Corporate-owned life insurance, also called company-owned life insurance, is a type of insurance in which the premium is paid by the company and as a result, the company receives benefits in case of the death of an insured employee.
This type of insurance helps the company in covering the expenses of hiring a new employee and helps provide employee benefits to the insured employee. But more than that corporate-owned life insurance policy can help the corporation minimize its tax burden. This is the reason some companies use it to exploit tax loopholes.
One of the main benefits of company owned life insurance is that the premiums paid by the company are taxed at an exceedingly lesser rate as compared to the rate paid by an individual shareholder. In Ontario, about 15% is paid in corporate taxes by active businesses whereas the investment income companies are applicable to pay 50%. The top individual marginal tax rate in Ontario is almost 53.5%
Furthermore, in addition to the previous taxes, another plus is that an individual is believed to realize the property at its fair market value upon death. Companies that possess life insurance policy are valued at cash surrender value instantly before death according to the Income Tax Act.
Naturally, this amount will be lower than the payout followed by death as stated in the policy. This will also be lower than the value of the property that would have otherwise been accumulated by the corporation had it not purchased the life insurance policy. Hence, buying the insurance policy contributes to a lower rate of tax payable at the time of death with respect to the shares of a private company, because it usually leads to a lower valuation for the corporate shares than had no life insurance been bought.
To purchase a corporate life insurance policy from an insurer, there must be a life insured, a policyholder, insurable interest as well as a beneficiary. The ‘life insured’ is a living person whose health check is conducted, and life expectancy is determined before deciding the cost and terms of the insurance policy. The death benefits of this policy are paid at the death of this life insured. The ‘policyholder’ is the owner of the insurance policy and holds the right to make decisions regarding the insurance contract. An ‘insurable interest’ is determined when the policyholder is different from the life insured, and the corporate sector has an insurable interest in its stakeholders, directors, and employees. The ‘beneficiary’ is the person or entity who receives the death benefit upon the passive away of the life insured.
While there are significant reasons behind opting for life insurance, potential policyholders have concerns regarding tax deductions. Have you wondered if life insurance is tax deductible in Canada or if it is possible to write off your life insurance premiums when you file your taxes? The answer to this varies for an individual’s life insurance and for a corporate life insurance. Typically, a standalone individual’s life insurance cannot be written off when filing taxes. However, in certain scenarios individuals can manage to secure a deduction on the amount of payable tax or even have it waived off.
Examples of such scenarios include a case where the policyholder is using their life insurance policy as collateral for a loan, or they are borrowing money against the policy’s cash value to use that money for earning income through property or a business. In some cases, it might introduce the possibility of a tax deduction. As for policyholders who donate their policy benefit to a charity, there is complete tax exemption on that amount, instead a tax credit is given lowering the overall tax amount the policyholder owes the government.
As for the corporate life insurance, qualifying for a tax-free growth of investment and crediting to the Capital Dividend Account (CDA), the insurance policy needs to be an exempt policy meaning its actuarial calculations must be clearly stated in the tax regulations. Only an insurance company can determine whether a policy can be termed as an exempt policy or not. Qualifying as an exempt policy imposes a limit on the buildup of cash value in the policy. If the policy’s cash value exceeds the amount defined by the Income Tax Act for this exempt policy, to restore its exempt status the policyholder must remove the additional amount within 60 days succeeding the policy anniversary.
The amounts that are mostly added up in a corporation’s CDA are the insurance amounts minus the Adjusted Cost Basis (ACB) of the proceeds of a death benefit from life insurance policies, tax-free portion of capital gains exceeding the non-deductible portion of financial losses of the corporation, and capital dividends from a different corporation.
The Cash Surrender Value (CSV) of a life insurance policy can be used as collateral by a corporation seeking to borrow and taxable dividends can be paid to the shareholder. This strategy has several taxation advantages despite requiring the shareholder to bear the dividend tax. For starters, this strategy is risk free of the probability of requiring the shareholder to pay tax on the full loan amount. At the death of the life insured, the corporation after settlement of the Adjusted Cost Basis (ACB) receives the full death benefit to its CDA.
As the corporate loan does not require the use of capital dividends nor it holds any additional collateral, its repayment is easier than that of a shareholder loan. However, such decisions are based on the tax scenario and the financial condition of the corporations as well as the shareholders at the time of loaning. Therefore, for your corporate retirement and estate transfer, corporate life insurance’s exempt policy is the preferred choice due to its tax benefits.
You can rely on us for further inquiries you might have regarding corporate-owned life insurance. For personalized quotes, please refer to Insurance Direct Canada’s quotes calculator.