Without corporate-owned life insurance, the risks of double taxation after a shareholder’s death are high. Speak with an Ontario estate-planning specialist to find out if corporate life insurance will address your tax and business succession concerns.
“It’s a great feeling knowing my family will be OK financially when I pass away.” -Andy L., Ontario
Move corporate wealth to your family more tax-efficiently at death.
Creates cash when your estate may face its largest tax bill.
Provides capital to help transfer ownership without draining business assets.
Corporate life insurance is permanent life insurance owned and paid for by a corporation, typically covering a shareholder or key business owner.
It can provide tax-advantaged growth inside the policy while creating a tax-free death benefit to help fund taxes, protect business assets, or support succession planning. In many cases, most or all of the insurance proceeds can be distributed to shareholders or beneficiaries tax-free through the corporation’s Capital Dividend Account (CDA).
An estate-planning specialist can determine whether corporate life insurance fits your business, tax, and estate-planning objectives.
Corporate-owned life insurance offers a unique tax advantage at death: it is the only planning strategy that can create millions of dollars of new tax-free CDA room simply because someone dies.
The corporation generally receives the life insurance proceeds tax-free, and most or all of the proceeds may then be paid to shareholders or the estate tax-free through the Capital Dividend Account (CDA).
Those tax-free dollars can then flow to your family, providing the cash needed to pay the estate tax bill without having to sell other assets..
Provides temporary life insurance protection for a set period, giving the corporation cost-effective coverage for short-term business, debt, or succession needs. Term coverage can range from 10-year term to term 100 coverage.
Provides permanent life insurance with tax-advantaged cash value growth and potential dividends, creating long-term wealth and estate value inside the corporation.
Combines permanent life insurance with a tax-advantaged investment component, offering flexibility in premiums, investments, and the amount of insurance coverage.
At SWPP we specialize in helping business owners, real estate investors, and families with complex estates to preserve their wealth.
| Feature | Term Life Insurance | Participating Whole Life Insurance | Universal Life Insurance |
|---|---|---|---|
| Coverage period | Set number of years | Lifelong | Lifelong |
| Premiums structure | Usually lowest | Generally higher and predictable | Flexible, depending on policy design |
| Cash value | None | Guaranteed cash value and potential additional values | Can grow based on selected investment options |
| Best suited for | Temporary debts or business risks | Predictable estate planning and wealth transfer | Flexible long-term planning |
Policy costs, guarantees, cash values, and tax consequences depend on the specific policy and how the corporation structures and uses it. An Ontario business owner should obtain advice based on the corporation’s needs and financial circumstances.
Corporate life insurance can be especially important in the following situations:
Corporate-owned life insurance can provide cash and the liquidity needed to pay taxes, protect business assets, and preserve more of your corporate wealth for your family.
Most people miss out on the advantages of using corporate life insurance because they see life insurance as a cost rather than a financial tool.
Canadian tax rules allow properly structured permanent life insurance to grow value on a tax-advantaged basis, meaning tax-sheltered growth can help pay the cost of the insurance.
At death, the corporation receives the insurance proceeds tax-free, and generally most of those proceeds can be credited to the Capital Dividend Account (CDA), allowing them to be paid to shareholders or the estate as a tax-free capital dividend.
Depending on the circumstances, one dollar delivered through life insurance can be worth close to two corporate dollars that would otherwise need to be withdrawn and personally taxed.
EXAMPLE
A business owner that I worked with recently had most of his wealth inside his corporation. He initially planned to have his estate sell corporate assets to pay the $3.8 million tax bill expected at death.
However, once we calculated the additional corporate and personal tax costs, his corporation would need to distribute approximately $7.3 million to leave his estate with the $3.8 million required to pay the taxes at death.
We structured a participating whole life policy and funded it with $350,000 annually for 10 years. By year 10, the projected death benefit will exceed $7.8 million, which is enough to cover the taxes upon death while also replacing the insurance deposits and providing additional estate value.
The cost depends on factors such as the insured person’s age, health, coverage amount, and the type of policy selected. Permanent insurance generally requires higher deposits than term insurance but can also build significant long-term cash and estate value.
The right policy depends on what you need the insurance to accomplish. Term insurance may work well for temporary needs, while participating whole life or universal life may be better suited to long-term estate planning, tax-efficient wealth accumulation, and business succession.
Generally, corporate life insurance premiums are not tax-deductible when the corporation is the beneficiary. There are limited circumstances where a portion of the premium may be deductible, such as when insurance is required as collateral for a business loan and specific tax requirements are met.
When an insured shareholder dies, the life insurance death benefit is generally received tax-free by the corporation. The amount of the death benefit exceeding the policy’s adjusted cost basis immediately before death can generally be credited to the corporation’s Capital Dividend Account (CDA). The corporation may then elect to pay qualifying capital dividends from its CDA to shareholders tax-free. Proper tax and legal advice is important to ensure the CDA balance and capital dividend election are handled correctly.
The corporation owns and pays for the life insurance policy and is typically named as its beneficiary. Depending on the policy, it can provide permanent insurance protection while also accumulating tax-advantaged cash value inside the corporation.
Do you need life insurance? Get started with a zero-obligation life insurance and estate planning consultation today.
SWPP helps Ontario business owners use corporate-owned life insurance to protect their companies, manage future tax liabilities, and transfer more wealth to the next generation. During our 35 years experience we’ve helped hundreds of families protect millions of dollars from taxes.
At SWPP, we are licensed and recognized advisors. Our goal is to protect your family’s money and assets. We help families, business owners, and real estate investors do comprehensive estate planning in Ontario.
We’re focused on making sure you leave the most for your loved ones instead of giving your hard-earned assets to CRA.
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