Corporate-Owned Life Insurance in Canada

Corporately-owned life insurance tailored to your company’s specific financial needs.

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Corporate-owned life insurance is an insurance policy that is owned, paid for and whose beneficiary is a privately-held corporation in Canada on the life of a key-employee, shareholder or manager-owner of the same corporation.

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Why Corporate-Owned Life Insurance?

Paying premiums through the corporation allows for the use of tax-advantaged dollars. Since corporations are taxed at a lower tax rate, corporate expenditures are often cheaper on an after tax-basis. thus, life insurance purchased by corporations is often cheaper than that purchased by individuals.

Tax-Advantaged Asset Growth

Fund values within participating whole life and universal life insurance policies grow on a tax-deferred basis and is exempt from passive investment rules.

Corporate Retirement Strategy

The wealth built within a corporate cash value insurance can be accessed tax-free (within legislative limits) or pledged to fund a corporate retirement strategy.

Tax-Advantaged Death Benefits

The death benefit(s) of corporate-owned life insurance can be paid to other shareholders or the deceased’s estate with little or no tax through capital dividends.

Understanding Corporate-Owned Life Insurance

What Is Corporate-Owned Life Insurance?

Corporate-owned life insurance is life insurance on the life of a key employee, director, or shareholder of a corporation which is owned and paid for by the corporate entity.

This type of policy is best suited for professionals like doctors, dentists, accountants, and/or lawyers whose practice and operations are done through a corporate entity or those who are partners, shareholders, or owners of Canadian controlled private corporations (CCPC).

The death benefits are paid to the corporation tax-free, which can then be used to fund a key-person replacement for the corporation’s continued operations, fund a buy-sell agreement to buy-out a deceased shareholder’s shares in the company, pay-off corporate debts, paid out to surviving shareholder(s) for share equalization, or paid out to the deceased’ estate to fund capital gains taxes at death or survivor benefits through the Capital Dividend Account.

In the case of key person life insurance, the insurance will protect your business against the costs of losing a key employee due to premature death.

Should the life insured pass away, the death benefit is paid out to the corporation and the proceeds can then be used to hire and/or train a new person to take over the deceased key person’s role so your company can continue its operations without experiencing the financial loss of losing a key employee.

The corporate business owner(s), in the context of Corporate-owned life insurance, is deemed as an employee of the corporation.

Therefore, if you are a Canadian-based entrepreneur or professional (i.e. medical doctor, dentist, accountant, etc.) who operate and/or practice under a privately-held Canadian corporation, your corporation can implement corporate-owned life insurance on yourself, and any other key-shareholders of the corporation, and fund the insurance contribution, instead of withdrawing funds, and then funding the life insurance contributions yourself with individually-earned dollars.

As you may know, corporations are usually taxed at a lower tax rate than individual tax payers, contributing corporate after-tax dollars, instead of individually-earned income into a life insurance policy results in huge tax-savings over time.

Yes, you’ve read that right, funds contributed to corporate-owned life insurance, ideally, should be after-tax dollars. This means you don’t get to claim your corporate-owned life insurance contributions as tax-deductible expense to your corporation. Not unless if the purpose of implementing corporate-owned life insurance is to secure a loan.

Claiming the insurance contribution on a corporate-owned life insurance, if implemented other than to secure a corporate loan will result in the death benefit being taxable. By not claiming the corporate-owned life insurance contributions as a tax-deductible expense, the death benefit payout remains tax-free.

Corporate-Owned Life Insurance vs. Passive Investments

While corporate life insurance is mostly viewed as a tax-efficient estate planning strategy, it is also an excellent way to build wealth from within a privately held Canadian corporation.

Most owners of privately held corporations would have made investments in mutual funds, stocks, royalties, and/or rental properties to grow wealth in a tax-efficient manner from within a Canadian-controlled private corporation (CCPC).


Due to the Small Business Deduction (SBD), many Canadian controlled private corporations enjoy lower tax rates in their corporate active and passive income on the first $500,000.00 of earnings.

