Canadian Business Owners, Real Estate Investors and Dentists in the US: Whole Life Insurance and Tax on Both Sides of the Border

Four illustrative people, not clients. A dentist crosses three days a week to treat patients in a Vermont clinic and owns 30% of its shares. An engineer who consults through her Canadian corporation spends long stretches on contracts in Michigan. A Quebec family business owner runs a US subsidiary with a warehouse in New York State and holds a US passport through her mother. A Calgary real estate investor owns two rental condos in Arizona, one personally and one through a company. Each is offered a participating whole life policy used with the Infinite Banking method originated by Nelson Nash, and asks: does the border change anything?

It can change almost everything, and one fact decides how much: your tax residence, and whether the United States treats you as a "US person". A Canadian resident who is not a US citizen and keeps a Canadian policy lives mostly under Canadian rules. Someone who moves south, or holds a US passport or green card here, brings the policy under a second set of tests, filings and estate tax. The rules turn on status, not on profession.

First, about me. I am licensed to sell life insurance in Canadian provinces only, so for someone living in a US state my role is to explain, and the policy and the US filings are handled by US-licensed professionals. And I am paid by insurer commissions when a policy is bought. Nothing below is tax or legal advice; each profile ends the same way: confirm with a cross-border tax professional before acting. The guides for business owners, incorporated professionals and, for the dentist in the example, dentists cover the Canadian side.

Which fact decides how a policy is taxed when you do business on both sides of the border?

Your tax residence and your US-person status decide it. A US citizen or green card holder is a US person wherever they live, and a Canadian can become a US resident by counting days. Once you are a US person, a Canadian policy must pass US tests and be reported to US authorities every year.

Three profiles cover most Canadians who ask. Find yours first.

The table simplifies. Confirm with a cross-border tax professional before acting.

When do working days in the United States make you a US tax resident?

When you pass the substantial presence test: at least 31 days in the US this year, and 183 days or more over three years, counting every day this year, one third of last year's days and one sixth of the year before. Passing it can still be answered by Form 8840 or by the treaty.

The IRS sets it out on its substantial presence test page (updated 14 March 2026). Days you regularly commute to work from a residence in Canada do not count; a cross-border accountant says whether your pattern qualifies.

Illustrative example. Assume three US days a week for 46 weeks, the same for three years, no excluded days, like the dentist in the opening. That is 138 days a year. The count for the third year is 138, plus one third of 138 (46), plus one sixth of 138 (23): 207, above 183. At two days a week the count is 138, under the threshold. The figures are assumptions.

If you were in the US fewer than 183 days in the year itself, kept your tax home in Canada all year and have a closer connection to Canada, the IRS lets you claim the closer connection exception on Form 8840 (updated 16 July 2026). Filed late, it can be lost.

At 183 days or more in the year, the answer is the Canada and United States tax convention. Its residence article breaks a tie in this order: permanent home, centre of vital interests, habitual abode, citizenship, then agreement between the tax authorities. The position is disclosed on Form 8833, and the US regulation on dual residents, 26 CFR 301.7701(b)-7, says that apart from computing your own US tax you are generally still treated as a US resident.

What do the US tests require of a Canadian life insurance policy?

For a US person, a policy counts as life insurance for US tax only if it meets section 7702: the cash value accumulation test, or the guideline premium limits with a cash value corridor. A Canadian policy is built for Canada's exempt test, and the US statute has no exception for a policy issued before you moved.

Section 7702 gives two routes. Under the cash value accumulation test, the cash surrender value may not exceed the net single premium needed for the future benefits. Under the other, premiums stay within guideline limits and the death benefit stays far enough above the cash value, a gap called the corridor. Whether a Canadian participating policy also passes is an actuarial calculation, and some Canadian contracts lack wording that would hold them inside a US test as values grow.

Failing has a yearly cost. Under section 7702(g), each year's income on the contract is ordinary income to the policyholder, whether or not you touch the policy. At death, only the payment above the net surrender value is treated as life insurance.

