The Accountant Asked to Approve This, and What to Check

Before you approve a corporate-owned specially designed, high-cash-value, participating whole life insurance policy, check ten things, and get each one in writing: the purpose; who owns the policy, who pays the premium and who is the beneficiary; the guaranteed values on their own; the policy's exempt status; the loan provision and how the insurer sets the rate; the adjusted cost basis and the tax on any policy loan; the capital dividend account arithmetic; the shareholder benefit risk; how money would reach the shareholder; and, for a Quebec corporation or family, the Revenu Québec and Civil Code points. If an answer is missing, or was only given out loud, the file is not ready to approve.

The accountant decides on a proposal made at a meeting they did not attend, and is the one asked about it years later. The owner can use the same list to prepare. A participating policy is life insurance first. It is not a savings account, a deposit or an investment, and it is not the place for money the business will need back soon.

Reading this costs nothing. It is published by Canadian Wealth Creation Centre Inc., which is paid by insurer commission if a policy is bought through it, so read it as you would any document from a party with an interest. Every tax conclusion on the file belongs to the accountant.

What should the accountant check before approving?

Work through the list with the owner, one item at a time.

1. Purpose. A documented need for permanent coverage on this life, such as a buy-sell obligation, a key person or tax at death, and not a near-term business need.
2. Roles. The owner, the premium payer, the person insured and the beneficiary, and whether they line up.
3. The guaranteed column. Guaranteed cash values and the guaranteed death benefit, read without the dividend columns.
4. Exempt status. The insurer's written confirmation that the policy is exempt, and a list of the changes that could affect it.
5. Loan terms. The contract's policy loan provision, how the insurer sets and changes the rate, and what happens if the loan overtakes the value.
6. Adjusted cost basis. The insurer's year-by-year schedule, and the tax on any planned policy loan.
7. Capital dividend account. The credit the corporation could expect at death, net of the basis.
8. Shareholder benefit. Any mismatch between the roles, and any pledge of the corporate policy for a personal loan.
9. The extraction step. How money would move from the corporation to the shareholder, and the tax on each route.
10. Quebec. The Revenu Québec filings and the Civil Code points, where the corporation or the family is in Quebec.

Add one item outside the tax file: the advisor's written answer on how they are paid for this recommendation.

What exactly is the accountant being asked to approve?

Three separate decisions. A recommendation that folds them into one has not given you enough to review.

The purpose. Does the corporation need permanent insurance on this person's life at all? A buy-sell agreement, a key person whose loss would last, or tax payable on the shares at death are needs that last. A plan to buy equipment in two years is not. A policy should never be bought to fund a near-term business need, because its early values sit below the premiums paid.

The ownership. Which entity owns the contract, which pays the premium, who is the person insured and who is named beneficiary. These four answers decide who gets the death benefit, whether a capital dividend account credit arises and whether a benefit is conferred on someone who did not pay. Whether the owner personally, the operating company or a holding company should own the policy is a structural choice with different results at death, on a sale and in front of creditors. There is no default answer. The accountant and the corporation's lawyer settle it together, with the owner's figures, and write down the reasons.

The design. A specially designed, high-cash-value, participating whole life insurance policy has a base premium, which buys the guaranteed coverage and guaranteed values. Some designs add optional additional deposits, which buy extra paid-up insurance under a rider. Dividends, when the insurer declares them, can buy more paid-up additions: small blocks of fully paid insurance with their own values. The split between base premium and additional deposits changes how fast value builds, how much room remains under the exempt test and, depending on the insurer, how the advisor is paid.

Which documents belong on the file before anyone signs?

Ask for these in writing, dated, and keep them with the working papers. Rely on no figure until the insurer supplies it.

A document the advisor or the insurer will not provide is an answer in itself.

How should the illustration be read?

Start with the guaranteed column and read it alone. It shows the cash value and death benefit the insurer is bound to under the contract, whatever dividends it declares. The current-scale columns add dividends that have not been declared yet. They are a projection, not a promise. The reduced-scale columns show the same policy if dividends come in lower. The Autorité des marchés financiers, Quebec's regulator, notes on its page on participating and non-participating whole life insurance that dividends are not guaranteed and that insurers can provide both a realistic and an adverse scenario. Ask for both, and for the reduced paid-up values.

The dividend scale interest rate. Some insurers publish a dividend scale interest rate each year. It is one input the insurer uses to set dividends on its participating policies. It is not the policyholder's return, it is not guaranteed and it can change every year. The return on a particular policy's cash value also depends on mortality, expenses, taxes, the premium design and the years in force. An advisor who presents that rate as the client's return has misread it.