This was an effective way of saving taxes on passive investments. Instead of withdrawing funds from the corporation to invest on an individual basis, the earned income is invested from within the corporation and enjoys the small business deduction.

In 2018, however, the federal government revised the rules for how corporate passive investment income affects corporate income tax. This means that income from passive investments may now expose corporate business owners to more taxes on their active income.

Since 2009, the federal business limit has been $500,000 of a corporation’s active business income carried on in Canada.

Starting in 2019 however, once a CCPC’s passive investment income exceeds $50,000, the amount of active business income eligible for the small business tax rate is reduced. 

When the corporation’s passive investments exceed the $50,000 threshold, every $1 of passive investment income earned has the potential of exposing $5 of active business income to additional taxation.

Say your CCPC earns $150,000 in passive investment income, its active business income will no longer be eligible for the small business tax rate, which results in more taxes in both the corporation’s passive investments and active income.

As a result, building wealth through passive investments inside a Canadian-owned and controlled private corporation may no longer enjoy the same benefits once available through to the corporate small business deduction.

Cash values within a corporate-owned life insurance policy are exempt from the new passive income rules since life insurance policies are technically not considered a form of passive investment, wealth growth within an exempt life insurance policy, therefore, does not affect the corporation’s passive investment earnings under the new passive income rules.

This gives cash-value corporate life insurance policies an edge over corporate passive investments since asset growth within the policy does not affect the corporation’s small business deduction.

Does this mean that you can no longer park retained earnings corporate passive investments? Not at all, you just have to watch out for the $50,000.00 threshold. Once your passive investments earn more than this amount, your corporation may no longer qualify for the small business deduction tax rate.

Corporate-owned life insurance offers the same passive and tax-deferred wealth-building opportunities once available to passive investments and as mentioned above is exempt from the new passive income rules.

While you can still continue building wealth through passive investments, redirecting part of your retained earnings in a cash value corporate life insurance may help you accumulate more.

The Corporate Retirement Strategy

A corporate-owned cash value life insurance allows wealth to accumulate tax-free within the policy until cashed in. The funds can then be used or leveraged to fund a corporate retirement strategy.

There are two ways that a corporation can use a corporate-owned life insurance to supplement a shareholder’s retirement income.

  1. Direct withdrawals from the cash values
  2. Pledged as a security for a series of tax-free loans.

The corporation can withdraw funds from the corporate-owned life insurance, tax-free up to the adjusted cost base of the policy, withdrawals in excess of the policy’s adjusted cost base (ACB) is taxable. 

For example, if the corporate-owned life insurance has an accumulated wealth of $1,000,000.00, and the adjusted cost base is $600,000.00. The corporation can withdraw up to $600,000.00 of the policy’s cash surrender values without tax implication. Any withdrawal in excess of the adjusted cost base ($400,000.00) is taxed accordingly at the time of withdrawal.

An important thing to note when thinking of directly withdrawing funds from the policy is the fact that the funds inside the policy is decreased at each withdrawal and may diminish over time. As such, withdrawals may result in partial or complete surrender of the death benefit when all cash values have been withdrawn. This means that there may no longer be death benefit left for the beneficiaries after the shareholder utilizes the corporate insurance for retirement.

By simply pledging the policy with a lender for a series of tax-free bank loans by the corporation, the funds and the death benefit of the life insurance policy continue to grow, while funds from the collateralized loans benefits the shareholder at retirement.

Funds paid out to the shareholder as part of the corporate retirement strategy are issued by the corporation as taxable dividends to the shareholder, not unless if there is a balance in the corporation’s capital dividend account, and the dividend is paid as a capital dividend.

With proper tax advice and structuring, however, it is also possible for the shareholder to apply for a personal loan, and have the corporation pledge the policy as a corporate guarantee on the loan. The bank loan can supplement the shareholder’s retirement income with tax-free dollars.

