Can my Ontario corporation own a life insurance policy on me, and is there a tax advantage?

A corporation can purchase and own a life insurance policy on a shareholder or key employee. On the death of the insured, the corporation receives the death benefit tax-free. A portion of that death benefit — roughly the amount exceeding the adjusted cost basis of the policy — adds to the corporation's capital dividend account. The corporation can then pay the accumulated capital dividend account out to surviving shareholders as a capital dividend, which is received by them tax-free.

This structure is used in estate planning to remove value from the corporation at death with minimal personal tax. The capital dividend election must be filed with the CRA before or with the first payment of the dividend. Using a capital dividend account for a purpose other than a capital dividend election, or paying out more than the balance in the account, creates adverse tax consequences.

Corporate-owned life insurance has costs: the premiums are generally not deductible to the corporation, and the policy must be structured and owned correctly to achieve the intended tax result. Whether this approach makes sense depends on your age, insurability, the value of your corporation, and your estate plan. An insurance advisor and a tax lawyer should review the arrangement together before the policy is purchased.