What the premium pays for. A participating premium pays for the insurance, the insurer's costs and the contract's values, all together. The illustration shows the resulting values, not an itemized charge for each part, so the costs cannot be tested line by line as on some universal life designs. The guaranteed column, the reduced-scale run and the reduced paid-up values are the practical way around that limit.

The early years. Guaranteed cash values in the first years sit below the premiums paid, because the costs of issuing and insuring fall early. A surrender in those years returns less than was put in. That is a permanent loss, not a timing difference.

More on paid-up additions is in how paid-up additions work, and on the surrender value in cash surrender value.

How is a policy loan taxed, and who owes whom?

A policy loan is an advance the insurer makes to the policyholder under the terms of the contract, secured by the policy's value. When the corporation owns the policy, the insurer lends to the corporation, the corporation owes the insurer, and the interest is paid to the insurer at a rate the insurer sets and can change. Nobody lends to themselves, and the shareholder owes nothing unless a second transaction moves the money to them.

The tax sits right beside the advance. Subsection 148(9) of the Income Tax Act treats a policy loan as a disposition of an interest in the policy. Under subsection 148(1), the part of the loan above the adjusted cost basis immediately before it is included in the corporation's income for that year, and the loan lowers the basis. If the basis is higher than the loan, nothing is included at that point. A repayment adds back to the basis and can give a deduction under paragraph 60(s), in the year of repayment, limited to amounts previously included. That deduction is not a refund of the earlier tax, and it does not arise without a repayment. These are federal rules; a Quebec corporation also reports to Revenu Québec.

Illustrative example. The figures are assumptions chosen to show the arithmetic, not values from any policy. Suppose the corporation requests a $50,000 policy loan when the insurer reports an adjusted cost basis of $35,000 immediately before it.

• Amount included in the corporation's income: $50,000 less $35,000, or $15,000.
• Adjusted cost basis after the loan: nil.
• Owed to the insurer: $50,000, plus interest at the insurer's rate.
• Total deduction available under paragraph 60(s) on later repayments: no more than the $15,000 included.

Interest and repayment. The contract may not require a repayment schedule, but interest accrues at the insurer's rate, and depending on the contract, unpaid interest is added to the loan. The Autorité des marchés financiers puts it plainly on its page on accessing the cash surrender value: a loan is eventually repaid with interest, and if the person insured dies first, the insurer subtracts the amounts owed and accrued interest from the insurance payable. When and how to repay depends on the contract. Where it sets no schedule, repayment is a plan the owner has to keep, and a plan that is not kept turns the arrangement into ordinary debt at the insurer's rate.

If the loan overtakes the value. When the loan and unpaid interest exceed the value that secures them, the contract can end after the notice it provides. For tax, the proceeds on that ending are the cash surrender value less the loans owing, and income arises only to the extent the proceeds exceed the adjusted cost basis. The small cheque left after the loan is settled is not the figure that decides the tax. An exception in subsection 148(9) covers a lapse caused by unpaid premiums when the policy is reinstated no later than 60 days after the end of the calendar year of the lapse. It is written for premium lapses; whether it can help a policy that ended because of its loan is a question for the insurer and the accountant, in writing. Reinstatement itself is the insurer's decision under the contract.

Dividends while a loan is outstanding. Whether a loan changes the dividends credited to the policy depends on the insurer's dividend policy. Some insurers adjust dividends on loaned values and others do not; the terms used are direct recognition and non-direct recognition. Ask the insurer, in writing, which applies to this policy. More detail is in how policy loans work and when a policy loan becomes taxable.

How does a policy loan differ from a loan by an outside lender?

The two are proposed side by side, but they differ in lender, in who is paid interest and in tax result.

After either loan, the policy still belongs to its owner. When a collateral loan is repaid, the lender releases the assignment and holds no further right over the policy. Ask the lender, in writing, what it requires to release the assignment.

Can the corporation deduct the premiums or the interest?

Premiums: generally not. Owning a policy through a corporation does not make the premium a business expense. Paragraph 20(1)(e.2) of the Income Tax Act allows a deduction for part of a premium only when each of these is true:

• the corporation borrowed from a lender that is a restricted financial institution as the Act defines it;
• the lender required the policy to be assigned as collateral for that loan;
• the interest on the loan is deductible, which means the money is used to earn business or property income;
• the corporation is the policyholder.

The deduction is capped at the lesser of the premium payable and the policy's net cost of pure insurance for the year, and only the share that reasonably relates to the amount owing counts. On whole life, the net cost of pure insurance can sit well below the premium in the early years, so the deductible part can be small. Ask the insurer for the net cost of pure insurance by year. The detail is in which part of the premium is deductible.

