Insurance that does real work.

01Why corporate ownership is often used

Permanent life insurance premiums are generally not tax-deductible, whoever pays them. What changes is which dollars pay them. A corporation pays premiums from retained earnings that were taxed at the corporate rate, as little as 11.2% on active business income in Ontario since July 1, 2026. To pay the same premium personally, an owner first has to take that money out of the company and pay the second layer of tax on it.

02How the death benefit leaves the company tax-free

When the insured dies, the corporation receives the death benefit tax-free. On its own, that would only move the problem: the cash would be inside the company, and taking it out as a taxable dividend would cost the family the second layer of tax. The capital dividend account is what makes the structure work.

The amount of the death benefit above the policy’s adjusted cost basis is added to the company’s capital dividend account. The company can then pay it to the estate or the surviving shareholders as a capital dividend, which Canadian-resident shareholders receive tax-free, once an election is filed with the Canada Revenue Agency. A policy’s adjusted cost basis typically rises in the early years as premiums are paid, then declines as the annual cost of insurance is deducted. In many long-held policies it eventually falls to zero, at which point the full death benefit can be credited. When that happens depends on the policy’s design.

ACB: the policy’s adjusted cost basis. CDA: capital dividend account.

03What the money is for

Paying the tax bill at death

The most common use. The capital dividend funds the tax on the final return, or the redemption of shares in a post-mortem plan, without selling the business or its investments at the wrong time. It interacts with the estate’s loss carryback through the stop-loss rules, so the two have to be planned together. See the tax bill at death.

Equalising an estate

Where one child takes over the business and others do not, insurance can provide the others with an equivalent inheritance, without dividing the company.

Funding a buy-sell agreement

Between business partners, corporate-owned insurance gives the corporation the cash to buy back (redeem) a deceased owner’s shares from the estate, on terms agreed in advance in the shareholder agreement.

Protecting the business from the loss of a key person

Coverage on an owner or key executive gives the company the capital to steady itself, replace the person and reassure lenders and clients.

04Structures to know

Holding company ownership

Policies are often owned by a holding company rather than the operating company. A policy’s cash value is not an active business asset, so keeping it out of the operating company can help preserve the shares’ eligibility for the lifetime capital gains exemption, and it keeps the policy away from the operating company’s creditors. Whether this helps depends on how the shares are held, since the exemption is claimed by individuals on the shares they own. Moving an existing policy from one company to another is itself a taxable disposition and needs advice.

Exempt policies and the passive-income test

Most permanent policies are designed to be exempt policies under the Income Tax Act, which limits how much savings a policy can hold relative to its insurance. The rules were tightened for policies issued after 2016. Growth inside an exempt policy is not taxed annually and is not counted toward the $50,000 passive-income threshold that erodes the small business rate. Surrendering a policy, withdrawing cash or taking a policy loan is a disposition: any amount above the policy’s adjusted cost basis (for a partial withdrawal, the portion of it allocated to the withdrawal) is fully taxable income (a “policy gain”), not a capital gain. Inside a corporation, a policy gain is investment income in the year it arises and is not credited to the capital dividend account.

Borrowing against a policy

Some owners borrow against a policy’s cash value, either from the start to keep capital working in the business (an immediate financing arrangement) or later to supplement retirement income. Interest may be deductible where the borrowed money is used to earn business or investment income, and a limited part of the premium may be deductible where the lender requires the policy as collateral. The loan is repaid from the death benefit. These arrangements depend on interest rates, policy performance, lender collateral requirements and strict documentation, and they draw the CRA’s attention. They are generally considered only for owners with strong cash flow, a long horizon and the reserves to absorb a collateral call. They should be stress-tested under higher rates before they are put in place.

Who owns, who pays, who receives

The tax result depends on the policy being owned by, and payable to, the right entity. When a corporation pays premiums on a policy it does not own, or a corporate-owned policy pays someone other than the corporation, the result can be a taxable benefit, and proceeds that bypass the corporation earn no capital dividend account credit. When more than one corporation shares in a death benefit, the credit can be reduced. These are drafting questions to settle at the start, not after a claim.

05Questions to bring to your accountant

• Which company should own the policy and be its beneficiary: the operating company or a holding company?
• How would the death benefit flow through our capital dividend account, and how does it fit with the post-mortem plan?
• How large will our capital gains tax liability at death be, and in today’s dollars, how much coverage would fund it?
• Are we close to the $50,000 passive-income threshold, and would moving surplus into an exempt policy help?
• Does our shareholder agreement describe how insurance proceeds will be used?
• If we are considering borrowing against the policy, what happens if interest rates rise by three points?