Corporate-Owned Life Insurance (COLI)

Corporate-owned life insurance is a policy that a company owns on the life of a shareholder, a key employee or a manager. The company applies, pays the premiums and is named as beneficiary, so when the person insured dies, the insurer pays the death benefit to the company. It is life insurance first. What makes the corporate version different is not the contract but three facts around it: which tax rate the premium dollars have already paid, what the Income Tax Act does when a private corporation receives a death benefit, and how hard it is to undo a structure once it is in place.

Premiums are generally not deductible. The tax advantage people talk about is real, but it is narrower than it sounds, and it depends on getting the owner, the payer and the beneficiary right from the first day. The sections below take each piece in the order an owner meets it.

Who owns, who pays, who is insured and who receives?

Four roles sit in every corporate file. Write them down before anything else, because the tax consequences follow from how they line up.

The corporation is the policyholder. It pays, it controls the contract and it receives the proceeds. The person insured has no personal claim to the cash value or the death benefit, however senior that person is in the company.

Roles do not always coincide. A holding company can own a policy that an operating company pays for, or a shareholder can own one the company pays for. Each of those variations is legal. Each also changes the tax result, and some of them create a taxable benefit, as the sections below explain.

What is corporate coverage for?

Name the purpose in writing first. Different purposes lead to different designs, different amounts and sometimes a different owner, and a policy designed for one job does another job badly.

Holding surplus. Some owners keep surplus in a permanent policy rather than in a portfolio that produces investment income each year. That only makes sense where a permanent death benefit is actually needed, because the policy is insurance and not an investment account.

Should the corporation own the policy at all?

This is the first structural choice, and it is hard to reverse: moving a policy from one owner to another is a disposition for tax purposes. The table compares the two owners on the points that decide it. It ranks neither.

Operating company or holding company. An operating company carries the business risk and may be tested for the capital gains exemption on a sale. A holding company keeps the value away from the operating risk but adds a step before the proceeds reach where they are needed. Neither is right in every case, and the answer can change as the company changes. The trade-offs are set out in whether a holding company can own the policy and in personal or corporate ownership of the contract. Your accountant and your lawyer make this call together, with your figures.

Are the premiums deductible?

Generally not, and it is worth saying first because the opposite assumption is easy to make. Owning a policy through a corporation does not make the premium a business expense.

The one narrow exception. Paragraph 20(1)(e.2) of the Income Tax Act allows a deduction for part of a premium when every one of its conditions is met:

• 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 borrowed money is used to earn business or property income;
• the corporation is the policyholder.

The limit. 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 of that amount that reasonably relates to the amount owing counts. On a whole life policy, the net cost of pure insurance can be well below the premium, so the deductible part can be small. The detail is in which part of the premium is deductible.

Outside that exception, premiums are paid from after-tax corporate dollars.

What does paying from the corporation actually save?

The advantage is about the tax rate on the dollars, not about the policy. Active business income that qualifies for the small business deduction is taxed at a lower rate inside the corporation than the same income would be taxed in your hands at a high personal rate. A premium paid by the corporation uses dollars that have paid less tax on the way.

Illustrative example. The rates here are assumptions for the arithmetic, not the rates of any province or year. Suppose the corporation's rate on qualifying income is 12 per cent and your personal marginal rate is 50 per cent.

The same $22,727 of corporate income could just as well fund $20,000 of any other corporate use: a corporate investment account, a reserve or paying down debt. So the lower rate is an advantage of corporate over personal ownership. It is not an advantage of insurance over the other things the corporation could do with the money. The fair comparison for a corporate policy is a corporate account funded with the same after-tax dollars, judged on the job each one does.

The advantage has conditions.

• It applies to active business income within the business limit. Income above the limit is taxed at the general corporate rate.
• Under subsection 125(5.1) of the Income Tax Act, the business limit shrinks as the adjusted aggregate investment income of the corporation and its associated corporations rises above a threshold. The mechanism is explained in retained earnings and the passive income rule.
• In Quebec, Revenu Québec runs its own small business deduction. Its note of 4 May 2026 confirms that the reduction based on the hours paid to employees remains in place.
• The money stays in the corporation. It leaves as salary, as a taxable dividend, or at death through the capital dividend account, and the part of the death benefit equal to the policy's adjusted cost basis does not go through that account.

Growth inside the policy. While the policy remains exempt under section 306 of the Income Tax Regulations, the growth inside it is not taxed each year. The definition of adjusted aggregate investment income in subsection 125(7) includes amounts in respect of a life insurance policy that are included in the corporation's income. On our reading, growth that is not included in income does not add to that measure, while a surrender, a withdrawal or a policy loan that produces income can. A policy that later stops being exempt is deemed disposed of, which can produce income nobody planned for. Your accountant confirms how this works for your corporation's figures.

