Key points
- The corporation is the owner, payer and beneficiary of the policy, usually on the life of a shareholder or a key person.
- Premiums are generally not deductible. The only exception is a policy a lender requires as collateral for a business loan, and even then only part of the premium.
- The death benefit is received tax-free, and the proceeds minus the policy's adjusted cost basis are added to the capital dividend account.
- Paying that amount out as a tax-free capital dividend needs an election on Form T2054, filed by the day the dividend becomes payable.
- It is a long commitment that suits some owners, not all. Ownership (opco or holdco), a future sale and the shareholders' agreement all matter.
What corporate-owned life insurance is
Any life insurance policy can be owned by a corporation instead of a person. The company applies for the policy, owns it, pays the premiums from its bank account and is named as the beneficiary. The person whose life is insured is usually a shareholder, often the founder, or a key person the business depends on.
The policy itself can be term insurance, which covers a set period and has no cash value, or permanent insurance (whole life or universal life), which covers you for life and usually builds a cash value. The life insurance guide explains the types. Most of the planning ideas people call "COLI" rely on permanent policies, because the company wants the money to be there whenever the death happens, not only within a term.
Why do owners look at it? Because many small corporations end up with money the owner doesn't need right away: profits taxed at the lower small business rate and kept in the company. Paying premiums from that money, rather than taking it out as salary or dividends and paying personal tax first, is the starting point of most COLI conversations.
How the money flows
| Stage | What happens | Tax treatment, generally |
|---|---|---|
| Premiums | The corporation pays the premiums from its own money, for as long as the policy requires. | Not deductible, except the narrow collateral rule below. Paid with money already taxed in the corporation. |
| Cash value (permanent policies) | Part of the premium builds a cash value inside the policy, which can grow over time. | Growth inside a policy that stays within the tax rules for "exempt" policies is generally not taxed each year. Taking cash out, or cancelling the policy, can create taxable income. |
| Death of the insured person | The insurer pays the death benefit to the corporation. | The death benefit is not taxable income to the corporation. |
| Capital dividend account | The corporation adds the proceeds minus the policy's adjusted cost basis to its capital dividend account. | A running balance the company tracks; nothing is paid yet. |
| Capital dividend | The directors declare a dividend and the company files Form T2054 to elect that it is a capital dividend. | Tax-free to Canadian-resident shareholders, up to the account balance. |
The capital dividend account credit
The capital dividend account (CDA) is a notional account every Canadian-resident private corporation keeps track of. It collects amounts the company received tax-free, such as the untaxed half of capital gains, so they can reach the shareholders tax-free too. Life insurance proceeds are one of its components.
The amount added is not the whole death benefit. CRA's Income Tax Folio S3-F2-C1, Capital Dividends, describes it as the proceeds received minus the adjusted cost basis of the policy immediately before the death. The adjusted cost basis is a tax figure the insurer reports. Broadly, it rises with premiums paid and falls with the cost of insurance each year, so on many permanent policies it is high in the early years and falls over time, sometimes to nothing.
Round numbers, for illustration only. A company owns a permanent policy on its founder with a death benefit of $1,000,000. When the founder dies, the policy's adjusted cost basis is $150,000. The company receives $1,000,000 tax-free and adds $850,000 to its capital dividend account. The directors declare a dividend of $850,000 and file Form T2054 by the day it becomes payable, so the founder's estate or the surviving shareholders receive it tax-free. The other $150,000 is still in the company and would come out as an ordinary taxable dividend, or stay for the business.
The election matters. A dividend is only a capital dividend if the company elects it on Form T2054, with a copy of the directors' resolution and a schedule of the account, by the day the dividend becomes payable (or the day any part is paid, if earlier). A late election is possible with a penalty. If the company elects more than its balance, it pays an additional tax of 60% of the excess unless it elects to treat the excess as a taxable dividend. So the balance has to be worked out before the dividend is declared, not after.
A capital dividend paid to a holding company is added to the holding company's own capital dividend account, so the tax-free amount can keep moving up a chain of companies to the people at the top.
Why premiums are generally not deductible
Life insurance premiums are a personal or capital-type cost in the eyes of the Income Tax Act, so neither you nor your corporation can normally deduct them. The exception is in paragraph 20(1)(e.2), and CRA's archived bulletin IT-309R2, Premiums on Life Insurance Used as Collateral, explains how it applies: when a bank or another restricted financial institution requires an interest in the policy to be assigned to it as collateral for a loan, and the interest on that loan is deductible, the company can deduct the least of:
- the premiums payable for the year;
- the policy's net cost of pure insurance for the year, a figure the insurer calculates under the regulations; and
- the part of those amounts that relates to the amount still owing on the loan.
