How does corporate-owned life insurance work?

• The corporation is owner, payer and typically beneficiary.
• Premiums are generally not deductible.
• The capital dividend account mechanism can allow tax-free distribution of proceeds to shareholders.
• Incorrect ownership or beneficiary structures can create a taxable shareholder benefit.
• Structure should be coordinated with the shareholders' agreement and the will.

Where a need is corporate — funding a buy-sell, protecting a lender, covering tax on shares at death, or holding permanent coverage long-term — paying from corporate dollars can be more efficient than paying personally from after-tax salary or dividends. The efficiency depends on the corporation's tax rate and the shareholder's rate.

The CDA is a notional account. When a private corporation receives a life insurance death benefit, the amount exceeding the policy's adjusted cost basis is generally added to the CDA and can be paid to shareholders as a tax-free capital dividend, with the required election filed. The ACB declines over time, which affects how much reaches the CDA.

A holding company paying premiums on a policy owned by an operating company, or a corporation paying premiums on a personally owned policy, can produce shareholder-benefit assessments. Split-dollar and shared-ownership arrangements require formal agreements and professional review.

• Corporate insurance can affect the qualified small business corporation share test for the capital gains exemption.
• Passive investment income rules may interact with policy funding decisions.
• Always coordinate with a Canadian accountant and corporate lawyer before implementing.

• Corporations — tax information for Canadian businesses — Canada Revenue Agency
• Income tax information for individuals — Canada Revenue Agency
• Life and health insurance in Canada — industry resources — CLHIA