Corporate Owned Life Insurance

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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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Carlo
Carlo

Hello
I am researching life insurance for my parents. They are purchasing a 10 year term policy for $1,500,000 each.

My mother is the sole director of their incorporated business, and my father is a consultant of that business.

This is basically a peronal policy to cover the mortgage and replace income should either of them pass away

However we’ve been advised that it may make sense to have the company own the policy, and pay the premiums.
What would be the advantage of that?

thank you
C

Jason C
Jason C

Hi There,

I am a 58 year old male non smoker. Looking for $300,000 to leave to my children. I want my company to the premiums. Which insurance company is best

Sandy
Sandy

If I purchase a personal umbrella policy, why would I need to buy other coverages? Sandy

Kalee
Kalee

Can I buy a corporate life insurance policy without disclosing my financial information. My broker is making give these details and I don’t think its any of his business.

Walter
Walter

Does Empire Life offer corporate life insurance I have a Term policy with them already. But it is individually owned. I’m born ….

R. Lake
R. Lake

Can you work on a quote for $1.5M of Term 20. I’m 59 don’t smoke, but had a mild heart attack in 2008

Rebecca
Rebecca

Will I save money if I incorpoaret and have my company pay the premiums. I’m paying close to $4000 a year so I’m thinking it might be worth it.

Nowlan L
Nowlan L

How does the capital dividend account work for a life insurance policy. Will it allow me to get the money out of my insurance policy tax free.

Storoszko & Associates, Tax Professionals
Storoszko & Associates, Tax Professionals

Hi Nowlan, Firstly, if your company is the beneficial on the policy, it’s not your policy. The corporation pays the premiums and therefore is the owner of the policy. As you legally are not the owner of the policy, you have no access to the capital account. If the policy permits the corporation to withdraw from the capital account, the company can pay you the proceeds, but this will be taxable income to you as the contributions/premiums paid by the corporation have been subject to tax deductibility. I hope this has answered your question. Regards, Storoszko & Associates Canadian &… Read more »

Nowlan L
Nowlan L

Thankds Michael. But which route is better from a tax point personal or corporate owned policy

Storoszko & Associates
Storoszko & Associates

Hi Nowlan,

The purpose of the corporate owned insurance and capital dividend account is to provide tax free proceeds/benefits to the corporation as the beneficiary of the policy and then to the sharesholders upon the the death of the key person.

In the position that the key person insurance drawn upon, there is no better preference as the money is taxed multiple times (corporately then personally).

I hope this has answered your question.

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

Trent
Trent

Can I get a life insurance if 81.

I’m still healthy and actively working. Please email me a quote if its available

Prime
Prime

Permanent insurance as a tax sheletered is a waste. Term insurance is the only way to go

Syed Raza
Syed Raza

Hi,

Thanks for the note. I agree that term insurance is great for some of today’s market.

However, there are a few different types of permanent life insurance such as Universal Life and Term 100 which may suit some people’s needs as well. There are consumers who prefer investing in guaranteed investments such as life insurance policies and segregated funds with insurance companies, rather than investing with the banks or investment firms who may produce inadequate returns.

Feel free to share any personal experiences you have had regarding your life insurance.

Thank you

Carol
Carol

Is there a maximum amount that can be transferred from the capital dividend account to my beneficiaries

Storoszko & Associates, Tax Professionals
Storoszko & Associates, Tax Professionals

Hi Nowlan,

That’s a question you should be having with your financial planner.

I hope this has answered your question.

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

Storoszko & Associates, Tax Professionals
Storoszko & Associates, Tax Professionals

Hi Carol,

The beneficiaries are the shareholders of the Company. The election to pay a capital dividend (not transfer) is done by the corporation.

The date of election, the length of time the corporation has been private vs public and the balance of the capital dividend account before and after contributions from life insurance pay-outs all contribute to the capital dividend amount payable.

I hope this has answered your question.

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

Betty G
Betty G

Can my company pay the premiums on a BMO policy?

Keith G.
Keith G.

Can you provide information on how a tax free inter-corporate dividend can be used to transfer a policy from Opco to Holco for no other FMV consideration. Thanks!