Interest: it depends on the use. Interest is deductible under paragraph 20(1)(c) only when the borrowed money is used to earn business or property income, and that paragraph excludes money borrowed to acquire a life insurance policy. Policy loan interest counts only as the insurer verifies it on CRA Form T2210, Verification of Policy Loan Interest by the Insurer. The accountant needs a record that traces each advance to its use. An advance used to pay a shareholder or a personal expense fails the test.

What does paying from the corporation change, and which tax rules apply?

The advantage of paying premiums from the corporation, where there is one, is about the tax rate on the dollars, not about the policy. A premium paid by the corporation uses dollars that may have paid less tax than the same dollars paid out to the owner and taxed personally. The same corporate dollars could fund any other corporate use, so the lower rate favours corporate over personal ownership. It does not favour insurance over the alternatives.

Whether that advantage exists depends on the corporation's position, and several regimes can apply before any figure means anything:

• the small business deduction and the business limit it applies to;
• the reduction of that deduction when adjusted aggregate investment income passes the threshold in subsection 125(5.1) of the Income Tax Act;
• the personal services business rules, which deny the lower rate where they apply;
• in Quebec, the provincial small business deduction and its condition based on hours paid to employees.

Growth inside an exempt policy is not income each year, so it is not part of the investment income measure while it stays inside. A policy gain realised on a loan above the basis or on a surrender is income in the year it arises. Ask the accountant how it would count in that year's calculation, before the loan is taken. More is in retained earnings and the passive income rule.

How does the exempt test affect the file?

Growth inside the policy is not taxed each year while the policy remains exempt under section 306 of the Income Tax Regulations. Exempt status is a condition the insurer tests, not a property the product has forever. Additional deposits, a change in the death benefit or a change of design can affect it, and the Act treats a policy that stops being exempt as disposed of. Ask the insurer to confirm exempt status in writing each year and before any change, and ask what the insurer does if a deposit would breach the test. The mechanics are in the exempt test and what happens when a contract fails it.

How much reaches the capital dividend account at death?

The credit. When the person insured dies, a private corporation that receives the proceeds as beneficiary adds to its capital dividend account the life insurance proceeds received because of the death, less the adjusted cost basis of the policyholder's interest immediately before the death. That is paragraph (d) of the definition in subsection 89(1) of the Income Tax Act. An insurer policy loan outstanding at death reduces the amount received. The account is a notional tax record, not money, and other entries also move it.

Illustrative example. The figures are assumptions for the arithmetic. A private corporation receives $1,000,000 as beneficiary, with no policy loan outstanding, and the insurer reports an adjusted cost basis of $80,000 for the policyholder's interest immediately before the death. The credit is $1,000,000 less $80,000, or $920,000. The remaining $80,000 is ordinary corporate surplus, which leaves the corporation as a taxable dividend.

Paying it out. A capital dividend needs an election under subsection 83(2), filed on CRA form T2054 on or before the earlier of the day the dividend becomes payable and the day it is first paid. A Quebec corporation also files Revenu Québec form CO-502, whose official version is in French. An election larger than the balance brings a tax of three fifths of the excess under subsection 184(2), which subsection 184(3) lets the corporation avoid by electing to treat the excess as a separate taxable dividend. A shareholder who is not resident in Canada is subject to withholding tax on a capital dividend. The accountant confirms the balance before the directors declare anything. The full reference is the capital dividend account, and the steps after a death are in paying a capital dividend after a death.

Where does a shareholder benefit arise?

Subsection 15(1) of the Income Tax Act includes in a shareholder's income a benefit the corporation confers on them. Two patterns bring a policy into that rule.

The roles do not line up. When the corporation pays a premium on a policy the shareholder owns, or on a policy whose value or death benefit goes to the shareholder or their family, the CRA can assess the premium as a benefit to the shareholder, and the corporation gets no deduction for it. When the corporation owns and pays but a family member is the beneficiary, the corporation also receives nothing to credit to its capital dividend account. Who pays decides the benefit question; who receives decides where the credit goes. The detail is in when the corporation pays and the shareholder owns.

The corporate policy secures a personal loan. The shareholder borrows from an outside lender, and the corporation assigns its policy as security. The CRA's Income Tax Audit Manual lists a corporate guarantee of a shareholder's personal loans among the benefits its auditors examine. A benefit may arise. It is not automatic, and it is not simply the amount borrowed. The shareholder owes the lender, the lender holds the corporation's policy, and the corporation's asset is exposed if the shareholder does not pay.