How does the capital dividend account work after a death?

The capital dividend account is a notional tax account that a private corporation keeps. Amounts credited to it can be paid to shareholders as capital dividends, which a Canadian resident shareholder does not include in income.

What is credited. Under paragraph (d) of the definition in subsection 89(1) of the Income Tax Act, the credit is the life insurance proceeds the corporation receives in consequence of a death, less the policy's adjusted cost basis immediately before the death. The credit follows the private corporation that receives the proceeds. Whether the proceeds reach the right corporation depends on who is named, so the owner, payer and beneficiary still have to be settled together.

Illustrative example. Assume no policy loan and no other entries in the account.

The $850,000 can be paid to shareholders as a capital dividend once the election is filed. The $150,000 remains in the corporation and leaves it, when it does, as an ordinary taxable distribution.

The basis moves. The adjusted cost basis is a statutory running total. Premiums add to it. The net cost of pure insurance each year subtracts from it. Policy loans and withdrawals reduce it, and repayments restore it within limits. Depending on the design, it can rise in the early years and fall later, sometimes to nil. So the credit is not a fixed share of the death benefit. Ask the insurer for a year-by-year projection of the basis and keep it in the corporate file.

Other things that change the balance. The account is shared across the corporation's whole history. Capital gains, capital losses, earlier capital dividends and other transactions all move it. An outstanding policy loan, and who is policyholder, beneficiary and creditor, can affect the amount credited. The accountant calculates the balance on the day it matters, not from a projection made years earlier.

The United States has no such account, so American material on corporate life insurance does not carry over to a Canadian corporation.

How is a capital dividend paid, and what can go wrong?

The credit does not pay anyone by itself. The directors declare a dividend and the corporation makes an election.

The federal election. Subsection 83(2) of the Income Tax Act requires the corporation to elect in the prescribed manner and form (the CRA's form T2054) at or before the time the dividend becomes payable, or the first day any part of it is paid if that comes earlier. The election covers the full amount of the dividend.

A late election. Subsection 83(3) allows an election after the deadline, with a penalty. It can be fixed, but it costs money and it should not be needed.

An excessive election. This is the costly error. If the corporation elects more than its account holds, subsection 184(2) imposes a tax equal to three fifths of the excess, which is 60 per cent. Subsection 184(3) lets the corporation elect to treat the excess as a separate taxable dividend instead, with the concurrence of the shareholders who received it, within the time the Act allows after the assessment. The simplest protection is to have the accountant confirm the balance, entry by entry, before the directors declare anything.

Shareholders living outside Canada. A Canadian resident shareholder includes nothing in income for a valid capital dividend; that treatment is not the same for a non-resident. A capital dividend paid to a non-resident can bear Canadian withholding tax, and treaty rules vary by country. A non-resident shareholder needs tax advice before any dividend is declared.

Quebec corporations. A Quebec corporation also elects under section 502 of Quebec's Taxation Act, on Revenu Québec form CO-502, whose official version is in French. Plan both elections together. The steps after a death are set out in paying a capital dividend after a death.

What does the corporation commit to, and what if it stops paying?

A permanent policy is a long commitment, and the corporation is the one making it. Look at the commitment before the tax features.

The premium period. Premiums are payable for the period the contract sets. Some designs call for premiums for life; others for a limited number of years. Ask which one you are being shown and what the total commitment is.

Underwriting. The insurer decides whether to offer coverage and at what price, based on the health and finances of the person insured and the reason for the amount requested. The person insured takes part, answers the questions and signs.

The early years. Guaranteed cash values in the early years can sit well below the premiums paid. A corporation that surrenders early can get back less than it put in, which is why the surplus used for premiums should be money the business will not need back soon.

If the corporation stops paying. The contract decides what happens. Depending on the policy, the options can include:

• an automatic premium loan, which the insurer advances against the policy and on which interest is owed to the insurer;
• using policy dividends, where the contract allows it, toward premiums;
• a reduced paid-up policy, with a smaller death benefit and no further premiums;
• surrender, which ends the coverage and can create income to the extent the proceeds exceed the adjusted cost basis.

Dividends are not guaranteed. On a participating policy, dividends are declared each year at the insurer's discretion and can go down. An illustration built on today's dividend scale is a projection, not a promise.

Ask for these in writing before applying. The guaranteed cash value and guaranteed death benefit at years 1, 5, 10 and 20; the same values illustrated on the current dividend scale and on a lower one; the projected adjusted cost basis for the same years; the premium period; and the options the contract gives if premiums stop. Compare the guaranteed column separately from the illustrated one.

How does money come out while the person insured is alive?

There are several routes, and each one has a different lender, a different person owed interest and a different tax result. The table names them.