Storoszko & Associates, Tax Professionals
Storoszko & Associates, Tax Professionals

Hi Keith, This can be done, but there is a high risk of a shareholder benefit assessment by CRA. Best to contact your tax advisor/council for review. Here are some options to discuss: – OPCO changing or making itself the beneficiary under the insurance policy. – Retaining the current ownership/beneficiary structure but having the HOLDCO reimburse OPCO for the premium costs to avoid the assessment of a shareholder benefit. – Structuring ownership/beneficiary designations at the HOLDCO level, presumably funded with tax free inter-corporate dividends. It should be noted that for existing arrangements, the transfer of a policy will result in… Read more »

Frank R
Frank R

What will be the tax implication if switch my existing Whole Life Life policy from Company to me personally. How much if any tax would I pay?

Storoszko & Associates, Tax Professionals
Storoszko & Associates, Tax Professionals

Hi Frank, Assuming your Whole Life policy is owned by your company, switching is not a simple process… the company has invested Whole Life policy so the policy will have a cash value and cost base. If the company was to cash out the policy, the cash value over the adjusted cost base would be taxable income to the company. In your situation, you cannot switch the policy from the company to you personally, but the company can sell you the policy. You would need to pay the company the current cash out value (even if you do not actually… Read more »

Bobby R
Bobby R

I have a Puple Shield policy and I just incorporated. I want to look at changing my policy.

Ilan
Ilan

Canada Life sent my a T5 on my life insurance for over $3500 is this interest or a capital gain?

Storoszko & Associates, Tax Professionals
Storoszko & Associates, Tax Professionals

Hi Ilan,

The T5 slip will indicate what the amount is… is the $3500 in the interest box? capital gain box? other income?

I hope this has answered your question.

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

Pavlo
Pavlo

What happens if I set up an insurance policy on a key employee and he leaves the company who owns the policy?

Martin
Martin

Can I have a holding company as the owner and beneficiary of my life insurance policy and what are the tax implications.

Storoszko & Associates, Tax Professionals
Storoszko & Associates, Tax Professionals

Hi Martin,

Yes, you can have a holding company as the owner and beneficiary of my life insurance policy.

The tax implications would be the same as if the policy was held by your active corporation.

I hope this has answered your question.

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

Paul T
Paul T

Corporate life insurance can be a great way to fund buy-sell agreement upon.

The last thing many partners want is a surviving shareholders family involved in the business.

I’ve seen this create huge problems. Also many of those families may not be interested in staying in the business.

Corporate Life insurance proceeds can be used to buy out the shares owned by the deceased shareholder’s estate or beneficiaries and avoid a lot of headaches.

Using corporate owned life insurance to fund the buyout helps ensure the business can keep while getting cash to the insured’s beneficiaries.

SLT
SLT

How is my my life insurance policy taxed if switch it from personal to corporate?

Storoszko & Associates, Tax Professionals
Storoszko & Associates, Tax Professionals

Hi SLT, You don’t indicate the type of policy; depending upon the type of policy there may be a tax consequence. If the policy is a Term Life based one, there is no tax consequence as it’s more an administrative and beneficiary change. If the policy is a Whole Life based one and it has an Adjusted Cost Base of $5,000 and it’s ownership is transferred your company at the time the policy has a cash value of $15,000, there would be a personal capital gain of $10,000. I hope this has answered your question. Regards, Storoszko & Associates Canadian… Read more »

Thomas
Thomas

Did the corporate tax rates change in 2014 and how would this impact my Universal Life policy if I withdraw funds next year

Storoszko & Associates, Tax Professionals
Storoszko & Associates, Tax Professionals

Hi Thomas,

No, the corporate tax rates have not changed for 2014, at least no official indication as of date.

You should consult with your insurance\broker provided for actual details… Universal Life policies can either allow you to withdraw cash or take a loan. There may be surrender penalties.

If the company is allowed to withdraw cash from the policy, any tax liability will be based on the cash value above Adjusted Cost Base of the policy.

I hope this has answered your question.

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

Jason
Jason

What exactly is the Capital Dividend Account.

LSM Insurance
LSM Insurance

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

Jerry
Jerry

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

Storoszko & Associates, Tax Professionals
Storoszko & Associates, Tax Professionals

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… Read more »

Jason H
Jason H

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

Storoszko & Associates, Tax Professionals
Storoszko & Associates, Tax Professionals

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

Joyce
Joyce

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

Trudy
Trudy

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?

Storoszko & Associates, Tax Professionals
Storoszko & Associates, Tax Professionals

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… Read more »

Pauline
Pauline

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