A Corporate Contract When the Company Is in Trouble

When a company cannot pay its debts, a life insurance policy it owns is, in the ordinary arrangement, one of its assets. The corporation is the policyholder. It pays the premium and names itself beneficiary. So the family exemptions from seizure in provincial law do not apply. A lender holding an assignment, a receiver or a trustee in bankruptcy may be able to reach the cash surrender value, depending on the documents and any court order. A surrender can also create taxable income for the corporation in a year when it can least afford it. Lawful steps remain, and they start with an insolvency lawyer and a licensed insolvency trustee.

What follows is written for companies in Quebec, Ontario and British Columbia. The federal insolvency and tax statutes apply in every province. The insurance and security rules are provincial, and Quebec uses its own terms: a movable hypothec, for example, where other provinces speak of a general security agreement. The aim is to give you the general rules, so you can bring sharper questions to the people who will apply them to your documents. Reading it is free. Canadian Wealth Creation Centre Inc., the firm behind this site, is paid by insurer commission if a policy is bought, and nothing here is legal, tax or insolvency advice.

Who owns the policy when the corporation is the policyholder?

The corporation does. In the ordinary corporate arrangement, the company applies, the company pays the premium and the company is named beneficiary. The person insured is a shareholder or a key person who is not a party to the contract. You may have signed the application and answered every medical question, but the rights under the contract belong to the company, and so does the value that builds inside it.

The Bankruptcy and Insolvency Act, as read on 15 September 2026, defines property very widely: money, goods, things in action, land, and every kind of estate, interest and profit, present or future, vested or contingent. Our reading is that an interest in a life insurance contract is a thing in action, and so property within that definition. The policy sits in the same pool as the receivables, the equipment and everything else the company owns. It is not held in trust for your family.

Ownership settles whose asset it is. It does not settle who ranks first, or who may tell the insurer to surrender the policy. Those answers come from the security documents, provincial law and any court order, which is why the sections below take them one at a time. How the corporate arrangement works in calmer years is set out on corporate-owned life insurance.

Why does the family exemption from seizure not protect it?

The exemption you may have heard about is real and statutory, but it protects a designation, not a type of asset. It applies while a particular kind of beneficiary is named, and the provinces define that beneficiary in different ways. Where no protected designation exists, the exemption has nothing to attach to.

In Quebec, the rule is article 2457 of the Civil Code of Québec, read on 30 September 2026. It covers a designated beneficiary who is the married or civil union spouse, descendant or ascendant of the policyholder or of the participant. While that designation stands, the rights under the contract are exempt from seizure until the beneficiary receives the sum insured. In British Columbia, section 65(2) of the Insurance Act protects a designation in favour of a spouse, child, grandchild or parent of the person whose life is insured. Ontario's Insurance Act has its own provision, with its own wording, which your lawyer can read for you.

So the reason the exemption fails is not that a corporation has no family. Outside Quebec, the list refers to the family of the person whose life is insured, and that person has one. The exemption fails because the beneficiary on file is the corporation itself, which is none of the listed relatives. Paragraph 67(1)(b) of the Bankruptcy and Insolvency Act shows what the exemption would otherwise unlock: it keeps property that is exempt from seizure under provincial law out of what a bankrupt's creditors share.

An irrevocable designation is a second route. Under article 2458 of the Civil Code, a stipulation of irrevocability binds the policyholder even if the beneficiary does not know of it. As long as the designation stays irrevocable, the rights the contract gives the policyholder, participant or beneficiary are exempt from seizure. In British Columbia, section 66(1) of the Insurance Act limits what the owner can do with a contract whose beneficiary is designated irrevocably, unless that beneficiary consents. In theory, a corporation could name someone other than itself irrevocably. In practice, that gives up control of a corporate asset. It can create a taxable benefit for the shareholder. It may breach the loan documents. And if it is done when trouble is in sight, it can be challenged. The wider subject is on the designation and what a creditor can reach and asset protection.

Who can reach the policy, and on what authority?

Each creditor comes to the policy through a different door, and each door is a document or a court order. The table sets out the usual players. It is a map for your lawyer's reading, not a forecast of your file.

