Should My Corporation Pay for My Life Insurance?
Sometimes, and the answer depends on who owns the policy and who gets the money. If the corporation owns the policy and is the beneficiary, it can pay the premiums. If you own the policy for your family and the company pays for it, that payment is usually a taxable benefit to you. Ownership comes first; the premium follows.
Why do owners ask this at year-end?
In the last weeks of the year your accountant asks how much salary and dividend to take, and whether the company should keep its profit. A life insurance premium is often one of the larger personal bills an owner pays. It is natural to wonder whether the company could pay it instead. The honest answer is that it can, in the right setup, and it can cost you more in the wrong one.
What changes when the company owns the policy?
When your corporation owns the policy on your life and is the beneficiary, the premium is the company's cost. In most cases the premium is not a deductible expense, so the company pays it from after-tax profit. That still matters, because an Ontario corporation earning active business income under the small business limit pays a much lower rate than an owner in a high personal bracket.
A rough illustration, using the published rates: to pay a ,000 premium personally, an owner in Ontario's top bracket needs about ,500 of salary. A corporation paying the small business rate needs about ,400 of profit to pay the same premium. Your own numbers depend on your bracket and how the company earns its income, so your accountant checks them. The CRA corporation tax rates page lists the current rates.
Where does the money go when the company is the beneficiary?
The death benefit is paid to the corporation, not to your family directly. For a private corporation, part of that payment can usually be added to the company's capital dividend account and then paid out to shareholders as a capital dividend. The company files an election with the CRA (form T2054) before it pays one. How much qualifies depends on the policy's cost base at the time, so your accountant works out the figure.
This is why company ownership suits key person cover, buy-sell funding and some estate plans. It suits a young family less if they need money quickly and the company has other shareholders, debts or a slow paperwork process.
What if I own the policy and the company pays?
This is the setup that catches owners out. If the policy is yours and your family is the beneficiary, a premium paid by the corporation is generally treated as a benefit to you. As a shareholder it is added to your income; as an employee it goes on your T4. Either way you pay personal tax on it, and the company usually can't deduct it. In many cases that leaves you no better off than taking the money as salary and paying the premium yourself, with extra bookkeeping on top.
Is there an exception for business loans?
Yes, a narrow one. When a lender requires a life insurance policy assigned to it as collateral for a business loan, the corporation may be able to deduct part of the premium for as long as the loan is outstanding. The deduction is limited to the cost of the pure insurance, not the full premium, and only for the coverage linked to the loan. Ask your accountant before you rely on it, and keep the lender's letter that says the assignment is required.
What about disability and critical illness cover?
Who pays matters here too. If the company pays your personal disability premiums as an employee benefit, the monthly benefit is usually taxable when you claim, which is when you can least afford a smaller cheque. Many owners pay their own disability premiums for this reason. Critical illness insurance follows its own rules depending on who owns the policy. We set out both options so your accountant can choose.
Can I move a policy I already own into my company?
You can, but it counts as a sale of the policy for tax purposes, with its own rules about the price. Some owners do it on purpose as part of a wider plan. Others find it costs more than starting fresh. Get your accountant's view before you sign a transfer form, and don't cancel an existing policy until any new coverage is approved and in force.
Which setup fits which goal?
- Protect the business if you die or can't work: the operating company owns and pays for key person cover.
- Fund a partner buy-out: the company, a holding company or the partners own the policies, matched to the buy-sell clause.
- Cover a business loan: the company owns a policy assigned to the lender, sized to the debt.
- Look after your family: you own the policy and usually pay for it personally, often from salary or dividends.
- Pass on wealth inside the company: a holding company or the operating company owns a permanent policy, planned with your accountant and lawyer.
Most owners end up with more than one of these. Our key person insurance guide and corporate plans page explain each one in more detail.
How does WealthPillar help?
We start with what each policy is for, then map who should own it, who pays and who receives the money. You get the options and the costs in writing, so your accountant and lawyer can check the tax and legal side before anything is signed. You speak with Chirag Kalra, a licensed life insurance advisor in Ontario, at our office at 181 Queen Street East in Brampton or by video call. WealthPillar is paid by insurer commission when a policy is placed. Coverage is subject to underwriting and insurer approval. We don't give tax or legal advice.
Ask who should own your policy
General education only; not individualized insurance, financial, tax or legal advice, or a recommendation to buy, replace or cancel a policy. Tax results depend on your facts and current law.
