Corporate Owned Life Insurance

Key employer photo by lindsey lissau
Considering corporately owned?
We can lay it out clear.

Personally owned, or corporately owned, that is the question, especially if you're a business owner considering the purchase of life insurance. Life insurance is an important piece of any business and can be a tremendous asset to your business in the following ways:

  • Key Person Insurance - In the event that the loss of a key person would mean a monetary loss for the company. In this situation, the corporation is the owner and beneficiary.
  • Buy/Sell Insurance - Can be used to help settle a buy/sell agreement between two or more partners. In this instance, the corporation owns the policy on the shareholders and on the death of a partner, the corporation can redeem his or her shares. There are at least five ways to set up buy/sell insurance, which I will discuss in a later article.
  • Estate or Succession Planning - This will help fund the transfer of shares to charity, family, or other business partners. In this situation, you need to be aware of the rules regarding taxable benefits when the insured is a shareholder vs. an employee or when the beneficiary is a spouse, rather than the corporation.
  • Taxes Payable - Life insurance can be used to offset tax liabilities on death, which negates the need to sell your assets at an inopportune moment. The proceeds will then be typically deposited into the Capital Dividend Account (CDA) for further disposition to shareholders tax free.
  • Charitable Bequests - Finally, life insurance can insure that a charity will receive a designated amount of money.

All of these life insurance options can be personally owned or corporately owned and which one is right for you will depend on the following factors:

  • What is the purpose of the insurance?
  • Who will receive the proceeds of the insurance?
  • How quickly will the funds be required?

    A common misconception is that life insurance is an expense that can be deducted as an expense by a corporation. The CRA Document addressing this issue indicates that the only real opportunities to deduct premiums is when the policy is collaterally assigned to a lending institution, is a charitable gift, an employee benefit, or part of a Retirement Compensation Agreement (RCA).

Disposition of proceeds - Keep in mind that on death, the designation of the beneficiary will determine whether there will be tax issues or not, assuming the life insurance policy is owned and paid for by the corporation.

But to really break it down and determine whether corporately owned life insurance is right for your circumstances, you may want to weigh the following attributes:

Benefits

  • Premiums are paid by the company - While deducting the premium isn't typically possible, you can have your company pay the premium of a corporately owned policy. The benefit of this is the typical difference in tax rates that comes with small businesses.

In Ontario, the highest individual marginal tax rate is 46.41% vs. 16.50% for small businesses. An annual $10,000 premium would require the individual to earn $18,660.20 ($10,000/(1-.4641) before tax to pay the $10,000 premium vs. only $11,976.05, if the small business pays the premium. *NOTE* The latter assumes the taxable income of the small business is under the $500,000 limit for the preferred rate.

  • Capital Dividend Accounts (CDA)'s are an option - It can be used to funnel the proceeds of the life insurance policy tax free at the death of a shareholder. As an added bonus, Capital Dividends do not reduce the Adjusted Cost Basis (ACB) of the shares.
  • Multiple Insured Parties Under One Umbrella - Often with a multiple ownership corporation, and buy/sell insurance in particular, there may be a considerable age or various underwriting premium differences in rates for the parties insured, which causes unequal premium rates between the people involved. A corporate owned policy can close the gap and solve the various inequalities in premium rates that come with each individual paying their own policy.  
  • Available for Universal and Whole Life Policies - These policies have cash values that build up over time and are considered an asset to a corporation. However, a split dollar strategy is also an option where the cash value belongs to the employee, but the death benefit goes to the corporation.
  • Peace of Mind - When asked, many business owners just prefer to pay out as much as they can from their corporate account, rather than their personal account. This is mainly because of the tax benefit outlined above. 

Things to Keep in Mind

  • There is no creditor protection - While individual life policies are creditor protected, corporate policies are not.
  • The Share Value Increases - When the insured shareholder dies, the cash surrender value of the corporate owned policy can potentially increase the value of the shares, raising the cost for family members who may wish to buy them.
  • Issues regarding the "Net Family Property" Designation - In Ontario, under the new Family Law Act,  a surviving shareholder who uses the life insurance proceeds to purchase shares from the deceased's estate, would not be able to claim those shares they bought as "net family property." However, in cases where the shareholder uses a Tax-Free Capital Dividend from the corporation, it has yet to be established whether this would be considered using the life insurance proceeds to avoid the "net family property" calculation.
  • Certain Policies Could Jeopardize the Preferred Tax Rate Benefit - CRA requires that 90% of a corporation's assets be used in an active business. It's possible that the cash value that comes with universal life and whole life policies may be considered passive and not an active business asset, which could jeopardize your ability to qualify for the preferred tax rate benefit.