Two practical points sit behind every row. The insurer acts on what it has on record and on the documents it receives, so ask it in writing what it holds: the owner, the beneficiary, every assignment and any hypothec it has been told about. And a creditor's right over the policy is only as good as its right over the company, so the loan documents come first.

What happens to a policy already assigned to a lender?

An assignment already given is the simpler and the harsher case. It was notified to and recorded by the insurer, and while the loan runs the corporation's power to deal with the contract is restricted by its terms. What the lender may actually do on a default is set by the signed document, and it can include rights over the cash surrender value and an instruction to surrender. There is no general answer, only the document that was signed.

It helps to keep two kinds of borrowing apart, because they are easy to confuse.

• An insurer policy loan. The insurer advances money to the corporation under the contract. The corporation owes the insurer, and the interest is paid to the insurer. The balance reduces the cash surrender value and the death benefit until it is repaid.
• A collateral loan from an outside lender. The lender advances money to the corporation. The corporation owes the lender, and the interest is paid to the lender. The policy is pledged by assignment. The insurer is not a lender in that transaction.

When a collateral loan is repaid, the assignment is released and the policy stays with the corporation, as it always was. If the person insured dies while the loan is outstanding, the lender is paid from the death benefit to the extent the assignment and the debt allow, and the balance goes to the beneficiary on record. If the policy lapses or is surrendered, the lender's rights over the value follow the assignment.

Giving the assignment created no tax. The definition of disposition in subsection 148(9) of the Income Tax Act, as read on 15 September 2026, excludes an assignment of an interest in a policy to secure a debt or a loan other than a policy loan. A surrender made under that assignment is a different matter, covered below. Premiums remain generally not deductible, with one narrow exception: paragraph 20(1)(e.2) of the Act allows a limited deduction where a policy is assigned as collateral for a loan and its conditions are met. Your accountant can check those conditions against the loan.

The practical loss on the assigned side is control. Elections that belong to a policyholder, such as how policy dividends are used or whether a premium is paid from the value, may need the lender's consent. The moment a company most wants flexibility is the moment it has least, so read the assignment now, with your own lawyer, while nothing has happened. The mechanics of the two kinds of borrowing are on policy loans and the shareholder loan and the policy loan.

What happens to a policy nobody ever assigned?

It is still property, and that is a hard answer to accept. A policy never specifically pledged is still an asset of the corporation. It appears on the corporate balance sheet, a lender reading those statements has seen it, and a receiver or a trustee reading them will see it too.

Whether a lender with general security has a claim on it is a narrower question. The answer depends on the wording of the general security agreement, or in Quebec the movable hypothec, and on provincial law, which treats interests under insurance contracts in its own way. Some agreements name policies expressly; others speak of all present and after-acquired property. Only counsel reading your agreement can say whether it reaches the policy and how that claim ranks.

What does not change is the end of the road. If a receiver is appointed over the company's property, or the company goes bankrupt, the policy is among the assets the receiver or the trustee deals with. The unassigned policy arrives there with more steps and more legal cost, not with more protection.

What is the sequence, from the loan documents to a receiver?

It starts years before the trouble, in documents nobody rereads. When the company borrowed, it may have given a general security agreement covering its personal property. The loan documents can also contain a negative pledge, a covenant to keep insurance in force, a covenant not to surrender or encumber policies, and sometimes an express assignment of a named contract. Those pages are on a shelf in the office today, and reading them this week costs nothing.

The second step is the demand. Section 244 of the Bankruptcy and Insolvency Act, as read on 15 September 2026, sets the rule. It applies where a secured creditor intends to enforce its security on all or substantially all of the inventory, accounts receivable or other property of an insolvent person that was acquired for, or is used in, a business. The creditor must send a notice of that intention in the prescribed form, and it cannot enforce until ten days after sending it, unless the insolvent person consents to earlier enforcement.

Ten days is a floor for that kind of enforcement, not a guarantee for every company. A lender acting on one assigned policy may not be enforcing against all or substantially all of the property, and may rely on the assignment itself. The third step, the appointment, can also come sooner. Section 243 lets a court, on a secured creditor's application, appoint a receiver where it considers it just or convenient. Subsection 243(1.1) allows that before the ten days end, where the insolvent person consents or the court considers it appropriate. Subsection 243(2) makes clear that a receiver includes a person appointed privately under a security agreement.

