Corporate Owned Life Insurance

Primary Applications

Three ways corporate life insurance protects your business

Each strategy uses corporate-owned life insurance differently: the right structure depends on your shareholder agreement and long-term goals.

Buy-Sell & Shareholder Agreement Funding

Provides immediate, tax-free capital so the business can settle a deceased partner's estate stake without taking on debt or selling operating assets, structured either as a share redemption or a cross-purchase, depending on your agreement.

No forced sale of business assets to raise cash
Funds a redemption of the estate's shares or a cross-purchase by survivors
Removes ambiguity and delay from a family or shareholder dispute

Key Person Protection

Reimburses the business for lost operational revenue, outstanding bank loan repayments, and the cost of recruiting and training a replacement executive if a key partner or founder passes away.

Bridges revenue gap during transition to new leadership
Can satisfy lender requirements tied to a key person's role
Funds an executive search without straining cash flow

Tax-Exempt Passive Surplus Accumulation

Moves idle corporate surplus out of taxable passive investments, subject to a combined corporate tax rate of roughly 50%+ on investment income in Ontario, into a tax-exempt policy whose cash value growth compounds without annual tax drag.

Tax-exempt policy growth generally doesn't count toward the passive-income threshold that grinds your Small Business Deduction
Death benefit ultimately flows to heirs largely tax-free via the CDA
Coordinated with your accountant against annual exempt-test limits

Tax Mechanics

The Capital Dividend Account (CDA) tax flow

How a corporate death benefit becomes a tax-free payout to shareholders or an estate.

Corporate Receipt: CDA Credit

The insurance carrier pays the full death benefit to the corporation, the named beneficiary, 100% tax-free, with no income inclusion.

The corporation credits its Capital Dividend Account by the death benefit less the policy's Adjusted Cost Basis (ACB) immediately before death.

CDA Credit = Death Benefit − Policy ACB

As mortality costs erode the ACB over the policy's life, a growing share of the benefit qualifies for tax-free treatment, though the ACB rarely reaches exactly zero, and the pace varies by policy type.

Premiums are funded with lower-taxed active corporate dollars rather than dollars already reduced by personal tax: the core cost advantage of holding the policy inside the corporation.

Shareholder Distribution: Tax-Free Payout

The corporation files CRA Form T2054 (Election for a Capital Dividend under subsection 83(2)) on or before the dividend becomes payable. Late or incorrect elections can trigger penalty tax, so this is filed jointly with your accountant.

This is where structure matters:

In a redemption-style buy-sell, the corp redeems the deceased's shares from the estate; the redemption proceeds are a deemed dividend under s.84(3), which can be elected tax-free via the CDA. In a cross-purchase, a straight capital dividend is paid pro-rata to surviving shareholders, who then personally buy the deceased's shares from the estate. Paying a flat dividend to all shareholders when the real goal is a targeted redemption creates inequity. Confirm which path your agreement actually uses.

Any proceeds equal to the remaining ACB (not covered by the CDA credit) are paid out as an ordinary taxable dividend to the recipient.

Our Process

How we implement your corporate strategy

Corporate Structure & Agreement Review

We review your shareholder or partnership agreement to confirm whether a redemption or cross-purchase structure applies.

Multi-Carrier Rate & ACB Projection

We benchmark Sun Life, Manulife, Canada Life, RBC Insurance, and Empire Life on rate and projected ACB decay.

Legal & Accounting Alignment

We coordinate directly with your CPA and lawyer on Schedule 89 CDA tracking and T2054 election timing.

Policy Delivery & Ongoing Review

We deliver the policy and revisit coverage annually as your corporate structure, shareholders, and valuation evolve.

FAQ

Corporate life insurance, explained clearly

How does corporate owned life insurance pass money tax-free to shareholders in Canada?

The corporation owns the policy and is the named beneficiary, so the death benefit arrives tax-free at the corporate level. Most of that amount then credits the Capital Dividend Account, letting the corporation pay it out to Canadian-resident shareholders or the deceased's estate as a tax-free capital dividend, via a share redemption or a direct dividend, depending on how your buy-sell agreement is structured.

What is the Capital Dividend Account (CDA) and how is the credit calculated?

The CDA is a notional tax account that tracks amounts a private corporation can distribute tax-free. For life insurance, the credit equals the death benefit received minus the policy's Adjusted Cost Basis (ACB) immediately before death. Any remaining amount up to the ACB is distributed as an ordinary, taxable dividend instead.

Why is it cheaper to pay premiums through a corporation than personally?

A CCPC's active business income is typically taxed at a lower combined rate than the personal tax you'd pay to withdraw the same amount as salary or dividends first. Paying premiums with corporate dollars before that extra layer of personal tax is applied is the core cost advantage. The exact spread depends on your corporation's income mix and your personal bracket, so we model it against your specific numbers rather than a rule of thumb.

Are corporate life insurance premiums tax-deductible in Canada?

Generally, no, premiums are paid with after-tax corporate dollars and aren't deductible. The one exception is under ITA 20(1)(e.2): if the policy is collaterally assigned as security for a loan from a bank or similar lender, a deduction is allowed for the lesser of the premium paid or the policy's net cost of pure insurance (NCPI), and only in proportion to the coverage actually assigned to the lender, not the full premium.

What form must be filed with the CRA to distribute tax-free capital dividends?

CRA Form T2054, Election for a Capital Dividend Under Subsection 83(2), must be filed on or before the earlier of the day the dividend becomes payable or the day any part of it is paid. Late or improperly filed elections can trigger Part III penalty tax on the excess, so this is always filed jointly with your accountant, not something to leave until after the dividend goes out.

Extract Corporate Surplus Tax-Free, While Funding Buy-Sell & Succession