The Policyholder Decision for an Incorporated Owner

An incorporated owner who reaches the application form meets a question that has nothing to do with the product. Whose name goes in the policyholder box. The corporation can be the policyholder. The owner can be the policyholder. Both arrangements are ordinary, both are used every day in Canada, and they produce different results at a death, on a sale of the company, and in front of a lender reading a set of financial statements.

This page sets out what each side of that question changes. It does not recommend one of them, because the facts that decide it belong to a particular company with a particular structure and a particular plan for the next decade. The decision belongs to the owner's CPA and the owner's lawyer or notary working together, on the company's real figures, before anything is signed.

What changes when the corporation is the policyholder?

The company applies, owns the contract, funds the premium from corporate after tax dollars, and controls every election under it. The accumulated value appears on the corporate balance sheet as an asset. On the death of the life insured, the amount payable arrives inside the corporation, where the company's own rules then govern where it goes.

Four consequences follow from that single fact. The premium is funded with dollars that met corporate tax rates on the way to the insurer, which for active business income up to the small business limit are materially lower than personal rates. The contract becomes a corporate asset that a lender reviewing the company will see. The insurer deals with the company on every request and every change, so an instruction that once needed one signature now needs whoever is authorised to bind the corporation. And the amount payable on death reaches the corporation, which is what makes the capital dividend account relevant at all.

None of that makes corporate ownership correct for a given company. It makes corporate ownership a set of facts an accountant can price: the rate at which the premium dollars were taxed, the effect of a growing asset on the balance sheet, the credit available at death, and the cost of moving money out of the company afterwards. Those four numbers exist for your company today, and they are the whole of the corporate case once the enthusiasm is taken out of it. The mechanics of the corporate arrangement itself are set out on corporate-owned life insurance.

What changes when the owner holds the contract personally?

The contract sits outside the company entirely. The premium is funded with personal after tax dollars. No corporate balance sheet carries the accumulated value, no question of a benefit to a shareholder arises from the premium, and the amount payable on death goes to the named beneficiary without passing through the company.

That simplicity has a price, and the price is the tax rate the premium dollars already met. An owner who draws salary or dividends and then pays a premium has funded it from money that has already been through the personal tax system, which for most incorporated owners is a higher rate than the company paid on the same profit. Over a long premium schedule that gap compounds into a real number, and your CPA can produce it from your own marginal rate and your own premium. The gap is the honest cost of the simplicity, and it should be stated as a figure.

The advantage shows up at a transaction. A personally held contract is no part of what a buyer is valuing, it stays out of the passive asset calculation that decides whether shares qualify for the exemption, and it never has to be extracted from a company before a closing. The proceeds also reach a person in one step, which is the step that corporate arrangements most often leave out of the illustration. An owner who expects to sell within a decade will hear this argument from an accountant before any other.

Which dollars pay the premium, and does that settle it?

Corporate dollars have usually met a lower tax rate than personal dollars on the way to the insurer, and that difference is the starting point of the corporate case. It does not settle the question. A premium funded cheaply inside a company can still cost more once the value has to be moved out to a person.

The arithmetic has two halves and owners are usually shown one. The first half is the cost of funding the premium, where the corporation generally has the advantage. The second half is the cost of getting the value where it is eventually needed. Money inside a corporation reaches a shareholder by salary, by dividend, or by the repayment of a shareholder loan, and each of those routes carries its own tax consequence in the shareholder's hands. An illustration that stops at the first half has answered half a question.

A capital dividend from the account described below is the exception that makes the corporate case strong, because it moves money to shareholders without tax in their hands, within the limits of the account. That exception applies at a death, and the extraction problem applies while everyone is alive, so the two sit at different ends of a plan. Your CPA can run both halves on your own figures and your own rates. Ask for the number after the extraction step, because the number before it flatters every corporate arrangement ever illustrated.

What does a contract on the balance sheet do to a lender and a buyer?

A corporately held contract with accumulated value is an asset of the company, and a lender and a buyer will both see it. A lender may count it in the security position or may ask for it to be assigned. A buyer will price it, question it, and want to know whether it leaves with the seller.

For a lender, visibility can help. A company with a growing asset, and with coverage on the person the loan depends on, presents a stronger file than a company with neither. Where the lender requires the contract assigned as security, that assignment is registered against the policy and restricts what the company can do with it while the loan runs, which is a constraint worth knowing about before it is agreed, since the moment the company wants to use the value is a poor time to discover it.