There is also a door the company can open. The Office of the Superintendent of Bankruptcy explains that filing a notice of intention to make a proposal brings a stay of proceedings that stops creditors from beginning or continuing legal action, and that a secured creditor that took possession of its collateral before the filing can keep or sell it. Timing is therefore the whole game: call counsel when the demand arrives, not on the ninth day.

Can a restructuring filing buy time?

It can, and the right tool depends on the size of the company. The Office of the Superintendent of Bankruptcy describes a Division I proposal under the Bankruptcy and Insolvency Act as open to businesses and individuals, with no limit on the amount owed. After a notice of intention, the proposal must be filed within 30 days unless the court grants an extension. A licensed insolvency trustee files it, calls the creditors' meeting and administers it if it is accepted. If the creditors vote it down, the company becomes bankrupt as of the date of the meeting. That last point matters before anyone files.

The Companies' Creditors Arrangement Act is for larger files. The Office of the Superintendent of Bankruptcy describes it as applying to insolvent corporations that owe more than $5 million, so a smaller company restructures, if it can, through a proposal. Under the CCAA, a stay is a court order, made on the terms the court sets. Subsection 11.02(1), as read on 15 September 2026, limits an initial order to a period of no more than ten days. Longer orders come on a later application, where the company must also show that it has acted, and is acting, in good faith and with due diligence. The same Office explains that an initial order may provide for interim financing and for the priority of that financing over the company's existing debts, so a filing can change who ranks ahead of whom.

What a stay does not do is just as important. It suspends enforcement for the period allowed; it does not cancel a security interest, and it does not turn a corporate policy into an exempt one. The cash surrender value stays a corporate asset throughout. And section 11.04 provides that a CCAA order has no effect on proceedings against a person, other than the company, who is obligated under a guarantee or letter of credit relating to it. In plain terms, a stay that protects the company does not protect the owner who guaranteed its debt.

What does a forced surrender cost in tax?

Subsection 148(1) of the Income Tax Act requires a policyholder who disposes of an interest in a life insurance policy to include in income the amount by which the proceeds of the disposition exceed the adjusted cost basis immediately before the disposition. A surrender is a disposition. For a surrender, the proceeds are the cash surrender value less any insurer policy loans outstanding. If the proceeds do not exceed the adjusted cost basis, there is no policy gain. A gain is ordinary income of the corporation, not a capital gain.

Three details change the result. First, an earlier insurer policy loan was itself a disposition and has already reduced the adjusted cost basis, so the insurer's current figure is the one that counts. Second, a collateral loan from an outside lender is not a policy loan. Our reading is that it is not deducted in measuring the proceeds, so the corporation can owe tax on a gain while the cash goes to the lender. Third, the adjusted cost basis is defined by formula in subsection 148(9) and changes over the life of the contract, so ask the insurer for a dated figure rather than inferring it from premiums paid.

Whether tax is actually payable depends on the company's other income and on losses of the year or carried forward. That is the accountant's calculation, and it belongs before a surrender, not after. Federal rules apply in every province, and a Quebec corporation also reports to Revenu Québec. How a tax debt arising in the year of an insolvency is treated is a question for the licensed insolvency trustee.

Illustrative example. The assumptions are invented to show the order of the steps, and describe no real contract. Suppose your company's policy has a cash surrender value of $400,000 with no insurer policy loan, an adjusted cost basis of $260,000 immediately before the surrender, and a collateral loan of $300,000 owed to an outside lender under an assignment that directs the insurer to pay the lender first. Suppose also that your accountant confirms $90,000 of losses the corporation can use that year. No tax rate is applied.

The arithmetic shows the shape and nothing more. Before any surrender, ask the insurer in writing for the proceeds of the disposition, the loan settlement, the adjusted cost basis and the tax slip it expects to issue, and have the accountant review them even if little cash will be paid. The mechanics are on cash surrender value and when a policy loan becomes taxable.

What happens if the person insured dies while the company is insolvent?

The insurer pays the death benefit to the beneficiary it has on record. If that is the corporation, the money becomes a corporate asset like any other, and it is available to the company's creditors. A lender holding an assignment is paid first to the extent the assignment gives it that right. An insurer policy loan outstanding at death reduces what the insurer pays. For a policy that is exempt under the Income Tax Act, a payment because of death is not a disposition. The death benefit itself does not create a policy gain.

