Generally, premiums paid for a life insurance are not tax deductible. One exception is when the insurance policy has been assigned to a restricted financial institution as collateral for a loan. The amount eligible for deduction in a particular year is limited to either the premiums payable by the taxpayer under the policy for the year, or the net cost of pure insurance under the policy for the year, whichever amount is less. Furthermore, only the portion of the lesser of these amounts that can reasonably be considered to relate to the amount owing under the loan is deductible. For example, if the life insurance coverage under an assigned policy is $500,000, and the amount owing under the loan throughout the taxation year is $200,000, the amount deductible under paragraph 20(1)(e.2) is limited to 40% of the lesser of the premiums payable and the net cost of pure insurance under the policy for the year.
Employer-paid premiums are taxable benefits to employees and shareholders. Please note that an employee benefit is deductible for the employer but a shareholder benefit is not because as per subsection 18(1)(a) expenses are only deductible if they are incurred to earn income from a business or property. When a person who is at the same time a shareholder and employee receives a benefit which is not offered to other employees, the CRA presumes that the person has benefited as a shareholder. However, when a similar benefit is offered to all the employees including those who also are shareholders, the latter are considered to have received a benefit by virtue of their employment. In case of sole employee-shareholder, the CRA would not likely accept that the benefit is provided because of employment.
If an employee-shareholder intends to have a life insurance, it is advantageous from tax point of view that the corporate employer to be the owner and beneficiary of the insurance policy and to pay the premiums. With this structure:
- The premiums are not deductible to the corporate employer.
- There are no tax consequences to the insured employee-shareholder.
- The proceeds of insurance death benefit will be paid to the corporation and are not taxable. The difference between the proceeds and the adjusted cost base (ACB) will be posted to the corporation’s capital dividend account (CDA). CDA can be paid to shareholders tax –free.
Therefore, as a shareholder of a CCPC with and ABI, if you personally own a life insurance policy; it might be advantageous to transfer it to your corporation. Since the corporation’s tax rate is normally lower than your personal tax rate, the after tax cost of the premiums will be lower. Having said that, before making the transfer, you need to consider the following factors:
- If the plan is to sell or wind up the corporation, there may be negative tax consequences on a future transfer of a life insurance policy out of the corporation.
- A corporate-owned life insurance policy does not have the same creditor-protection benefits as an individually owned policy with the proper beneficiary designation. A corporate-owned life insurance policy will be vulnerable to the corporation’s creditors.