The policy loan in detail. Subsection 148(9) of the Income Tax Act defines a policy loan as an amount the insurer advances to the policyholder under the terms of the policy, and treats it as a disposition. Only the part of the advance above the adjusted cost basis immediately before it is included in income, under subsection 148(1). Repayments add back to the basis, and a repayment can give a deduction under paragraph 60(s), limited to amounts previously included. The insurer sets the loan rate and can change it; ask for the provision in writing. More is in how policy loans work and when a policy loan becomes taxable.

Illustrative example. Suppose the corporation requests a $100,000 policy loan when the adjusted cost basis immediately before it is $60,000. The corporation includes $40,000 in income for that year, and the basis after the loan is nil. The corporation owes the insurer $100,000 plus interest at the insurer's rate.

If the policy ends with a loan outstanding. On a surrender or a lapse, the proceeds for tax are the cash surrender value less the loans owing, and income arises only to the extent they exceed the basis. The small cheque after the loan is settled is not the figure that decides the tax. Ask the insurer in writing for the proceeds, the loan settlement, the basis and the expected tax slip, and have your accountant review them first.

Interest deductibility. Interest is deductible only when the borrowed money is used to earn business or property income, and policy loan interest counts only as the insurer confirms it on CRA Form T2210.

The second step. Apart from the shareholder's own loan, each route leaves the money in the corporation, and moving it to a shareholder is a separate transaction with its own tax. See the shareholder loan and the policy loan.

What if a shareholder borrows personally against the corporation's policy?

This arrangement is proposed to owners who want money personally without a salary or a dividend. The shareholder borrows from an outside lender, and the corporation assigns its policy to that lender as security for the shareholder's loan.

Why it raises a benefit question. The corporation is using its asset to support a personal debt. The CRA's Income Tax Audit Manual lists a guarantee provided by a corporation in respect of a shareholder's personal loans among the benefits its auditors examine under subsection 15(1) of the Income Tax Act. A benefit may arise. It is not automatic, and it is not simply the amount borrowed: whether it arises and what it is worth depend on the documents and the facts.

What to ask your accountant before signing.

• 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 that fee?
• What happens if the lender is repaid from the policy at death, when a corporate asset settles a personal debt?
• What happens on a default, if the lender forces a surrender and the corporation has income above the adjusted cost basis?
• How does this compare, after tax, with a documented salary or dividend?

Who owes whom. The shareholder owes the lender. The lender holds the corporation's policy as security. The corporation has pledged its asset and may be exposed if the shareholder cannot pay. None of that is visible on the annual policy statement, which is why it belongs in writing with the accountant and a lawyer before it is signed. The lender's side is covered in what a lender looks at when a corporate policy is assigned.

Which risks surface later?

Structuring errors are quiet. Nothing on the annual statement shows them, and they tend to appear at a death, an audit or a sale. Four deserve a place on the corporate calendar.

Owner, payer and beneficiary out of line. When one company pays and another entity or a shareholder gets the value of the payment, a taxable benefit can arise for whoever was advantaged. The same can happen when the corporation owns and pays but a shareholder or family member is the beneficiary; in that case the corporation also receives nothing to credit to its capital dividend account. Who pays decides the benefit question. Who receives decides which corporation gets the credit. The detail is in when the corporation pays and the shareholder owns.

A structure that no longer matches the company. Shares are exchanged, a holding company is inserted, two companies amalgamate, a shareholder leaves or arrives. The policy stays exactly as it was issued. Its owner may no longer be the intended entity; it may insure someone who has left while a new shareholder has no coverage at all. Transferring ownership to fix it is a disposition and can create tax or a benefit, so the policy belongs on the checklist before a reorganisation, not after.

A sale of the shares. A buyer sees the policy's value on the balance sheet, and its price is a negotiation. The value can also count as a passive asset when the shares are tested for the capital gains exemption, and that test looks back over a period, not at one date. See whether a corporate policy affects the small business share test and what happens to the policy if the corporation is sold or wound up.

Creditors. When the corporation owns the policy and is its beneficiary, the cash value and any proceeds it receives are corporate assets, and a creditor of the corporation may be able to reach them. Provincial insurance law protects some personal beneficiary designations; whether any protection applies when the corporation is both owner and beneficiary is a question for a lawyer in your province. The situation of a company under strain is covered in a corporate contract when the company is in trouble.

How is buy-sell funding structured?

A shareholder dies. The survivors want to carry on without the estate as a partner. The estate wants to be paid, not to hold a minority stake in a private company. Both want the same transaction, and neither has the cash. Funding it is one piece of a wider plan for who will own and run the company, described in the succession planning process.

Two questions for the accountant on a redemption. How will the policy be valued when the deceased's shares are valued at death? And can the rules that limit a loss on shares redeemed with capital dividends reduce the estate's loss? Both change how well a redemption works, and both should be modelled before the shareholders agreement is signed.