Bear in mind that entire books have been written on the subject, so clearly, this only scratches the surface. Still, we hope you have enough information to at least start the conversation with your insurance advisor. We would be happy to help, so call us at 1.866.899.4849.

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63 Comments

  1. LSM Insurance 01/31/2014 at 3:51 pm

    We did a video a little while back highlighting the ins and outs of Corporate Life Insurance link to youtube.com

  2. Barry 02/06/2014 at 10:34 am

    Can I deduct my life insurance I’m using the policy for my business?

  3. LSM Insurance 02/06/2014 at 10:37 am

    The answer in most instances is “no”
    A life insurance premiums can be a deductible expense if that is required as collateral to secure a loan. You should get something in writing that the policy is required as a condition for the loan.

  4. Jerry 02/08/2014 at 8:49 pm

    I’m thinking to transfer my personal life insurance policy to my Corporation which I own 76%.
    For best tax saving scenario, shall I name the beneficiaries in the will for my shares of the Corporation. One of them owns 24% the other one doesn’t own any shares. Thank you

  5. Hi Jerry,

    Under a personal life insurance policy you name your beneficiaries and the expense (premium) is not deductible for tax purposes; under a corporate life (key person/loan collateral) insurance policy, the corporation is the beneficiary and the expense is deductible for tax purposes.

    Under the corporate policy, you cannot name any other beneficiary than the corporation. If the policy was to pay out, the pay out would be paid to the corporation.

    Since the life policy is owned by the corporation, you cannot name beneficiaries in your Will.

    I hope this has answered your question.

    Regards,
    Storoszko & Associates
    Canadian & US Tax Specialists
    link to storoszko.net
    647 367 3477
    Twitter: @Storoszko_Assoc

  6. Jason H 04/08/2014 at 1:50 pm

    What is the corporate tax ready in Ontario. My business made $225,000 last year.

  7. Hi Jason,

    The Ontario basic income tax rate is 11.5%, but if you qualify the Ontario small business deduction reduces Ontario basic income tax, resulting in a lower tax rate of 4.5%.

    If your corporation is a Personal Service Business, it would not qualify for the SBD, as well it would not qualify for many deductions available to a small business corporation.

    I hope this has answered your question.

    Regards,
    Storoszko & Associates
    Canadian & US Tax Specialists
    link to storoszko.net
    647 367 3477
    Twitter: @Storoszko_Assoc

  8. Joyce 04/16/2014 at 8:41 am

    Can a Last to Die policy be corporately owned. I’m 62 NS and my husband is turning 71 in may but had some heart issues

  9. LSM Insurance 04/16/2014 at 8:58 am

    Yes a Last to Die policy can be Corporately Owned. The premiums will depend on the type of plan and the amount of coverage. Most insurance companies use age nearest pricing – so we would need your actual date of birth and more details around your husbands health issues. I’ll email you now. Thanks,

  10. Trudy 07/20/2014 at 5:01 pm

    We have a corporate owned life insurance policy, and the beneficiary was always the company. Last year our accountant suggested we change the beneficiary to my Dad who holds 51% stake as a shareholder in the company. What is the advantage of this? At this point, we have sold our business property, and are no longer operating, and it is being suggested that we transfer the corporate policy to my Dad (holds 51% stake as shareholder). What are the tax implications for the company and/or my Dad personally if this is done?

  11. Hi Trudy,

    Your accountant’s advice is not in the best interest of the company.

    The beneficiary of the life insurance policy must remain the company so that the premium payment are able to be tax-deductible. Once the beneficiary is changed anyone, but the company, the insurance policy does not belong to the company and the premiums are not able to be used as a deduction; additionally, if the policy premiums are paid by the company and your father is the beneficiary, the policy premiums become a taxable benefit to him… so no benefit to the company and a tax liability to your father.

    I hope this has answered your question.

    Regards,
    Storoszko & Associates
    Canadian & US Tax Specialists
    http://www.storoszko.net
    647 367 3477
    Twitter: @Storoszko_Assoc

  12. Pauline 08/07/2014 at 12:49 pm

    How do I find out the adjusted cost base on my life insurance policy. I don’t see it on my annual statement or in the policy

  13. LSM Insurance 08/07/2014 at 1:00 pm

    The adjusted cost base is calculation that must be made by the insurance company. This figure will not appear on your annual statement and increases each time there is an insurance charge on the policy

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