Corporate Life Insurance

How Is Corporate-Owned Life Insurance Taxed in Canada?

Corporate-owned life insurance is taxed differently at three separate stages — the premiums, the cash value growth while the policy is in force, and the death benefit. Here's the tax treatment at each stage.

Premiums: Not Deductible, But Paid With Cheaper Dollars

Life insurance premiums are generally not a deductible business expense for a corporation. The tax advantage of corporate ownership isn't a deduction — it's that the premium is paid using corporate income taxed at the (typically lower) small business rate, rather than personal income you'd have withdrawn and paid personal tax on first. See Can My Corporation Pay My Life Insurance Premiums? for a closer look at this, including the important distinction between corporate ownership and a corporation paying premiums on a personally-owned policy.

Growth: Sheltered From Annual Tax

A permanent life insurance policy that meets the "exempt" test under the Income Tax Act allows its cash value to grow without being taxed each year — a meaningful difference from a corporate investment account, where interest and most gains are taxed annually as they're earned, often at rates around 50% in Alberta for passive income inside a CCPC. This is the mechanic behind the Corporate Wealth Transfer strategy.

The Death Benefit: Tax-Free to the Corporation, Then the CDA Takes Over

When the corporation receives the death benefit, it is not included in the corporation's income — life insurance proceeds are received tax-free, regardless of who the beneficiary is. What determines how much of that money reaches shareholders tax-free is a separate mechanism: the Capital Dividend Account. The amount by which the death benefit exceeds the policy's adjusted cost basis is credited to the CDA and can be paid out as a tax-free capital dividend. Any portion not covered by that credit would be taxed as a regular dividend if distributed to shareholders that way.

Frequently Asked Questions