Before signing either, ask the accountant:

• Would a benefit arise on these documents, and how would it be valued?
• Would a fee paid by the shareholder to the corporation for the security change the result, and how would the corporation report it?
• What happens at death, when a corporate asset repays a personal debt?
• What happens on a default, if the lender forces a surrender and the corporation has income above the basis?
• How does the arrangement compare, after tax, with a documented salary or dividend?

How does money reach the shareholder?

A policy loan on a corporate-owned policy is an advance from the insurer to the corporation. The money is then in the corporation. Getting it to the shareholder is a second transaction with its own tax, and the accountant chooses the route before the advance is requested.

A further step can add a further debt. If the shareholder then lends to a child or a parent, there are now two debts: the corporation owes the insurer, and the relative owes the shareholder. Each needs its own written terms. The shareholder loan is covered in the shareholder loan and the policy loan.

What is different in Quebec?

Federal tax rules apply everywhere in Canada. A Quebec corporation also deals with Revenu Québec, and Quebec civil law governs the insurance contract.

• Capital dividends. The federal election under subsection 83(2) and, for Quebec, Revenu Québec form CO-502 under section 502 of the Taxation Act.
• The small business deduction. Quebec's own deduction, with its condition based on hours paid to employees.
• Who may be insured. Under articles 2418 and 2419 of the Civil Code, a person may insure another's life if they have an insurable interest in it, or with the written consent of the person insured. Article 2419 names subordinates and staff among the people in whom an insurable interest exists.
• A spouse as beneficiary. Where a policy owned by an individual names a married or civil union spouse in a writing other than a will, article 2449 makes the designation irrevocable unless it stipulates otherwise. That matters when a policy is later moved between the owner and the corporation.
• Legal documents. A Quebec lawyer or notary should read the shareholders agreement, the beneficiary designations and any assignment.

Creditors. The protections from seizure that provincial law gives some policies are written around individual owners and family beneficiaries. A corporate-owned policy's value is an asset of the corporation. Ask a lawyer (in Quebec, a lawyer or notary) what the corporation's creditors could reach.

What should the advisor and the insurer answer in writing?

On the design. What is the split between base premium and additional deposits, and why that split? What premium must the corporation sustain, and for how long? Test it against a weak year's cash flow, not the strongest one.

On pay. Ask how the advisor is paid, in writing: whether the advisor or the firm receives insurer commission if the policy is issued, whether the split between base coverage and additional deposits changes that pay, and what compensation and conflicts the rules of your province require them to disclose. Keep the answer on the file.

If premiums stop. The contract decides, and each option has a cost:

• an automatic premium loan, which is a policy loan from the insurer, with interest owed to the insurer, and a disposition for tax when it is made;
• dividends applied to premiums, where the contract allows it, which works only while dividends are declared;
• reduced paid-up insurance, with a smaller death benefit and no further premiums;
• a lapse or a surrender, which can create income to the extent the proceeds exceed the adjusted cost basis.

On the insurer and the loan. The insurer's legal name, its supervisor and its Assuris membership; how the loan rate is set and changed; whether unpaid interest is added to the loan; and what notice comes before the policy ends.

Which answers should end the review?

Some answers are enough to stop and ask for more, or to decline:

• A figure for a rate, a threshold or a limit with no source and no date.
• A dividend scale interest rate presented as the client's return.
• A policy loan described as though no interest were charged, or no tax could arise.
• A premium called deductible without naming paragraph 20(1)(e.2) and its conditions.
• The arrangement called tax free without conditions.
• Language suggesting the corporation lends to itself or pays interest to itself.
• A refusal to show the guaranteed column on its own.
• No written answer on how the advisor is paid.
• A short or cheerful answer to who the arrangement does not suit.

A careful answer costs nothing to give; carelessness about a source casts doubt on the rest of the file.

How should the opportunity cost be tested?

Not with a general claim in either direction. A participating policy and a portfolio do different jobs, and neither one's future result is certain. Run the test instead.

1. Take the policy's guaranteed values, current-scale values and reduced-scale values at the years that matter to this client: the planned exit, a sale of the shares, retirement.
2. Set beside them the realistic alternative for the same corporate dollars, after corporate tax on its income, with the cost of any coverage the corporation would still need to buy separately.
3. Compare what each would make available at those years, and what each would pay at death.
4. Express the difference in the client's own units: how much the business would have to keep contributing, and for how long.

The comparison must also reflect what the client would really do with the money; the client's own history is evidence on that.

Illustrative example of the early-exit loss. The figures are assumptions for the arithmetic, not any policy's values. Premiums of $20,000 a year for five years total $100,000. If the guaranteed cash surrender value at year five were $70,000, a surrender that year would return $70,000, which is $30,000 less than was paid in. Whether any income arises on that surrender depends on the adjusted cost basis at the time. The real figure comes from the insurer's guaranteed column.

