The short answer.
- Premiums are generally not deductible when a corporation owns a policy on an owner's life. They are a personal or capital outlay, not an expense of earning income.
- The main exception is a policy assigned to a lender as collateral because the lender requires it. Part of the premium can then be deducted, limited to the net cost of pure insurance and the share of coverage tied to the loan.
- Deductibility is the wrong test. Corporate premiums are paid with dollars taxed at the small-business rate rather than after personal tax, which is usually the larger difference.
- The payout is the other half. A death benefit received by a private corporation is tax-free, and generally most of it can be added to the capital dividend account and paid to the estate or heirs tax-free.
Why premiums are not deductible.
Under the Income Tax Act, an outlay is deductible only if it is made to earn income from a business or property, and not on account of capital (paragraphs 18(1)(a) and 18(1)(b)). Life insurance on a shareholder protects the owner's family or the company's value. CRA treats that as outside the ordinary cost of earning business income.
That applies whether the policy is term, whole life or universal life, and whether the corporation is an operating company or a holding company. Calling it a business expense on the books does not change the tax result.
The collateral assignment exception.
Paragraph 20(1)(e.2) allows a deduction when a policy is assigned to a restricted financial institution as collateral for a loan, the lender requires the assignment, and the interest on that loan is itself deductible (for example, borrowing to invest or to run the business).
The deduction is limited to the lesser of the premium paid and the net cost of pure insurance for the year, and only the portion of coverage that relates to the outstanding loan. With permanent policies the deductible amount is often a modest share of the total premium in early years.
This is the mechanism behind an Immediate Financing Arrangement. It is a real deduction, but it should never be the main reason for buying a policy.
Corporate dollars versus personal dollars.
On active business income within the small business limit, combined corporate tax is roughly 9% to 12% depending on the province. To pay the same premium personally, an owner first has to take the money out as salary or dividends, often at personal rates above 45% for high earners.
Illustration: to fund a $20,000 annual premium personally at a 50% marginal rate, the owner needs about $40,000 of pre-tax income. Inside the corporation, the same premium costs about $22,500 of pre-tax business income at an 11% rate. The deduction is lost either way; the cost of the dollars is very different.
This is why owners with surplus cash in the company often hold permanent insurance corporately. It is not universally better: personal ownership can make sense for creditor reasons, family law, or if the corporation may be sold. We compare both neutrally.
The capital dividend account advantage.
When a private corporation receives a life insurance death benefit, it is not taxable to the corporation. The proceeds less the policy's adjusted cost basis are added to the capital dividend account (CDA), defined in subsection 89(1).
The corporation can then elect to pay a capital dividend from the CDA, which the shareholder or estate receives tax-free. Without the policy, getting the same amount out of the company would generally mean taxable dividends.
The adjusted cost basis tends to fall toward zero over time on many permanent policies, so in later years close to the full death benefit can flow through the CDA. Timing and policy design matter, which is why this should be modelled, not assumed.
What about group, disability and key person coverage?
Group term life premiums a corporation pays for employees are generally deductible to the company, with a taxable benefit to the employee. Premiums for key person coverage owned by and payable to the company are generally not deductible. Personally owned policies paid by the corporation create a shareholder benefit under subsection 15(1), which is usually the worst of both worlds.
Read more on key person insurance and buy-sell agreement funding.
Frequently asked questions.
Can my corporation deduct life insurance premiums in Canada?
Generally no. Premiums on a policy insuring a shareholder are not deductible. The main exception is when the policy is assigned to a lender as required collateral for a loan with deductible interest, and then only up to the net cost of pure insurance attributable to the loan.
Is the death benefit taxable if my corporation receives it?
No. A life insurance death benefit received by a corporation is tax-free, and the amount above the policy's adjusted cost basis is added to the capital dividend account, which can be paid out to shareholders or the estate as a tax-free capital dividend.
Is it better to own life insurance personally or through my corporation?
It depends. Corporate ownership usually uses lower-taxed dollars and gives access to the capital dividend account. Personal ownership can be better for creditor protection, a planned sale of the company, or family law reasons. Both should be compared on your facts.
Does my corporation paying my personal policy create a tax problem?
Yes. If the corporation pays premiums on a policy you own personally, the payments are generally a taxable shareholder benefit to you and are not deductible to the company.
Where to go deeper.
Primary sources cited in this guide
Disclaimer. This guide is general educational information published by Goald & Co Financial Inc. It is not tax, legal or accounting advice. Examples are illustrative composites, not real clients. Outcomes vary by province, corporation and shareholder facts and changes in law. Verify every figure with your CPA and legal counsel before acting.