The exchange rate adds a trap, since US tests run in US dollars. Illustrative example: a death benefit of CAD 2,000,000 is worth USD 1,400,000 at an exchange rate of 0.70 and USD 1,560,000 at 0.78. Nothing changed in the contract, yet the US-dollar death benefit rose by USD 160,000, about 11.4%, and an increase in the death benefit can count as a material change. The rates are assumptions.

What happens if your policy becomes a modified endowment contract?

The death benefit stays excluded from income, but money taken out while you live, loans included, is taxed gain first, with a 10% additional tax on the taxable part before age 59 1/2. A policy becomes a modified endowment contract by failing the seven-pay test of section 7702A.

Section 7702A asks a simple question about the first seven contract years: have you paid in more than seven level annual premiums would have needed to pay the policy up? If you have, the contract is a modified endowment contract, a MEC, for the rest of its life, and a contract received in exchange for a MEC is a MEC too.

The consequences sit in section 72. Under section 72(e)(10), amounts received from a MEC, including loans and pledges, are taxed as income first until the gain in the contract is used up. Under section 72(v), the tax rises by 10% of the taxable portion unless you are 59 1/2 or older, disabled, or receiving substantially equal periodic payments for life. The death benefit remains excluded from income under section 101(a).

Three events restart or reopen the test:

• A material change, such as an increase in the death benefit, treats the contract as new from that day, with a new seven-year period.
• A reduction in benefits during the first seven years is retested as if the contract had been issued at the lower level, so dropping a term rider in those years can make a compliant policy a MEC after the fact.
• Premiums for paid-up additions count as amounts paid and use up the seven-pay room, while term coverage on your own life can, depending on the contract, form part of the death benefit that sets the limit. The rider and the additions are designed together.

Why does the Infinite Banking method originated by Nelson Nash need extra care for a US person?

Because the method leans on heavy early premiums for paid-up additions, which is exactly what pushes a policy toward the seven-pay limit. For a US person, a policy that crosses it is a MEC, and every policy loan from it is then taxed as income first. The design is tested before any money goes in.

The Infinite Banking method, the name of the approach R. Nelson Nash described, builds cash value early for later policy loans you repay on a schedule you hold yourself to. In the United States that funding pattern meets a second ceiling.

On either side of the border, the insurer is the lender: it advances its own money at a rate it sets and may change, and it receives the interest. The cash value is the security. In Canada the loan is taxable above the adjusted cost basis; in the US a loan from a MEC is taxed gain first. An unpaid loan reduces the death benefit, and a lapse with a loan outstanding can create taxable income. The policy loans page covers the Canadian mechanics.

Illustrative example, one loan, two tax systems. Assume a cash surrender value of 120,000, total premiums paid of 100,000, a Canadian adjusted cost basis of 45,000 and a policy loan of 60,000. In Canada, the income is 60,000 less 45,000: 15,000. In the US, if the policy is a MEC, the loan is taxed up to the gain in the contract, 120,000 less 100,000: 20,000, and before age 59 1/2 the additional tax is 10% of that, 2,000. If the policy passes section 7702 and is not a MEC, the US generally does not tax the loan while the policy stays in force. None of these figures is a quote.

So the order is fixed. An actuary who tests Canadian policies under the US rules checks the design, riders and funding schedule; then the policy is funded; then every change is retested before it is made.

Confirm with a cross-border tax professional before acting.

What do Canadian tax rules say about the same policy?

Canada tests the policy under Regulation 306, the exempt test, and taxes a policy loan above the adjusted cost basis as a disposition under s. 148(9) of the Income Tax Act, as ordinary income. A collateral loan from another lender is not a disposition. A policy from a US insurer still has to pass the Canadian test.

For policies issued after 2016, the exempt test policy endows at age 90 and is paid up over eight years, and the adjusted cost basis tends to be higher. That leaves more loan room before income arises and a smaller capital dividend account credit at death; it did not make loans more punitive. A policy that fails becomes non-exempt, and its growth above the adjusted cost basis is taxed each year under section 12.2 of the Income Tax Act. Regulation 306 allows 60 days after a policy anniversary to bring it back within the limits. See the exempt test.

