Corporate Life Insurance

Questions and Answers

Why have your corporation own your life insurance policy?

Business owners can realize significant annual savings by having their corporation own the policy and pay the premiums with retained earnings from their active business income. Since a corporation’s tax rate is much lower than the business owners personal tax rate, it then requires less pre-tax income to fund the premiums through the corporation compared with paying for them personally.

Can you give me an example of this premium savings?

Let’s suppose Bob owns a Canadian controlled private corporation in Ontario. He purchases an insurance policy with an annual premium (cost) of $100,000. Bob’s personal marginal tax rate is 46.0% and his corporation’s tax rate is 12.2%. If Bob purchases the insurance policy personally, his corporation will have to earn and then pay $185,185 to Bob in order to have $100,000 after tax to pay the premium. In contrast if Bob’s corporation owns and funds the life insurance policy, his corporation would only have to earn $113,895 before taxes to fund the $100,000 annual premium. The result is that Bob’s corporation saves about $71,290 per year when the premiums are paid with corporate dollars.

(If we assume Bob needs to earn money outside the corporation to have the corporation pay him, so he can in turn pay the premium, the disparity gets even worse. If you assume the corporation has to earn $210,917 to be able to pay Bob his $185,185, then turnaround and pay $100K for the insurance premium. In summary, the corporation needs to earn $113,895 to pay $100K inside the Corp. The individual and the corporation combined would need to earn $210,917 to pay the $100K personally).

What are the 3 main reasons owners of Canadian Controlled Private Corporations (CCPC), invest some of their profits into a tax-exempt permanent insurance policy,

1. Losing out on the full benefit of the small business corporate income tax rate.

Currently, for CCPCs resident in Ontario, the small business tax rate on the corporation’s first $500,000 of annual active business income is 12.2%. The tax rate applied to active business income in excess of $500,000 is taxed at the general business tax rate of 26.5%.

Tax rules were introduced in 2019 to penalize business owners that hold passive investments in their corporation in addition to the corporation carrying on an active business.

With the tax changes, if a corporation, is earning more than $50,000 in passive income in a year, the amount of active business income eligible for the small business corporate income tax rate is reduced by $5 for every $1 of passive income above the $50,000 threshold. By moving some of your passive income into a corporate insurance plan, you can stay within the small business tax rate of 12.2%.

2. Tax-sheltered growth

Significant cash values (the investment component of the insurance plan) can accumulate on a tax-deferred basis in a permanent insurance policy within the maximum deposits permitted by the Income Tax Act. The deposits can be designed so that they remain tax-sheltered within the contract. The key here is the tax-exempt limit. This is the maximum savings allowed inside a policy at a given point in time before it would lose its exempt status.

3. Tax-Free Distribution on Death

Shares in a family-owned corporation can be a major component of a person’s estate. In many cases, the shares of the family business are left to family members involved in the company, and remaining assets are divided among family not involved in the business. If an individual continues to hold onto the corporation until his or her death, he or she will have a deemed disposition at death equal to the fair market value of the shares of the corporation.

The death benefit of a corporate-owned life insurance policy is one item that can be credited to the capital dividend account (CDA) tax-free. When a private corporation is the owner and named beneficiary of a tax-exempt life insurance policy, a credit to its CDA for the amount of the death benefit proceeds received less the adjusted cost basis (book value) of the insurance policy is recorded. The death benefit can be paid out of the corporation as a tax-free capital dividend.

The insurance company would provide the specifics.

What is the Capital Dividend Account?

The capital dividend account (CDA) is a notional account that keeps track of the tax-free amounts accumulated by a private corporation. The CDA appears on a company’s financial statement. Business owners can use the CDA to pay out tax-free income to its shareholders as a capital dividend. This is an efficient way to minimize the tax burden arising at death upon the distribution of the deceased’s assets to beneficiaries. It’s an important part of a tax reduction strategy and is only available to Canadian controlled private corporations residing in Canada.