The capital dividend account may be credited with the death benefit received less the policy's adjusted cost basis, under paragraph (d) of the definition in subsection 89(1). A credit is not cash available to shareholders, though. Paying a capital dividend needs the election under subsection 83(2). Corporate law also restricts dividends by a corporation in financial difficulty: federal and provincial business corporations statutes set a solvency condition for any dividend. The corporation's lawyer can apply it to your facts. A shareholder who lives outside Canada faces withholding tax on a capital dividend. How the account works is on the capital dividend account and paying a capital dividend after a death.

What happens if the premiums stop?

The contract decides, so read it before the first missed payment rather than after. Depending on the contract and the options chosen when it was issued, an unpaid premium can lead to a grace period, then to an automatic premium loan, to policy dividends applied to the premium, to reduced paid-up insurance, or to a lapse. An automatic premium loan is an advance by the insurer: it adds to the loan balance owed to the insurer, and interest on it is paid to the insurer. Reduced paid-up insurance keeps some coverage without further premiums, at a lower death benefit. Ask the insurer to set out each provision that applies to your contract, in writing.

A lapse with a loan outstanding can produce income for the corporation to the extent the proceeds exceed the adjusted cost basis. The Income Tax Act has an exception for a lapse caused by unpaid premiums where the policy is reinstated within the period the Act allows, which is no later than 60 days after the end of the calendar year of the lapse. Reinstatement itself is the insurer's decision under the contract. A policy that ends because the loan balance overtook the value securing it is a different case: ask the insurer and the accountant in writing whether the exception can apply. Where a receiver is in place, whether premiums keep being paid may be the receiver's call, not yours, so raise it early.

What is lost when a policy is surrendered?

The coverage ends, and with it the reason the policy was bought. A surrender does not produce the capital dividend account credit that a death benefit can, because that credit comes only from proceeds received in consequence of a death. It does not erase a balance the account already holds from other sources, such as the non-taxable half of a capital gain.

The second loss is the terms the policy was issued on. The premium was set on the age of the person insured when the contract was issued, and on the medical evidence of that day. Replacing the coverage later means a new application, at the age reached by then, with a new medical file. It could cost more, or be unavailable, depending on the insurer's products at that time, the age and health of the person insured, and underwriting. Before any surrender, ask the insurer whether an in-force option, such as reduced paid-up insurance or a lower death benefit, would keep some coverage and what each would do to the values.

What can still be done lawfully once the company is in difficulty?

More than owners are sometimes told. A transaction meant to put value beyond the reach of creditors can be challenged and reversed, and the paragraphs below explain how. But ordinary, lawful steps remain, and taking them early widens the choices.

1. Call an insolvency lawyer and a licensed insolvency trustee before anything is transferred, surrendered, signed or promised.
2. Ask the insurer for a written, dated statement of the cash surrender value, the insurer loans and interest, the adjusted cost basis, the beneficiary and every assignment on record.
3. Have the lawyer read the loan, security and assignment documents with the policy in mind.
4. Ask the lender, through counsel, whether it will agree to forbearance while a plan is worked out.
5. Ask the trustee whether a notice of intention and a proposal fit the company.
6. Ask whether a sale of the policy at fair market value, with every consent required, is open, and have it valued independently.
7. Ask the insurer what each election, such as reduced paid-up insurance, does to coverage and values, and ask the accountant what it does to tax.
8. Have the accountant price any surrender against the company's available losses before it happens.

Two sections of the Bankruptcy and Insolvency Act, as read on 15 September 2026, let a trustee in bankruptcy ask a court to review transactions made before a bankruptcy. Section 95 deals with preferences: a payment or transfer that favours one creditor over the others, such as handing the policy to a shareholder to repay a shareholder loan. It looks back three months for a creditor at arm's length and twelve months for one who is not, and the test is not the same in the two cases. Section 96 deals with transfers at undervalue, where the company received less than fair value. It looks back one year, or up to five years where the parties are not at arm's length, and its conditions, such as whether the company was insolvent or intended to defeat or delay a creditor, differ from one branch to the next.