A policy loan works on the terms explained in the previous section. In Canada, the part of the loan above the adjusted cost basis just before it is fully included in income as ordinary income. The insurer reports it on a T5 slip, in box 14 under paragraph 56(1)(j), and Quebec residents also deal with Revenu Québec and its investment income slip, the RL-3. Repaying can give a deduction under paragraph 60(s), up to the amount included before. When a policy loan becomes taxable shows the calculation.

A loan from a bank or another lender, with the policy assigned as collateral, is not a disposition; in Quebec the security is a hypothec on the policy's rights. Under paragraph 20(1)(e.2), part of the premium can be deductible when a restricted financial institution requires the assignment for a loan whose interest is deductible, limited to the least of the premium, the net cost of pure insurance and the part attributable to the loan.

A US insurer's policy owned by a Canadian resident must still pass the Canadian exempt test, which an actuary runs, and you may not receive a T5. The CRA's questions and answers on Form T1135 (modified 15 April 2026) treat a policy issued by a foreign issuer as specified foreign property, measured at its adjusted cost basis, reportable when your specified foreign property costs more than $100,000 at any time in the year.

Confirm with a cross-border tax professional before acting.

How does owning a Canadian corporation change the picture?

It adds corporate rules on both sides, whether you hold a professional corporation or an operating company. In Canada, the personal services business test, the passive income grind and the capital dividend account come first. If US persons control the corporation, the US treats it as a controlled foreign corporation, with Form 5471 every year.

First, the test that comes before any talk of corporate surplus. A corporation that gives one payer services you would otherwise give as an employee can be a personal services business, which the CRA describes on its page on personal services businesses (modified 20 November 2025): no small business deduction, an additional 5% tax and limited deductions. If your corporation bills a single US client for your time, as the engineer in the opening might on a long contract, ask your accountant how the test applies.

Then the passive income rule. The CRA's page on the small business deduction rules (modified 26 June 2021) reduces the business limit by $5 for each $1 of adjusted aggregate investment income above $50,000, to zero at $150,000. Growth inside an exempt policy is not counted; policy amounts included in the corporation's income, such as a loan above the adjusted cost basis or the yearly accrual on a non-exempt policy, are. Illustrative example: at $90,000 of that income, the reduction is 5 times $40,000, or $200,000, leaving $300,000 of a $500,000 limit. In Quebec, the provincial small business deduction also carries a condition on hours paid to employees, which Revenu Québec sets out.

At death, a private corporation named beneficiary adds the proceeds less the policy's adjusted cost basis to its capital dividend account under s. 89(1), and pays a capital dividend by filing Form T2054, the election under subsection 83(2); see the capital dividend account. The US has no capital dividend, and in our reading a US-person shareholder generally reports one as a dividend on the US return. A shareholder not resident in Canada also faces Canadian withholding.

A policy loan on a corporate-owned policy goes to the corporation on the terms already described; getting money to you is a second transaction, salary or a dividend, with its own tax, and premiums the corporation pays on a policy that benefits you personally can be a shareholder benefit. Who should own a policy, you, your corporation or a holding company, has no general answer; your accountant and lawyer decide it with you.

For profile C, if US persons own more than half of the corporation, it is a controlled foreign corporation. Each US shareholder files Form 5471 with the US return, and the instructions set a $10,000 penalty for each annual accounting period of each corporation not reported on time. For tax years beginning after 31 December 2025, the inclusion formerly called GILTI is net CFC tested income under section 951A, and an individual can elect under section 962 to be taxed on it at corporate rates. A holding company with mostly passive assets can be a passive foreign investment company under section 1297, with Form 8621, though the CFC rules take over for a 10% US shareholder.

Confirm with a cross-border tax professional before acting.

What does the US require each year of a US person who owns a Canadian policy?

Three things. Report the policy on the FBAR when your foreign accounts together exceed USD 10,000, report it on Form 8938 when your foreign assets pass that form's thresholds, and pay a 1% excise tax on premiums sent to a Canadian insurer, filed quarterly on Form 720.

