Why Corporate-Owned Life Insurance is a Unique Asset Class: A Comprehensive Overview

By Tim Leonard and Laura Fitzsimons

Unique Treatment Under Canada’s Income Tax Act

Permanent cash value life insurance stands out from other financial investments such as stocks, bonds, GICs, real estate, precious metals, cryptocurrencies, and portfolio investments due to its tax-exempt status under Canada’s Income Tax Act.

Why Business Owners Prefer Corporate-Owned Life Insurance

Affluent Canadians often possess sufficient assets to be self-insured, eliminating the need for traditional insurance. However, business owners leverage corporate-owned life insurance for its tax-efficient benefits. This strategy allows them to accumulate passive wealth within their company, access it in a tax-effective manner, and transfer it virtually tax-free to surviving beneficiaries.

The Problem: Taxable Investments by Companies

Business owners frequently invest retained profits or surplus cash in taxable investments, particularly when they don’t need the extra income and face higher personal marginal tax rates compared to their business. While saving money within their corporation offers tax deferral benefits due to low corporate tax rates on active business income, eventually, these funds must be withdrawn and will be taxed at high dividend tax rates.

The Solution: Corporate-Owned, Tax-Exempt Permanent Life Insurance

Investing retained profits in corporate-owned, tax-exempt permanent life insurance presents several advantages:

1. Tax-Free Growth: The savings component (Cash Surrender Value) of the policy grows tax-free.

2. Tax-Effective Access: The cash value can be accessed in a tax-effective manner.

3. Exemption from Passive Income Rules: Funds invested in the policy are not subject to passive income rules.

4. Tax-Free Capital Dividend: A significant portion, if not all, of the policy proceeds payable at death can be distributed to the shareholder’s estate as a tax-free capital dividend.

Additional Tax Advantages

Corporate-owned life insurance premiums are paid with corporate after-tax dollars, taxed at much lower rates than individual personal tax rates. For instance, the corporate tax rate on active business income in Ontario is approximately 13%, while the rate on investment income is just over 50%. In contrast, the top individual marginal tax rate in Ontario is about 53.5%. Upon an individual's death, their property is deemed disposed of at its fair market value. However, life insurance proceeds are paid out to heirs tax-free (less the adjusted cost base) through the company's Capital Dividend Account (CDA).

This publication contains the opinion of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any securities. The information in this publication is intended for informational purposes only and is not intended to constitute investment, financial, legal, tax or accounting advice. Many factors unknown to us may affect the applicability of any statement or comment made in this publication to your particular circumstances. Hence, you should not rely on the information in this publication for investment, financial, legal tax or accounting advice. You should consult your financial advisor or other st professionals before acting on any information in this communication.