(The CDA balance resulting from receipt of death benefit proceeds from a life insurance death benefit will remain until such time as capital dividends are elected. This allows corporations the ability to elect to pay a capital dividend when it’s most advantageous for shareholders).

How can corporate-owned life insurance maximize estate values in comparison to investments

Business owners will often accumulate excess wealth within their corporations because they don’t need to use the income personally. There can be a significant tax-deferral by leaving the cash in the corporation rather than distributing as a non-eligible dividend and paying personal tax on it.

Often retained earnings are invested in interest bearing vehicles which generate the highest income taxed at the highest corporate tax rate ranging from 44.7% to 50.67%. depending on the province where a corporation does business.

In contrast the cash value (investment component of the insurance plan) growth within a tax-exempt life insurance policy is not subject to annual accrual taxation. This feature coupled with the CDA credit results in corporate life insurance having two significant and unique tax advantages compared with investments. Therefore, corporate life insurance can be an excellent financial product for maximizing a life insured’s estate value.

How should a corporate-owned policy be set up?

In most cases the corporation that owns and pays for the policy should also be the policy beneficiary, otherwise potential taxable shareholder benefit issues could arise.

Which insurance product should I purchase?

The types of insurance products available for business owners are seemingly endless, hence the need for an experienced insurance broker who keeps up-to-date on all products and new products available to consumers. From term insurance to universal life and whole life insurance, each type of product can be personally arranged to fit a person’s needs.

How much corporate insurance should I buy?

One way is to insure the amount that the company is worth now and possibly 10 years from now. However, there is no general rule since insurance needs are based on a person’s unique situation including business and personal needs and how much they can afford to transfer to the insurance plan.

What are the key benefits of a corporate-owned insurance plan?

Using potentially lower after-tax corporate dollars to pay for insurance premiums

Currently, passive investment income attracts a top corporate rate of 50.17% (Province of Ontario). Corporate-owned insurance will provide tax sheltering of this rate. Shareholders extracting dividends from their company will be either taxed at the top rate of 33.0% or 47.44% for eligible and non eligible dividends respectively.

(All types of investment income are officially taxed at the same rate, 50.17% However, when you add in the dividend tax credit for dividend income and the capital gains inclusion rate you end up with the effective rates listed. In short officially all rates are the same but with the appropriate adjustments for the nature of the income you get the variance shown).

Why is owning a corporate insurance plan one of the best ways to pass your corporate assets to your loved ones?

A corporate-owned insurance can utilize the Capital Dividend Account to disburse no dividend tax upon death.

What if I decide to wait and buy corporate owned life insurance?

Not a good idea for a few reasons:

In the September 2018 Canadian Money Saver edition, I wrote an article titled, “How Business Owners Can Continue to Shelter Income in Face of New Prohibitive Tax Law.” I discussed Bill C-43, the 2017 tax legislation which reduced the amount of life insurance proceeds allowed to be distributed tax-free through the corporation’s CDA. Revenue Canada’s hunger for your corporate tax dollars suggests this could happen again. It makes sense to apply for insurance now in case another CDA reduction does become law.

It’s also a good idea to apply while you’re in good health. If you wait, and your health deteriorates, you may not qualify and be able to take advantage of tax-free capital dividends.

Finally, the older you get the more the insurance costs, since the amount of insurance cost is based on a person’s age.

What is the enormous mistake business owners make when purchasing a corporate-owned insurance plan?

There are so many insurance products available today. Using the services of a highly skilled and experienced agent who is well versed in shopping for and structuring insurance products that fits your needs is vital. Not to mention avoiding overpaying for the insurance plan.

How safe is my insurance plan?

Life Insurance products are among the safest investments around because they are financially backed by Canada’s insurance companies, which in turn are backed by an organization called Assuris (

Assuris is the not-for-profit organization that protects Canadian policyholders in the event that their member life insurance company should fail.

What is the Golden Rule when purchasing a corporate insurance plan?

Shop the insurance market for best product at the best price while you’re in GOOD HEALTH!

How can I get the best insurance rates on the marked today?

Give us a call. We shop the insurance markets daily for best rates.


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