The IRS comparison of Form 8938 and FBAR requirements (updated 19 September 2026) makes a foreign cash-value life insurance contract reportable on both. FinCEN requires the FBAR when foreign financial accounts total more than USD 10,000 at any time in the year, and the IRS FBAR page (updated 30 July 2026) sets the due date at 15 April, with an automatic extension to 15 October. Form 8938 thresholds for a single filer living in the US are USD 50,000 at year end or USD 75,000 at any time, USD 100,000 or USD 150,000 jointly; living abroad, USD 200,000 or USD 300,000, and USD 400,000 or USD 600,000 jointly.

Section 4371 imposes 1 cent on each dollar of premium paid to a foreign insurer for a life insurance contract, and section 4372(e) reaches policies on the life of a US citizen or resident. The Form 720 instructions make the person who pays the premium liable, and the IRS list of treaty exemptions from the section 4371 tax (updated 22 March 2026) does not include Canada. Illustrative example: an annual premium of USD 30,000 paid in four payments of USD 7,500 means USD 75 of tax a quarter, USD 300 a year.

Confirm with a cross-border tax professional before acting.

What changes when you own shares in a US company?

The company's tax status, the buy-sell agreement and any insurance it owns, whether it is a clinic, a practice or a subsidiary. An S corporation may not have a nonresident alien shareholder, so your residence can decide its status. A US company that owns a policy on your life needs your written consent before issue.

The IRS S corporation page (updated 11 June 2026) and section 1361 bar nonresident alien shareholders. A TN professional who meets the substantial presence test is a resident alien and can hold S corporation shares. Two risks remain. A shareholder claiming Canadian residence under the treaty enters ground the regulation marks "reserved". And a shareholder who leaves the US and becomes a nonresident alien ends the S election for the whole company. A C corporation has no such limit, but it is taxed itself and a dividend to you is taxed again, with US withholding on a nonresident; the company's US CPA compares the two.

If your Canadian corporation owns the US business, section 1361 generally limits S corporation shareholders to individuals, estates and certain trusts and exempt organizations, so the US subsidiary is a C corporation. A US branch run directly by your Canadian company, or US real estate held for the business, brings its own US filings; the US accountant maps them first.

If the other owners or the company must buy your shares at death, the buy-sell agreement is funded across the border: a Canadian estate selling US shares, a buyer paying in US dollars, perhaps a policy owned in the other country. Funding a buy-sell agreement covers the Canadian side.

When a US company owns a policy on your life, section 264 denies a deduction for premiums where the company is a beneficiary and limits interest on policy-related debt, with a key person exception capped at USD 50,000 of debt per insured and a special rule for a 20% owner. Under section 101(j), an employer-owned contract's death benefit is excluded beyond the premiums paid only if, before issue, you received written notice and gave written consent, and an exception applies to you, such as being a director or highly compensated. The company reports such contracts yearly on Form 8925.

Confirm with a cross-border tax professional before acting.

How is estate tax handled on each side of the border?

Canada taxes a deemed disposition of your capital property at death. The US taxes a nonresident non-citizen only on US-situs assets, such as shares in a US company or US real estate, and a US citizen or domiciliary on everything. Insurance on a nonresident non-citizen's life is not US property, but its proceeds can shrink the treaty credit.

For profile A, the IRS nonresident estate page (updated 27 June 2026) requires Form 706-NA when US-situated assets exceed USD 60,000, and lists US real estate and stock of US corporations among them. That page and section 2105(a) treat insurance on the life of a nonresident who is not a US citizen as property outside the United States.

The policy still matters through the treaty. Article XXIX B of the Canada and United States tax convention gives a Canadian resident the greater of the nonresident credit and a share of the citizen's credit equal to the proportion of US-situs property in the entire gross estate wherever situated, death benefit included. Illustrative example, in US dollars: US-situs assets of 900,000 in a worldwide estate of 6,000,000 that includes a death benefit of 2,000,000 give 15%; without the policy, 900,000 of 4,000,000 is 22.5%. The values are assumptions.

For profile C, section 2042 includes life insurance payable to the executor or held with any incident of ownership at death. The basic exclusion for deaths in 2026 is USD 15,000,000, under Public Law 119-21 signed on 4 July 2025, according to the IRS page What's new, estate and gift tax (updated 23 July 2026). Above it, an irrevocable life insurance trust drafted for both countries and owning the policy from the start is the structure to discuss. As a general rule under section 2035, a policy transferred within three years of death returns to the estate.