Our reading is that these are remedies used by a trustee under that Act, and that they do not by themselves apply in a receivership. A transaction is not reversed merely because it falls inside a look-back period; the court applies the test to the facts. Outside bankruptcy, provincial law can reach the same transactions. In Quebec, article 1631 of the Civil Code, read on 30 September 2026, lets a creditor who suffers injury through a juridical act made by the debtor in fraud of his rights, in particular an act by which a debtor renders himself insolvent or, being insolvent, grants a preference to another creditor, obtain a declaration that the act may not be set up against him. The common law provinces have fraudulent conveyance and preference statutes, such as Ontario's Fraudulent Conveyances Act. Which rule applies to your file is for an insolvency lawyer.

Does a personal guarantee put the owner's own policies in play?

It can, which is why the company's troubles are sometimes the owner's too. A guarantee makes you personally liable for the company's debt. As the CCAA section above explains, a stay that protects the company does not protect you as guarantor, and a lender can pursue you while the company restructures.

Whether a policy you own personally can be reached by a lender collecting on your guarantee is a separate question with a separate answer. It depends on who owns the policy, who is named as beneficiary, whether the designation is irrevocable, when it was made, and the law of your province. A family or irrevocable designation made in calm years is analysed differently from one changed after the demand. Ask your own lawyer, not only the company's, because your interests and the company's can part ways.

Does Assuris protect the policy if the company fails?

No. Assuris protects policyholders if a member life insurer fails; it has no role when the policyholder's business fails. Every life insurer authorized in Canada must be a member. For whole life, Assuris states (read 30 September 2026) that a policyholder keeps up to $1,000,000 or 90% of the death benefit, whichever is higher, and up to $100,000 or 90% of the cash value, whichever is higher, calculated on net values after policy loans. Solvency supervision depends on how the insurer is chartered: OSFI for a federally incorporated insurer, the home province (the AMF in Quebec) for a provincially incorporated one. The details are on Assuris's whole life page.

If the company is still solvent, what is worth doing now?

Everything above is decided by documents signed in good years and by choices made in calm ones. A solvent company has options that a company under demand does not. Whether the corporation or you personally should own a policy is weighed on the policyholder decision, and which company should hold it on the holding company and where the contract sits. Each option has its own tax, creditor and control effects. The choice belongs with your accountant and your lawyer, and it is not a creditor strategy.

A short review this year can answer these questions:

• Who owns each policy, and who is the beneficiary on the insurer's record?
• Is any policy assigned, or subject to a hypothec, and to whom?
• What do the loan documents say about insurance: covenants, negative pledges, consents?
• Have you, personally, guaranteed any of the company's debts?
• What are the current cash surrender value, insurer loans and adjusted cost basis?
• Could the company keep paying the premiums through a bad year?

A policy is life insurance first. Participating whole life insurance is an insurance contract and is not an investment. Its policy dividends are not guaranteed. It is not bought to fund a near-term business need. Nor does it suit a reader looking for a way to keep an asset from a creditor. That search leads to the kind of transaction the statutes above are built to unwind, and a good lawyer will say so kindly and early. The wider picture for incorporated owners is in the business owners section.

Who should the owner call, and what should they bring?

An insolvency lawyer first, before anything is transferred, surrendered, signed or promised. A licensed insolvency trustee next: trustees are licensed and supervised by the Office of the Superintendent of Bankruptcy, which explains their role and keeps a registry on what is a licensed insolvency trustee. Then the company's own accountant, to price the tax on any disposition before it happens. In Quebec, questions about a beneficiary designation can also go to a notary.

Bring these to the first meeting and it will be a shorter, cheaper one:

1. The loan documents and the general security agreement or hypothec.
2. Any demand, notice under section 244, or appointment order.
3. The policy contract, with any riders and amendments.
4. The insurer's dated statement of values, loans and adjusted cost basis.
5. Any assignment, with the insurer's acknowledgement.
6. The corporate records showing who can bind the company, and any personal guarantees.

The licensed representative who placed the policy can help with something narrow and real: the contract's mechanics, the insurer's requirements, the current values and what each election does to the coverage. That help belongs behind counsel, not in front of it. An insurance licence qualifies nobody to give legal, tax or insolvency advice, and no product is offered here as an answer to a company in trouble.