Corporate Owned Life Insurance: What Alberta business owners should know

You have built a business worth protecting. What would happen if an owner or key employee died unexpectedly? Could the business cover its obligations, fund an ownership transition or give the family time to make decisions?

Corporate-owned life insurance can help address these questions. For some incorporated businesses, it can also support long-term estate and tax planning. The starting point is a clear insurance need and a structure that fits the business.

What is corporate owned life insurance

A corporation can own a life insurance policy on an owner or another person important to the business. In a common arrangement, the corporation pays the premiums and is the beneficiary of the death benefit. Ownership and beneficiary arrangements should be reviewed with the business’s insurance, tax and legal advisors.

Term insurance provides coverage for a defined period. Permanent insurance can provide lifelong coverage and some policies build cash value. The right choice depends on the purpose of the coverage, the budget and how long the protection is needed.

Where it can help

Life insurance can provide funds to help a business manage the loss of a key person, repay debt or support a buy/sell agreement. It may also provide liquidity for estate planning. Any policy intended to fund an ownership transfer should align with the legal agreement and the parties’ obligations.

What paying premiums through a corporation means

Corporate premiums are generally paid with after-tax corporate dollars and are not usually tax-deductible. A limited deduction may be available for certain qualifying loan collateral arrangements, but specific conditions apply.

Using corporate funds may reduce the need to withdraw personal income to pay premiums. However, a lower corporate tax rate alone does not establish an overall saving. Your accountant should compare the arrangements using your actual tax position, business structure and long-term goals.

Understanding the Capital Dividend Account

A life insurance death benefit received by a corporation is generally not taxable. For a private corporation, qualifying proceeds can also create a credit in its Capital Dividend Account, or CDA.

The CDA is a tax tracking account, not a bank account. The life insurance credit generally equals the death proceeds received less the policy’s adjusted cost basis immediately before death, subject to applicable adjustments. The insurer can help confirm the adjusted cost basis.

An available CDA balance can allow a private corporation to pay capital dividends to Canadian-resident shareholders without personal income tax. This requires the appropriate election and supporting calculations. The full death benefit is not automatically available for tax-free distribution. Your accountant should confirm the balance and filing requirements before a dividend is paid.

Policy growth and access to cash

Cash value growth within a qualifying exempt permanent policy is generally not subject to annual income accrual taxation while it remains inside the policy. This does not mean every way of accessing that value is tax-free.

Withdrawals, surrendering a policy and insurer policy loans can trigger taxable policy gains. A bank loan secured by a policy is a different arrangement, with its own lending terms, interest costs and risks. Taking money from the corporation for personal use may also have separate tax consequences.

Before using policy values, ask how the transaction affects the death benefit, ongoing premiums and tax position. Borrowing adds repayment obligations and should be assessed separately from the insurance need.

Questions to ask before choosing a policy

• What business or family need should the coverage address?
• Can the business sustain the premiums without restricting operating cash?
• Does term or permanent insurance best fit the purpose?
• How does the proposed structure fit our ownership and succession agreements?
• What values are guaranteed and which depend on future assumptions?
• What happens if we need cash, sell the business or cancel the policy?

The key tax framework is federal. Alberta owners should also consider the provincial tax rates that apply to their circumstances. Review the proposal with an insurance advisor and accountant, with legal advice where ownership or succession agreements are involved.

Have a question about protecting your business? Health Risk Services can help you understand the insurance options and the questions to take to your professional advisors.

This article provides general information, not individual tax or legal advice. Suitability and tax treatment depend on the policy, ownership structure and applicable rules.