In Canada you are deemed to dispose of your capital property at death, US shares and real estate included. The deemed disposition at death explains where the death benefit sits, and crediting a US estate tax against the Canadian tax is a treaty calculation for both accountants.

Confirm with a cross-border tax professional before acting.

What changes when you own US rental or business real estate?

For a nonresident, US rent is taxed at 30% of the gross unless you elect to be taxed on net rental income, and the buyer generally withholds 15% when you sell. Canada taxes the same rent, with a foreign tax credit, and a US rental property counts for Form T1135. A policy is not a way to hold the property.

Under section 871(a)(1), a nonresident alien's US rent is taxed at 30% of the amount received. Section 871(d) lets you elect to treat it as effectively connected income, so expenses are deducted; the election continues unless revoked with IRS consent. Publication 519 says the choice is made by a statement attached to Form 1040-NR. Illustrative example: gross rent of USD 24,000 costs USD 7,200 at 30%, whatever the expenses. On a sale, the IRS FIRPTA withholding page (updated 21 July 2026) sets withholding generally at 15% of the amount realized, with the buyer in most cases the withholding agent. US estate tax on the property is covered in the estate section above.

In Canada, a resident reports the rent, and the CRA's foreign tax credit page (modified 14 August 2026) allows a credit for foreign tax paid on income included in your Canadian return. The CRA's T1135 questions and answers treat a property held for rent as specified foreign property, a property held primarily for personal use as not, and a property used exclusively in an active business as excluded. If a company owns it, your accountant applies these rules to the company.

The policy sits beside the property, never as its owner. A policy loan for a down payment carries every policy loan term explained earlier, and the rent must carry the repayment. The real estate investors hub covers the Canadian side. Confirm with a cross-border tax professional before acting.

What happens to a Canadian policy when you move to the United States?

Canada does not tax a life insurance policy in Canada on departure, and the Act ties that status to where the person insured lived when it was issued. From the day you become a US resident, the US tests, filings and excise tax start, and a Canadian insurer generally will not issue you a new policy.

The CRA's page on dispositions of property for emigrants (modified 20 January 2026) lists interests in life insurance policies in Canada, other than segregated fund policies, among the property excluded from the deemed disposition on leaving. In our reading, that turns on where the person insured lived at issue. If you later surrender or borrow as a nonresident, the insurer files Form T2062B, the notice of disposition of a life insurance policy in Canada by a non-resident.

Canadian insurers generally issue only to people living in Canada at the time, and a Canadian representative licensed only in provinces cannot place a policy for someone living in a US state. The policy you own before you move may be your last Canadian one.

What to do before you move:

1. Have an actuary who tests Canadian policies under the US rules test each one under sections 7702 and 7702A and set a premium ceiling.
2. Settle paid-up additions and riders with that actuary before your US residence date; a later change can be a material change.
3. Ask the insurer in writing for the adjusted cost basis, cash surrender value, loan balance and nonresident reporting.
4. Ask a cross-border tax accountant (a US CPA or enrolled agent working with a Canadian CPA) for your filing list, including the first-year dual-status return.
5. Ask a cross-border estate lawyer whether ownership or beneficiaries should change first, given the three-year rule.

What general rules apply to every Canadian who does business in the United States?

The same ones, whatever your trade. US citizenship follows a dual citizen to Canada, and days decide residence for everyone else. A US person reports foreign policies and accounts, pays the excise tax on foreign premiums and has foreign life insurance tested. Corporations, US companies, real estate and estates add their own layers.

A dual citizen who has never filed is still a US person, and a green card holder stays a US tax resident until the status formally ends.

Applied to the opening illustrations: the dentist stays in profile A while his weighted count stays under 183 or Form 8840 holds, and his clinic shares are US-situs. The engineer counts days and asks about the personal services business test. The family business owner is profile C through her passport: US testing, Form 5471 if US persons own more than half of her company, and US estate tax on everything. The investor stays in profile A, decides with his accountant on the net rental election and counts the condos in his US estate. Each confirms with a cross-border tax professional before acting. In every trade, keep a dated log of your US days and their purpose, and ask both accountants before changing a policy, a beneficiary or a corporate owner.