The agreement and the funding must match. An agreement that requires a purchase at fair market value, funded by coverage sized on a valuation from ten years ago, is underfunded. Valuations move; coverage does not, unless someone reviews it. And the agreement has to exist on paper. An understanding between partners is worth little when one of the people who shared it has died. The next step is in funding a buy-sell agreement.

How much key person coverage is enough?

Size it on what the loss would cost, not on guesswork or a multiple of salary.

1. Lost profit. Gross profit, not revenue, for as long as a replacement would take.
2. Transition. Search costs, lower output for a while, and possibly a premium salary.
3. Lenders. Clauses in credit agreements triggered when a named person leaves.
4. Customers and suppliers. Relationships that belong to the person; harder to price, and possibly the largest item.

What it is not. The company is the beneficiary, so key person proceeds are not money for the family. Family protection is separate coverage with separate ownership. Mixing the two produces an arrangement that does neither job well. More is in key person coverage and the capital that stays.

What is different in Quebec?

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

Consent. Article 2419 of the Civil Code names subordinates and staff among those in whom an insurable interest exists. Whatever the province, the person insured signs the application, and an arrangement that could not be explained to that person without embarrassment should not go ahead.

The shareholders agreement. A Quebec agreement that names an "executor" who does not exist under Quebec law can slow the very payment it was meant to speed up. Have a Quebec lawyer or notary read it. The questions of insurable interest are covered in financial underwriting and insurable interest.

What stands behind the coverage?

The promise to pay is the insurer's and depends on its solvency. No government backs it. Every life insurer authorized in Canada must belong to Assuris, which protects policyholders if a member insurer fails. For whole life, as read on 26 September 2026, a policyholder keeps the higher of $1,000,000 or 90 per cent of the promised death benefit, and the higher of $100,000 or 90 per cent of the promised cash value, calculated on net values after policy loans. That is not deposit insurance. 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. A corporate policy with a large death benefit can exceed the protected amount, so check Assuris's current rules for your case.

Who does it suit, who does it not, and what else could do the job?

Corporate-owned permanent coverage fits some companies and not others. These lists describe conditions, not advice about your company.

It can fit when:

• there is a documented, lasting need for a death benefit: a buy-sell obligation, a key person whose loss would last, or an estate tax bill on the shares;
• the surplus is steady and can carry the premium through a weak year;
• the company has separate liquidity for its own needs;
• no sale is planned soon, or the effect on the capital gains exemption has been modelled;
• the owners accept that the largest benefit arrives at death, not during life.

It tends not to fit when:

• the risk is temporary and term coverage would cover it;
• surplus is irregular or the business may need the money back within a few years;
• the corporation carries expensive debt;
• a sale of the shares is close;
• the goal is personal retirement income, which needs a second transaction to leave the corporation;
• nobody needs a death benefit at all.

Other uses of the same corporate dollar. These do different jobs and are not interchangeable. The table ranks none of them.

The comparison that matters is not insurance against a portfolio in general. It is this policy, with its guaranteed values and its costs, against the other things the company could do with the same after-tax dollars, for the job you actually need done. Participating coverage itself is explained in participating life insurance. The arguments against the approach, including the ones critics get right, are in objections and risks.

What should each professional confirm, and when?

A corporate file needs three professions, and each one answers different questions. The contract can be well designed and still fail if one of them was assumed rather than asked.

Ask whether your accountant has handled a capital dividend election after a death and a policy's adjusted cost basis before. The questions to take to that meeting are in accountants and the strategy they are asked to approve, and funding questions are in funding premiums from corporate cash flow.

Review it every year, and before every change. Each year, check that:

• the owner, payer and beneficiary still match the company as it is today;
• the shareholders agreement still reflects what the coverage is meant to fund;
• the passive income position has not moved in a way that affects the small business deduction;
• the shares would still qualify for the capital gains exemption;
• any policy loan balance, with its interest, is well inside the value securing it.

Review again, outside the annual cycle, before a reorganisation, a sale, a new shareholder, a departure or a change of beneficiary. Record what was checked and who has to act.

Where does this leave you?

Corporate ownership is a structure, and the policy is only as good as the structure around it. Settle the purpose, then the owner, payer and beneficiary, then the amount, and only then the contract. Nothing here recommends a policy for your company. Reading is free; the firm behind this site sells life insurance and is paid by insurer commission if a policy is bought through it. The wider framework is in business owners, and the mechanics of the contract itself are in how a participating policy works, year by year.

The diagram below sets out the order: the corporation pays, the corporation is paid on the death of the person insured, and a credit arises in the capital dividend account. The shareholder benefit question sits beside all three steps rather than after them, so settle it with your accountant before the application.