Key points
- Corporate-owned life insurance: premiums paid with corporate money; proceeds above the policy's adjusted cost basis go to the capital dividend account.
- Capital dividends can be paid to shareholders tax-free, by filing an election (Form T2054) on time.
- Part of a premium may be deductible when a lender requires the policy as collateral for a loan (ITA s. 20(1)(e.2)).
- Life insurance is often used to fund tax at death on investments, rental property or private company shares.
- Premiums are otherwise generally not deductible. Plans are designed with your agent, lawyer and accountant together.
Corporate-owned life insurance
When a private corporation owns a life policy on a shareholder, the premiums are paid from the company's after-tax income, which is usually taxed at a lower rate than the shareholder's personal income. When the insured person dies, the company receives the proceeds tax-free. The amount above the policy's adjusted cost basis is added to the capital dividend account (CDA), and the company can pay it out to shareholders as a tax-free capital dividend by filing an election on Form T2054 by the date the dividend is payable.
The adjusted cost basis generally falls over time, so the share of the proceeds that can reach the CDA usually rises. Our guide to corporate-owned life insurance explains the mechanics, the timing of the election and the common mistakes.
Policies used as loan collateral
Life insurance premiums are generally not deductible. The exception is a policy a lender, as a restricted financial institution, requires you to assign as collateral for a loan whose interest is deductible, such as a business or investment loan. The deduction is limited to the lesser of the premium and the net cost of pure insurance, for the part that relates to the amount owing. The lender's requirement matters: offering the policy voluntarily doesn't qualify.
Funding tax at death
At death, capital property such as investments, a rental property or private company shares is generally treated as sold at fair market value, and RRSPs and RRIFs are generally included in income, unless they pass to a spouse or partner. The result can be a large bill on the final return just when the estate has little cash. Permanent life insurance, including joint last-to-die policies that pay on the second death, is a common way to have that money ready. See estate planning.
Growth inside a permanent policy
Permanent policies that build a cash value can let that value grow without annual tax, within limits set by the Income Tax Act for so-called exempt policies. Withdrawals, policy loans and surrenders can create taxable income where what you take out exceeds your cost in the policy. These rules are technical and depend on the policy; the agent explains the product, and we explain the tax.
Where Finvo fits
We model the tax side before a policy is bought: the corporate cash flow for premiums, the capital dividend account, the election when proceeds are paid, the collateral deduction, and an estimate of the tax at death. Our tax-side financial planning brings it together with your RRSPs, TFSAs and corporation.
Finvo itself does not sell insurance or give insurance advice. Finvo can connect you with a licensed insurance agent from our partner network who can help with insurance advice if you need it. The licensed agent advises on products and coverage; Finvo covers the tax side. Insurance and other specialists are joining Finvo as contractors, so a group of consultants can work on your file together and you don't have to go from place to place.
Whoever you deal with, you can check that an agent is licensed: in British Columbia with the Insurance Council of BC licensee directory, and in Alberta with the Alberta Insurance Council agent lookup.
This page is general information, checked against the sources below on 5 Nov 2026. Every policy and plan has its own terms; it isn't insurance, tax, investment or legal advice for your situation.