Take note that using a corporately-owned life insurance policy as security for a corporate guarantee on a personal bank loan of the shareholder could result in a taxable benefit under the Income Tax Act. In most cases, a guarantee fee should be paid by the borrower to the corporation to minimize the taxable benefit. This guarantee fee is taxable income to the corporation. Borrowers should speak to their tax advisors when implementing this strategy to avoid adverse tax consequences.

Corporate Life Insurance Types

Corporate-owned life insurance can be any type of life insurance, it can be a term life insurance, whole life insurance, universal life insurance or even term to 100 but to take the most advantage of this strategy, it should be structured either as a participating whole life or universal life insurance as both allow tax-advantaged wealth accumulation within the life insurance policy and as such, is not considered passive investment for the purpose of the passive income rules.

By implementing a cash-value life insurance, you’re not necessarily wasting corporate dollars in funding the life insurance  death benefit and instead, it allows you to grow wealth on a tax-advantaged basis. 

And as mentioned at the previous section, the tax-deferred wealth accumulated from within the corporate-owned life insurance can fund a corporate retirement strategy by making direct withdrawals or leveraging the policy. 

Should the life insured pass away, the death benefit, which may include the accumulated wealth, will be paid out tax-free to the corporation.

Corporate-Owned Life Insurance Purposes

Corporate-owned life insurance can serve many different purposes and can be a huge asset to your business, especially if you implement the right type. 

Below are some of the purposes where implementing corporate life insurance makes the most sense:

Funding Buy-Sell Agreements

Corporate-owned life insurance can be implemented to fund buy-out agreements between two or more partners/shareholders of a private corporation. In this case, the company owns the policy and the partners or shareholders are the lives insured. If one partner dies, the company claims the life insurance benefits and uses the proceeds to “buy-out” the deceased partner’s share. 

Key-person Insurance

As mentioned, this type of COLI is taken on the life of a key employee of the company. If that employee dies, the business can claim the benefits and use the funds to recruit and train a replacement, thereby protecting the company’s financial interest. In some instances, key person insurance may also be paid out to the life insured’s estate through as capital dividends. 

Estate/Succession Planning

This type of corporate life insurance is designed specifically to benefit beneficiaries of a business owner upon his/her death. The business owns the policy and pays premiums while the business owner is the life insured. When he/she dies, the benefits are paid out to the corporation, which is then transferred to the heirs as capital dividends. 

Corporate Retirement Strategy

As mentioned above, corporate-owned life insurance is an excellent way to build wealth from within a privately-held Canadian corporation as it allows tax-free asset accumulation until the funds are cashed in.

The funds built within the policy can be used to fund a corporate retirement strategy for a key employee or the business owner, either by directly withdrawing funds from the cash values or by leveraging the policy for a series of bank collateral loans at retirement.

Fund Taxes at Death

The proceeds from corporate-owned insurance can be used to pay off tax liabilities when the business owner dies. In Canada, all assets (which include the business) are considered disposed of at death (or before death), this results in capital gains taxes that has to be paid off by either your heirs or your estate. Corporate life insurance gives you the peace of mind in knowing that your assets are secure from being liquidated to settle outstanding taxes at death. 

Estate Equalization

In an ideal world, all of the corporate business owner’s children are actively participating in the operations of the business, since we live in an imperfect world, a business owner would be lucky if at least one of the kids actually have an interest in continuing the business operations. 

In this case, it may make more sense to give cash to children who are not active participants in the business instead of leaving shares in the company. Corporate life insurance can provide the funds in equalizing the business owner’s legacy to his or her next generation.

Leave a Legacy

In some instances, the corporation may be liquidated or sold after the death of the owner-manager, hence the surviving heirs will no longer benefit from the profits of the corporation. Corporate insurance can provide the funds that allow the business owner to leave a legacy to his or her next generation without them having to continue running the business operations.

Disclaimer: Neither SmartWealth Financial Incorporated nor the presenter has been engaged for the purposes of providing legal, accounting, taxation, or other professional advice. No one should act upon the examples/information presented here without a thorough examination of the legal/tax situation with their own professional advisors, after the facts of their specific case are considered. Unless specifically stated, the values and rates presented are not guaranteed.

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