For a buyer, visibility is a negotiation. The accumulated value forms part of what is being purchased unless the parties agree otherwise, and agreeing otherwise means extracting the contract before closing, which is itself a disposition with its own tax cost. A buyer may also discount the asset, on the view that an insurance contract on a departing person is worth less to them than its statement value. A personally held contract raises none of this, because there is nothing on the company's statement for anyone to argue about.

How does the credit to the capital dividend account work?

Where a corporation receives a life insurance death benefit, the amount exceeding the policy's adjusted cost basis is credited to the corporation's capital dividend account under Income Tax Act s.89(1). The corporation may then elect to pay a capital dividend from that account to its shareholders, free of tax in their hands.

Three qualifications belong with that sentence every time it is stated. The credit is the excess over the adjusted cost basis and never the whole amount payable, and that basis moves over the life of a contract, so the credit is no fixed proportion of anything. The election is a filing that has to be made correctly and on time, and an error there is expensive and entirely avoidable. And the account is notional and shared, because other corporate transactions add to it and subtract from it across the company's history.

This credit is the strongest uniquely Canadian argument in the whole subject, and it exists only where the corporation receives the amount payable. A personally held contract produces no credit, because nothing passes through the company. The comparison that matters is therefore between a credited capital dividend at a death and proceeds that were already in personal hands, which are two routes to the same family and two different tax outcomes. Have your CPA calculate the expected credit on your own projected adjusted cost basis under s.89(1) before you treat it as a reason to choose corporate ownership.

When does a corporation paying a premium create a shareholder benefit?

Where a corporation pays a premium on a contract that someone else owns, or on one that benefits a shareholder personally, the Canada Revenue Agency can treat the premium as a benefit conferred on that shareholder under Income Tax Act s.15(1). The trigger is a mismatch among who owns the contract, who pays, and who is named.

The classic cases are ordinary and they look sensible from the inside. A company pays the premium on a contract the owner holds personally. A company pays and the owner's spouse or children are named as beneficiaries. An operating company pays on a contract a holding company owns. Each of the three has a version that works and a version that does not, and telling those apart is an accountant's job on the actual facts of the company, the agreement and the designation.

The reason this matters to the ownership question is timing. A benefit under s.15(1) does not announce itself when it arises. It surfaces years afterwards on an audit or during the diligence on a sale, with an assessment covering several years at once, and correcting it is expensive because transferring ownership of a policy is itself a disposition. Settle owner, payer and beneficiary in writing with your CPA before the application is signed, and keep that note with the policy so the next reader knows why the structure looks the way it does.

What can splitting the four roles of the contract do?

Four roles exist in every life insurance contract: the policyholder who owns it, the person or company that pays the premium, the life insured, and the beneficiary. They can be held by different parties, and separating them solves problems a single owner cannot. Each separation also creates a question a lawyer or a notary has to answer.

A shared ownership arrangement, in which one party holds the coverage element and another holds the accumulating value, is used to place a death benefit where it is needed while the value waits somewhere else. A holding company can own coverage on the life of a shareholder of an operating company. A shareholders agreement can require a corporation to hold and maintain a contract for one stated purpose and no other, which turns a policy into an obligation the company owes its own shareholders.

These arrangements are drafted, and that is the word that matters. The allocation of premium between the parties, the treatment on a wind up, the rights each party has if the other stops paying, and what happens when the company is reorganised all have to be written down and agreed. The Canada Revenue Agency has commented on some of these arrangements over the years, which is one more reason the drafting is specialised work. Your lawyer or your notary drafts the agreement and your CPA prices it, before the insurer issues anything.

What does a passive asset do to the qualification of the shares?

The lifetime capital gains exemption at Income Tax Act s.110.6 applies to qualifying small business corporation shares, and qualification depends on what proportion of the company's assets are used in an active business, tested over a period before a sale. Accumulated value inside a corporately held contract can count against that test.

That is the sharpest reason an accountant may prefer personal ownership for a company heading toward a sale. A contract accumulating value for fifteen years inside an operating company can quietly move the balance sheet across the line, and because the test looks back over a period, a discovery made at the offer stage comes too late to fix cheaply. Purification is a planned exercise with its own tax consequences, and it takes time the calendar of a transaction rarely allows.

