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Corporate-Owned Life Insurance: complete guide 2026
Holding a life insurance policy through a private corporation offers significant tax advantages, most notably the Capital Dividend Account (CDA) credit upon the insured's death.
Why Hold a Policy Through the Corporation?
When a shareholder holds a life insurance policy personally, premiums are paid with after-tax personal dollars (marginal rate potentially exceeding 50%).
By having the corporation own the policy, premiums are paid with after-corporate-tax dollars (rate of 12–26% depending on the type of income). The tax savings on premium payments can be substantial.
At death, the death benefit is received by the corporation tax-free. The difference between the death benefit and the ACB of the policy is credited to the CDA, enabling a tax-free capital dividend to shareholders or the estate.
The CDA Credit
The Capital Dividend Account (CDA) is a notional account. Upon the death of the insured:
CDA Credit = Death benefit received − ACB of the policy
The ACB (adjusted cost basis) increases with premiums paid and decreases by the net cost of pure insurance (NCPI). For permanent policies held for many years, the ACB can be very low, maximizing the CDA credit.
Once the CDA is credited, the corporation can pay a tax-free capital dividend to shareholders. This is the key mechanism that makes corporate-owned life insurance so advantageous.
Premium Deductibility
As a general rule, life insurance premiums are NOT deductible for the corporation. However, exceptions exist:
• Collateral assignment for a commercial loan: if the policy is assigned as security for a loan used to earn business income, the NCPI portion of the premium may be deductible • Key person insurance: generally not deductible • Employee benefit plans: group life insurance premiums are deductible for the employer
Even without deductibility, premiums paid with corporate dollars are less costly than personal dollars because of the lower corporate tax rate.
Interaction with Passive Income Rules
Since 2019, passive investment income accumulated in a corporation can reduce access to the small business deduction (SBD). However, the cash surrender value of an exempt life insurance policy is NOT considered passive investment income.
This makes exempt life insurance a particularly attractive accumulation vehicle for corporations approaching the $50,000 passive income threshold. Growth inside the policy does not affect the SBD, unlike GICs or mutual funds held corporately.
Frequently Asked Questions
Are corporate-owned life insurance premiums deductible?
Generally no. Exception: if the policy is assigned as collateral for a commercial loan, the net cost of pure insurance (NCPI) portion may be deductible. Even without a deduction, corporate premiums cost less than paying personally.
How does the CDA credit work?
At death, the death benefit minus the ACB of the policy is credited to the CDA. The corporation can then pay a tax-free capital dividend to shareholders. This is the primary advantage of corporate-owned life insurance.
Does the cash surrender value affect passive income?
No. The growth of the cash surrender value of an exempt policy is not passive investment income and does not affect access to the small business deduction. This is a significant advantage over traditional corporate investments.
What happens if the shareholder leaves the corporation?
Transferring a corporate policy to a shareholder is a taxable disposition. The gain (cash surrender value minus ACB) is taxable to the corporation, and the surrender value constitutes a taxable benefit to the shareholder. Consult a tax specialist before any transfer.
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Résumé en français :Guide sur l'assurance vie détenue par une société au Québec. Couvre les avantages fiscaux de payer les primes via une société, le crédit au CDC au décès, le suivi du CBR, les exceptions à la déductibilité des primes et l'interaction avec les règles sur les revenus passifs.