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Tax Advantages of Corporate Life Insurance

Corporate-owned life insurance offers significant tax advantages for businesses and their owners. However, to fully leverage these benefits, it’s crucial to understand planning implications and potential pitfalls. In this article, we’ll delve into corporately-owned life insurance tax advantages and downsides from a Certified Financial Planner (CFP)’s perspective. Additionally, we’ll emphasize the importance of proper structuring and financial planning.

Potential Upsides of Corporate-Owned Life Insurance

Premium Funding: A Cost-Effective Approach for Business Owners

The corporation can fund policy premiums more cost-effectively than individuals. This is due to the difference in corporate and individual tax rates, resulting in significant savings for business owners. For example, consider Tom, a Canadian Controlled Private Corporation (CCPC) owner, contemplating life insurance with a $1000 monthly premium. Tom’s marginal tax rate is 48%, while his corporate tax rate is 11%. If Tom were to fund the policy premiums personally, he would need to earn $1923 in the corporation. After paying himself personally, he would have $1000 left after tax for premium payments. However, if the corporation pays for the life insurance, only $1123 in pre-tax earnings are required for the $1000 premium. This results in an $800 monthly savings. Learn more about corporate tax rates from the Canada Revenue Agency.

Tax-Deferred Cash Value Growth: A Powerful Tax-Planning Tool

Secondly, the tax-deferred growth of a policy’s cash value can help shelter corporations from passive investment income. It’s essential to understand the tax implications of passive investment income for CCPCs. Inside CCPCs, this advantage is vital because passive investment income earned has very punitive taxes associated with them, often taxed at the highest marginal tax rate. In addition, the new passive income rules introduced in 2018 could affect the tax rate on active business income. If a CCPC earns too much investment income, it will grind down its small business deduction limit. The tax-deferred cash value growth within a corporate permanent life policy benefits business owners by helping them shelter the CCPC from passive income to reduce the impact of the two above tax integration rules.

While the tax deferral advantage of permanent life insurance also applies to personally held policies, investing within the company saves the tax cost of paying the owner through salary or dividends for personal investment. Permanent life insurance products appeal to business owners with surplus long-term investment funds for wealth accumulation inside the corporation.

Tax-Efficient Estate Planning: Capitalizing on CDA Benefits

When life insurance proceeds exceed the policy’s cost basis, creating Capital Dividend Account (CDA) room allows the corporation to pay tax-free capital dividends to beneficiaries upon the insured’s death. This feature can benefit the tax-efficient asset transfer to the next generation.

A knowledgeable financial planner must structure the policy correctly for all the tax benefits mentioned above of corporate insurance to be tax-efficient. Otherwise, the CCPC owner could face significant future tax liabilities. Discover more about the Capital Dividend Account and its benefits.

Potential Downsides of Corporate-Owned Life Insurance

Liquidity: Evaluating Long-Term Investments and Cash Flow

Before purchasing a permanent life insurance policy, it is important to assess your cash flow needs and overall investment strategy, as these policies are generally long-term and may lack the liquidity of marketable securities. Read more about assessing your financial goals before investing.

Sale of Business: Preparing for Smooth Transitions

Owning permanent insurance may pose issues if selling the corporation owning the insurance is anticipated. Transferring the policy from the corporation before the sale could result in taxable gains if not set up correctly. In addition, there could be a potential shareholder benefit assessment if no consideration is exchanged for the policy. Again, avoiding this issue requires a financial planner or accountant specializing in corporate planning. Learn more about business transition planning.

Access to the capital gains exemption

For business owners, holding permanent life insurance within a corporation may affect their ability to claim the lifetime capital gains exemption (LCGE) on their shares. The investment portion of a life insurance policy is treated similarly to marketable securities and other passive investments, not as an active business asset. When the shareholder is the life insured, the policy is typically valued at its cash surrender value to determine if the company shares qualify for the LCGE. With the 2023 LCGE on qualifying share dispositions at $971,190, your shares’ qualification can significantly impact your future tax liabilities.


Corporate-owned life insurance can offer substantial tax advantages for businesses and their owners. However, to maximize these benefits, it is crucial to understand the Financial planning implications, potential pitfalls, and the importance of proper policy structuring. A Certified Financial Planner (CFP) can provide invaluable guidance on aligning life insurance policies with overall business and personal financial objectives while minimizing potential drawbacks and tax liabilities. By seeking the expertise of a CFP, CCPC owners can make well-informed decisions about corporate-owned life insurance and its role in their long-term financial planning.