The lender has to require the assignment; a policy the company chooses to pledge doesn't qualify. In practice the deduction is often a small part of the premium on a permanent policy.
Watch who benefits. If the company pays the premiums but the shareholder's family is the beneficiary, or the shareholder owns the policy personally, the CRA can treat the premiums as a taxable benefit to the shareholder. The company should be both owner and beneficiary when the company pays.
Operating company or holding company?
| Question | Operating company owns it | Holding company owns it |
|---|---|---|
| Paying premiums | Paid directly from business profits. | The holding company needs the money, usually from dividends paid up from the operating company. |
| Creditors | The cash value is a business asset and can be exposed to the business's creditors. | Generally kept away from the trading business's risks, though creditor protection is partial, not absolute. |
| Selling the business | Goes with the company unless moved out first, and moving a policy out has its own tax rules. | The operating company can be sold without the policy. |
| Capital dividend account | Credit lands in the operating company; a capital dividend can pass it up to a holding company. | Credit lands where the investments and family shareholders often already are. |
| Key person cover | Puts the money where the loss is felt: the business. | Less direct for a key person who is not a shareholder. |
Some owners split the roles between companies, for example one company owning the policy and another being the beneficiary. Those arrangements can create taxable benefits between related companies and need advice before they are set up. Our holdco or opco guide explains what a holding company does in general.
What owners use it for
- Paying the tax on death. When an owner dies, they are treated as having sold their shares at fair market value, and the tax on the gain is due on the final return. A policy can provide the cash so the family or the company doesn't have to sell assets in a hurry. The estate planning guide covers the deemed disposition.
- Funding a buy-sell agreement. Shareholders often agree that if one dies, the others or the company will buy the shares. Insurance can pay for that purchase. How the agreement is written changes the tax result, so it is drafted by a lawyer with the accountant's input.
- Key person cover. Money to recruit, cover lost profit or reassure lenders if someone the business depends on dies.
- Passing on surplus. Using money the owner will never spend to fund a policy whose proceeds reach the next generation through the capital dividend account.
Risks and costs to weigh
- It is a long commitment. Permanent policies are priced for premiums over many years. If the company's profits fall, the premiums still have to be paid or the policy may lapse.
- Early years are expensive. The cash value is usually low at first, and cancelling in the early years often returns less than was paid.
- Projections are projections. Illustrations of cash value and death benefit on participating and universal life policies depend on future returns and the insurer's decisions. Ask the agent which parts of an illustration are contractual and which are not.
- Health and age. The insured person goes through underwriting; cost and availability depend on age and health.
- The rules can change. The capital dividend account, the exempt-policy test and the rules on moving policies have all been amended over the years.
- Records. The account balance, the adjusted cost basis on the insurer's statements, the resolutions and the T2054 filings all have to be kept and found again, sometimes decades later. A company without a securities register and minute book in order will struggle at exactly that moment.
Who it may suit
COLI conversations usually make sense when most of these are true: the company has steady profits beyond what the owner needs to live on; the owner already pays themselves in a way that works and uses their RRSP and TFSA room; there is a real insurance need (tax on death, a buy-sell, a key person, or money to pass on); the company can keep paying premiums for many years; and the owner is insurable at a reasonable cost.
It usually doesn't make sense as a first step for a young company with uneven profits, for an owner who will need the money in the company to live on, or as a way around tax on money that will be taken out soon anyway. For paying yourself, see salary or dividends and the salary vs dividend calculator.
How Finvo helps
We cover the accounting and tax side of a corporate-owned policy: recording premiums and policy statements in the books, tracking the capital dividend account, preparing the directors' resolutions and the Form T2054 election when a capital dividend is paid, and making sure the corporate records show who owns what. Before a policy is bought, we look at how the premiums fit with how you pay yourself and the company's cash flow, as part of a business membership or tax-side planning.
Finvo itself does not sell insurance. If you need insurance advice, we can connect you with a licensed agent from our partner network; the agent advises on products and coverage, and we cover the tax side. Insurance and other specialists are joining Finvo as contractors, so a group of consultants can work on your file together. Shareholders' and buy-sell agreements are drafted by your lawyer, who we work alongside.
This guide is general information for owners of private corporations in BC and Alberta, checked against the CRA's folio on capital dividends, its bulletin IT-309R2 and the Income Tax Act on 4 Nov 2026. It isn't tax, legal or insurance advice for your situation, and rules can change.