Who should the accountant tell no?

The arrangement suits a corporation with a lasting need for coverage and a lasting surplus. It does not suit everyone, and saying so kindly is part of the review.

• No durable surplus in a normal year. Test the premium against a weak year's cash flow. Our own screening habit is to look at the weaker years of the last five, because a premium that only works in a strong year will be missed in a poor one.
• Money needed back soon. If the corporation may need the money before the early costs are absorbed, the answer is no. We look for at least ten years before a planned exit as our own rule of thumb, because early guaranteed values sit below premiums; the real test is the guaranteed column at the planned exit year.
• A near-term business need. Equipment, a lease or a payroll gap is funded another way.
• High-cost debt. Compare the after-tax cost of that debt with the policy before any premium is committed.
• A client who wants a rate of return. They are asking insurance to be an investment, and an honest comparison will disappoint them.
• No disability coverage. Earning capacity is the asset every other plan assumes will continue.
• No purpose in the client's own words. When the purpose comes back as the presenter's phrases, it has not been understood.
• No written answers. When the advisor or the insurer will not answer in writing, you will have nothing to rely on when someone later asks what was represented.

What stands behind the contract?

The insurer's contractual promise, which depends on the insurer's solvency. No government backs it, and it is not a deposit. Solvency supervision depends on how the insurer is chartered: the Office of the Superintendent of Financial Institutions supervises federally registered insurance companies, and the home province supervises a provincially incorporated insurer, which in Quebec is the Autorité des marchés financiers. Put the insurer's name and its supervisor on the file.

Every life insurer authorized in Canada must belong to Assuris, which protects policyholders if a member insurer fails. For whole life, as read on 30 September 2026, a policyholder keeps up to $1,000,000 or 90 per cent of the promised death benefit, whichever is higher, and up to $100,000 or 90 per cent of the promised cash value, whichever is higher. The protection is calculated on net values after policy loans. A large corporate death benefit can exceed the protected amount.

Dividends are not guaranteed. They are declared each year at the discretion of the insurer's board, based on the results of the participating account, and past dividends do not indicate future ones. The guaranteed values and the projected values above them are two different columns on the same page.

Does the same review apply to an accounting practice?

It does, and it is not always put to the accountant. A practice has a partnership or shareholders agreement whose buyout terms may never have been funded, a client list whose value depends on relationships, work in progress and receivables that are not cash, and partners whose death or departure is the event the agreement was written for.

The buyout obligation. An agreement that obliges the surviving partners to buy a departed partner's interest is a promise that needs capital on a date nobody chooses. Where the capital is assumed rather than arranged, the agreement becomes a negotiation at the worst possible moment, among people who have just lost a colleague. How insurance can fund that obligation is set out in funding a buy-sell agreement.

Succession in a professional firm takes time. Clients follow people. A successor has to be visible to them for years before a transition, and a practice that has not done that work is worth less than its billings suggest. The succession planning process sets out the sequence, and a small firm's own cash strain is examined in the small firm, the draw, and money that is not the firm's.

A file you are part of. Run the same enquiry on your own file that you run on a client's, with a second professional who is not you. None of that argues for a policy. It argues for the review.

Whose idea is the underlying method?

The underlying idea is not this practice's. The financing approach R. Nelson Nash called The Infinite Banking Concept® is a mark of Infinite Banking Concepts, LLC, described in his own writing. Neither Canadian Wealth Creation Centre Inc. nor Jose Salloum is affiliated with that organization or endorsed by it.

Infinite Financial Sovereignty® is a registered trademark of Jose Salloum. It names a narrower discipline, carried out over a lifetime: a business plans the capital for the purchases it makes again and again, uses a policy's value through advances from the insurer or loans from outside lenders when it needs to, and repays them on a written plan. In each case the insurer or the outside lender lends, and is the one paid interest.

Naming the marks matters to a reviewer: material in this field circulates with terms attached to claims their originator never made, and a presentation that will not say whose method it describes is unlikely to be precise elsewhere.

Where do the related rules sit?

The corporate questions are gathered under business owners, and the full treatment of ownership, premiums and the capital dividend account is in corporate-owned life insurance. How the contract works is in policy basics. The honest costs are in the real costs, the ways an arrangement can fail are in risks and failure modes, and how to check an advisor's licence is in is it legitimate. Two close cases are incorporated physicians and retained earnings and pharmacy owners and the capital on the shelf. Nothing in this decision needs to be signed before the written answers arrive.