Corporate-Owned Life Insurance – Tax Considerations

Introduction

A corporation may own a life insurance policy for various purposes:

• Key person insurance
• Business loan protection
• Buy-sell funding
• Funding capital gains tax on a business at death
• Executive compensation
• Retirement funding
• Wealth creation

Understanding the tax implications is crucial before placing a policy in a corporation.

Corporate Income Taxation of Life Insurance

Life Insurance Proceeds:

• Death benefits from an exempt life insurance policy are tax-free.
• Proceeds are not considered a disposition under subsection 148(1) of the Income Tax Act.

Treatment of Accumulating Income:

• Cash value growth within an exempt policy is tax-deferred.
• Tax applies only if there is a disposition of the policy.

Policy Dispositions

Dispositions include:

• Withdrawals
• Policy loans
• Surrenders
• Transfers

Gains on policy dispositions are taxed as ordinary income.

Capital Dividend Account (CDA)

The CDA allows tax-free amounts (such as life insurance proceeds) to be distributed tax-free to shareholders.

When a corporation receives a death benefit, it receives a CDA credit equal to:

Death Benefit – Adjusted Cost Basis (ACB)

Deduction of Premiums

Generally, life insurance premiums are not deductible.

Exception: If the policy is used as collateral for a business loan, a portion may be deductible.

Ownership & Beneficiary Designations

The corporation should be both the owner and beneficiary to avoid tax issues.

Premiums paid for an individual’s policy may result in taxable employee or shareholder benefits.

Small Business Deduction (SBD)

Corporations with passive income exceeding $50,000 may lose part of their SBD.

Life insurance cash values do not count as passive investment income.

Key Takeaways

• Ensure proper ownership and beneficiary designations.
• Maximize the use of CDA for tax-free distribution.
• Be aware of tax consequences when transferring policies.
• Consult a tax professional before making corporate insurance decisions.

Questions & Discussion

Open floor for questions and real-world case study discussions.