Which forms are due each year, and when?

On the US side, the FBAR on 15 April with an automatic extension to 15 October, Form 720 every quarter, and Forms 8938, 5471, 8833 and 8840 with the return. On the Canadian side, Form T1135 with your return, and the T2054 election when a capital dividend is paid.

Dates move when they fall on a weekend or holiday; each form's instructions govern.

Which claims about cross-border policies keep appearing online?

Several, and each can cost money. The claims below appear in material found online. Each is set against what the statute or the tax authority says, as read on 5 October 2026. Ask for the section number behind any claim, then read it.

What are the drawbacks and risks?

The costs are real: actuarial testing, two sets of returns, a 1% excise tax and penalties for missed forms. A policy can fail a US test through currency movements or a change you did not see as a change. Dividends are not guaranteed, and the law on both sides can change.

• Testing. Each test is an actuarial engagement, repeated before each change. Skipping it saves a fee and risks a MEC or a failed contract.
• Penalties. Missed FBAR, Form 8938 or Form 5471 filings carry penalties that can dwarf the excise tax.
• Status. Leaving the US or claiming treaty residence can change a US company's S status and your own estate exposure.
• Policy loans. The insurer is the lender, at a rate it sets and may change, and it receives the interest. The cash value is the security. The loan is taxable above the adjusted cost basis in Canada and, from a MEC, taxed gain first in the US. An unpaid loan reduces the death benefit, and a lapse with a loan outstanding can create taxable income.
• Dividends. The dividends the insurer may declare are not guaranteed, so a design that fits the US limits only on an illustrated scale can drift when the scale changes.

A participating policy is life insurance first, not a bank account, and no place for money you need within a few years.

What should you ask before you act?

Ask the accountant what you must file and pay, the actuary whether the policy passes and how much more it can take, the lawyer who should own the policy and the US shares or property, and the representative how the policy is serviced across the border and how they are paid. Get each answer in writing.

For the cross-border tax accountant:

1. Am I a US person this year, and what would make me one?
2. Which of FBAR, Form 8938, Form 720, Form 5471, Form 8833 and Form 8840 apply to me?
3. How is a policy loan taxed in each country, and does a foreign tax credit apply?

For an actuary who tests Canadian policies under the US rules:

1. Does my policy pass section 7702, and by which test?
2. What is my seven-pay limit, and how much room is left?
3. Which changes, currency movements included, would be material changes?

For a cross-border estate lawyer:

1. Who should own each policy, the US shares and any US real estate, given my status?
2. Does an irrevocable life insurance trust drafted for both countries make sense for me?
3. How does the buy-sell agreement fund my shares, and in which currency?

For the insurance representative, licensed where you live:

1. What are the cash surrender value, the adjusted cost basis and any loan balance today?
2. How are you paid on this policy, and by whom?

How should you read the figures above?

Every day count, exchange rate, premium, cash value, loan and estate value in the illustrative examples is an assumption chosen for the arithmetic. The thresholds and dates come from the IRS, FinCEN, the Code, the CRA and the treaty, as read on 5 October 2026. US amounts are in US dollars, Canadian thresholds in Canadian dollars.

Tax law changes on both sides; your year's figures are those then in force. No real premium, rate or insurer figure appears, and the examples leave out dividends, which are not guaranteed. When you want to go through your own situation, start with the self-check on the Becoming a Client page.

Who this does not suit

A participating policy used with the Infinite Banking method originated by Nelson Nash does not suit you if you are a US person who will not pay for actuarial testing before funding and before each change, or if your plan needs heavy early premiums the seven-pay limit will not allow. Nor if you will move south before the testing is settled, or will not keep up the yearly US filings. Nor if you would not repay a policy loan nobody schedules for you, if your family or partners need every dollar of the death benefit, or if the money is needed within a few years. Term insurance and fewer moving parts is a sound choice too. The guides for business owners and incorporated professionals go further. Confirm with a cross-border tax professional before acting.