insurance proceeds to be paid as a tax-free capital dividend to Canadian resident shareholders. Generally, an amount equal to the life insurance proceeds received by a private corporation less the policy’s adjusted cost basis (“ACB”) may be added to its CDA. The ACB of a life insurance policy is generally the sum of the cumulative premiums paid less than the net cost of pure insurance (“NCPI”). 

NCPI is defined as an assumed mortality cost in the Income Tax Act (Canada) (“ITA”) and over time, it may reduce the ACB of the policy to nil. At that time, the CDA credit would equal the full amount of the life insurance proceeds. As noted, to the extent the corporation has a CDA balance, it’s able to pay a tax-free capital dividend to its Canadian resident shareholder(s). Depending on the deceased shareholder’s estate plan, the shareholder(s) could include the estate, spouse, or heir(s). 

A corporation can pay a capital dividend as a cash dividend or as payment upon the redemption of shares. Canada LifeTM can provide details of the policy’s ACB to assist a tax professional in calculating the corporation’s CDA balance. Before the capital dividend is paid, an election needs to be filed with the Canada Revenue Agency (and Revenue Quebec, if applicable). Any part of the insurance proceeds not covered by the CDA balance would generally be paid from the corporation as a taxable dividend. Corporate-owned life insurance can maximize estate values in comparison to corporate investments business owners often accumulate wealth within a holding company because they don’t need all their business’ profits to fund their lifestyle. This achieves a significant tax deferral since these funds are left at the corporate level and not paid out to the business owner as a taxable distribution (dividend or salary). 

These corporate assets are often used to purchase investments that generate income that’s taxed at the highest corporate rate, which ranges between 48.7% and 54.7% depending on the province or territory and may also reduce the operating company’s small business limit. In contrast, the cash value growth within a life insurance policy is tax-advantaged meaning it isn’t subject to taxation. 

As a result, the policy’s growth isn’t slowed by tax and it doesn’t contribute to reducing the corporation’s small business limit like other forms of passive corporate income. The tax-advantaged growth within a policy and the CDA mechanism are two unique advantages that life insurance has over corporate investments – making it a tax-efficient tool for transferring corporate wealth to a surviving spouse or the next generation. 

For example, suppose Tracy, from the above example, is age 50, a non-smoker and a standard risk life insured. Tracy’s corporation purchases a Canada Life participating life insurance policy with a $10,000 annual premium that’s paid over 20 years. 

Compare the estate values from this arrangement to the estate values if the same premium dollars are invested in a corporate-owned GIC earning interest at 4%. The corporate tax rate on passive income is 51%, and Tracy’s personal tax rate on non-eligible dividends is 45%.

Estate values

          Age                                    GIC @ 4%                                 Participating life insurance

           75                                      $174,297                                               $402,103

           85                                      $226,384                                               $601,394

           95                                      $289,631                                               $854,944

The above example is for illustrative purposes only. Situations will vary according to specific circumstances. The results of this comparison demonstrate an enhancement to Tracy’s estate for her heirs as compared to a GIC. With a GIC, the interest income is subject to tax at a high rate and on Tracy’s death, the proceeds are distributed to her estate as a taxable dividend. With life insurance, the growth in policy values is tax-advantaged and all or a significant portion of the insurance proceeds are paid to her estate as a tax-free capital dividend.

Other considerations

There are tax and non-tax considerations when deciding to own a life insurance policy corporately:

  • Corporate-owned life insurance doesn’t provide overall creditor protection. Ideally, a life insurance policy with cash value should be held in a holding company to protect it from potential creditors of the operating company.
  • Corporate ownership adds complexity to estate plans where the intended end recipient of the insurance proceeds won’t be a shareholder of the corporate policy owner.
  • There may be significant tax consequences if the policy is transferred, for example, if the corporate owner is to be sold or purified before a sale. As a result, serious thought should be given to the ownership of a life insurance policy and whether alternative shareholdings or a minor corporate restructuring is needed.
  • The cash value of the policy is reflected in the value of the shareholder’s shares at death for tax purposes. This is generally not an issue where there’s a spousal rollover or an estate freeze is implemented.
  • The cash value of the policy may disqualify the shareholder from using their lifetime capital gains exemption (LCGE) in respect of a disposition of the corporation’s shares. For a shareholder to use the LCGE, one of the tests requires that at the time of the disposition of the shares, all or substantially all (generally is understood to mean 90%) of the fair market value of the corporation’s assets need to be used principally (generally understood to mean 50%) in an active business. A policy’s cash value is a passive asset for the purposes of this test. This is also the case with marketable securities like stocks and bonds.


There are many advantages to corporate-owned life insurance; including tax savings from the use of corporate dollars to pay insurance costs and the maximized estate values from both the tax-advantaged growth in policy values and CDA. The determination of whether a life insurance policy is owned corporately or personally needs to be fully analyzed to consider both tax and non-tax implications.