When it comes to financial planning, life insurance is a critical tool that offers protection and peace of mind. However, for Canadian business owners, an additional layer of complexity arises: should you hold life insurance within your corporation or personally? Each option has its advantages and potential drawbacks, and the right choice depends on your unique circumstances and objectives.  

Often, we find, financial planners will provide a general recommendation of “this should be paid in the corporation, because even though it is not a corporate tax deduction, you are not using after tax personal dollars, so the cost is lower.” 

This is a very simplistic recommendation that does not take into account all factors, so you do want to consider all sides before making a decision. Also note, that we do sincerely recommend you speak with your accountant, as they can assist you on putting together these sides to make a decision. 

With that, let’s take a look at some of the considerations to help you make an informed decision (or at least start a conversation with your friendly accountant!). 

Personal Life Insurance 

Benefits 
  1. Tax-Free Death Benefit: When you hold life insurance personally, the death benefit is paid out tax-free to your beneficiaries. This can provide financial security for your loved ones without any tax implications.

  2. Simplicity: Personal life insurance policies are straightforward. You own the policy, pay the premiums with after-tax dollars, and your family benefits directly. It is paid outside of your estate.

  3. Control: You retain complete control over the policy, including the beneficiaries and coverage details. 
Drawbacks 
  1. Higher After-Tax Cost: Premiums are paid with after-tax personal dollars.

  2. Limited Business Benefits: Personal policies do not offer the same potential for integrating with your business’s financial strategy.  

Corporate-Owned Life Insurance 

Benefits 
  1. Lower Premium Cost: When your corporation owns the life insurance policy, the premiums are paid with corporate dollars. This can make the cost of insurance more affordable compared to paying with after-tax personal income. However, we will note that it is not (except in specific scenarios related to debt) generally a corporate tax deduction.

  2. Tax-Free Death Benefit: While the death benefit is received by the corporation, it can generally be passed tax-free to your estate or beneficiaries through the corporation’s Capital Dividend Account (CDA).This can make owning the life insurance through a corporation very appealing. But note that there are a few considerations with this. A capital dividend is a specific type of payout that requires an election (called a T2054) and the filing of a Schedule 89 as well. It also has to be filed in advance of payment along with dividend resolutions. Generally, we see the costs of these ranging from $500-$800. Although it is a one-time filing. This can offset the “tax savings” of being in the corporation vs using personal funds for a number of years. These filings are not required when life insurance is paid directly.

    There is generally also a longer delay in payout to the beneficiaries as it has to go through that extra layer of going through the corporation. Thus, there is a longer delay in general from payout to being actually received by the beneficiary. This can cause a lot of unnecessary stress for your surviving loved one’s. So, I generally advise, that there be considerations around funds available immediately after death, if these funds will be a vital consideration you may want to opt for a direct payout.

  3. Business Planning Tool: Corporate-owned life insurance can play a key role in business succession planning, funding shareholder buyouts, or covering outstanding corporate debts in the event of an owner’s death. Consideration of partner life insurance is very important in a multi-shareholder company and should be part of your discussions with both your accountant and your lawyers as well. 
Drawbacks 
  1. Complex Tax Rules: Integrating the life insurance policy with your corporate structure adds complexity. The death benefit is generally tax-free, but tax implications may arise based on the policy’s structure and the use of proceeds. If you deduct the premiums, they will be taxable. Typically, only premiums required by a debt agreement are deductible, so most premiums do not qualify as a corporate tax deduction.

  2. Beneficiary Designations: Naming a personal beneficiary for a corporate-owned policy can create unintended tax consequences as this becomes a taxable benefit and is required to be on a T4 or other slip to be taxed personally. This approach eliminates the advantages of a corporate-owned policy, so it is strongly discouraged.

  3. Impact on Corporate Cash Flow: Depending on the size of the premiums, the policy could tie up corporate cash flow that might be needed for operations or other investments. This could also be a factor in a multiple shareholder environment if there are multiple policies in place that may be at different amounts based on age/risk classifications. 

Key Factors to Consider 

  1. Tax Implications

For corporate-owned policies, premiums are not typically tax-deductible. However, the tax savings on using corporate dollars often outweigh this downside. Work with a tax advisor to understand how the Capital Dividend Account works and how it impacts your estate. You also must consider the cost of such future filings for your estate and related administration time and complexity. 

  1. Purpose of the Policy
A personal policy works best for family financial security, while a corporate policy suits business needs like debts or buyouts.
  1. Estate Planning

Corporate-owned policies can complicate estate planning. You’ll need a clear strategy to transfer the death benefit to your heirs efficiently and tax-effectively. 

Conclusion 

Deciding whether to hold life insurance personally or through a corporation is not a one-size-fits-all decision. It requires careful evaluation of your financial goals and business structure. It is essential to consult a financial advisor to align your strategy with your goals and avoid potential risk.

At Virtual Heights Accounting, we specialize in helping Canadian small business owners navigate complex financial decisions like these. Contact us today to discuss how we can support your insurance planning and broader financial goals.