None of that is a verdict against corporate ownership. A holding company structure, a plan to wind the company up, or a business with no realistic sale in its future changes the weight of the point entirely. Some companies will never be sold to a third party, and for those the exemption argument carries almost no weight at all. Test qualification periodically with a CPA who has the company's actual figures, and test it years before a buyer appears, because the period being tested has already begun by then.

What happens to each structure when the company is sold or wound up?

A corporately held contract goes with the company unless it is extracted first, and extraction is a disposition with its own tax cost. A personally held contract is untouched by either event. That difference is small while the company is running and large in the weeks before a closing.

On a share sale, the parties decide whether the buyer acquires a company that still holds a contract on the life of a person who is leaving. Buyers frequently do not want that. Moving the contract to the shareholder before closing triggers a disposition measured against the adjusted cost basis, and the tax on it is far easier to plan for a year ahead than in the week diligence closes. The proceeds of that planning belong in the purchase price discussion as well.

On a wind up, the contract has to be dealt with as an asset of the corporation, and the same disposition question arises. On an asset sale the company usually survives and the contract can stay where it is. Each of these is a separate file, and the answer turns on the structure, the accumulated value and the adjusted cost basis at that moment, which is a calculation for a CPA and never an assumption anyone should carry into a negotiation.

What can creditors reach under each arrangement?

A contract owned by a corporation is an asset of that corporation and is available to the corporation's creditors. A personally owned contract sits with the individual and may attract protection under provincial insurance legislation or the Civil Code of Quebec where a beneficiary of a protected class is named. Neither position is guaranteed.

The protection that exists on the personal side is statutory. It depends on the province, on who is named, and on when the designation was made, and it can be set aside where a transfer was made to defeat creditors. It is a question for a lawyer or a notary on your own facts and your own province, and the answer can differ between two owners living an hour apart. Nothing on this page establishes that any particular contract is beyond the reach of a creditor.

On the corporate side the exposure runs the other way. Accumulated value inside an operating company sits behind that company's trade creditors and its lender. A holding company structure can move the value away from the operating risk, and it adds a step to getting proceeds where they are needed. Incorporation itself answers nothing about a personal guarantee, which is most small business lending, and it answers nothing about director liability for source deductions or sales tax.

Who decides this, and when?

The owner's CPA and the owner's lawyer or notary decide it together, on the company's real structure and figures, before any application is signed. An insurance advisor contributes the contract mechanics and the insurer's requirements. A decision made in reverse, with the contract issued first and the professionals consulted afterwards, produces the expensive corrections.

Four things belong in writing before the application. That the proposed owner, payer and beneficiary arrangement creates no benefit under s.15(1). How the credit under s.89(1) is expected to be calculated on the projected adjusted cost basis. The effect of the arrangement, if any, on qualification of the shares under s.110.6. And what happens to the contract on a reorganisation, established before one is contemplated. Four short answers on paper are worth more than an hour of verbal reassurance, because the person who gave the reassurance may not be in the file when the question is asked again.

This practice holds an insurance licence and gives no tax advice and no legal advice, and nothing on this page is either. What an advisor can usefully do is put the question in front of the right professionals in a form they can answer, and then design the contract around the answer they give. An owner who arrives with the four written answers above will find the design conversation short. The framework for an incorporated owner is set out across the business owners section.

Who this suits, and who it does not

This page suits an incorporated owner who has surplus in the company, a contract under consideration, and no settled answer about whose name belongs on it. It suits the owner whose company has been reorganised since a contract was issued and who has never checked whether the arrangement still matches. It applies with most force where a sale of the shares is possible within ten years.

It applies with less force to an owner whose company holds no surplus worth placing anywhere, because the ownership question sits downstream of whether a contract belongs in the picture at all. It applies with less force again where the coverage is small and temporary, since the accumulated value that drives most of this analysis barely exists in a term life insurance contract. Those owners can settle the coverage question first and come back to this page later.

It does not suit a reader who came for a rule. No rule exists here. Participating whole life insurance is an insurance product and it is not an investment, and the ownership question turns on facts this page does not have: your structure, your surplus, your horizon, your province, and what your own professionals conclude when they look at the four roles together.

Answer the two questions underneath it before you answer the ownership question itself. What is the coverage actually for, and where does the money need to arrive. An owner who can answer both can evaluate any structure put in front of them, and an owner who cannot will end up with whichever structure the paperwork defaulted to.