When the Corporation Pays the Premium and the Shareholder Owns the Contract

A corporation can pay a life insurance premium in four different positions, and the Income Tax Act treats each position differently. This page is about one thing only: the shareholder benefit that arises when a corporation pays for a contract it does not own, or names a shareholder or the shareholder's family as beneficiary on a contract it does own. It does not explain the ordinary corporate arrangement, which is set out on the corporate-owned life insurance page, and it does not cover money borrowed against a corporate contract, which is on the shareholder loan page.

Everything below is general information written by a licensed insurance professional. Whether any of it reaches a particular corporation, a particular contract or a particular year is a tax question, and tax questions belong to a Chartered Professional Accountant with the corporate file in front of them. Canadian Wealth Creation Centre Inc., trading as IBC Financial, is not authorized to give legal, tax or notarial advice and gives none here.

What is a shareholder benefit under subsection 15(1)?

A shareholder benefit is a value a corporation confers on a shareholder other than by way of a dividend or salary. Subsection 15(1) of the Income Tax Act includes the amount or value of that benefit in the shareholder's income for the year, and nothing in the Act gives the corporation a deduction for it.

The wording is broad by design. Subsection 15(1) reaches a benefit conferred at any time by a corporation on a shareholder, on a partner in a partnership that is a shareholder, or on a contemplated shareholder, and it includes the amount or value of the benefit in computing that person's income for the taxation year that includes the time, except to the extent that the amount is deemed by section 84 to be a dividend. The exceptions listed in the subsection cover a dividend, a stock dividend, a right conferred on all owners of common shares, and a small number of corporate reorganizations. A premium is none of those.

The second half of the mechanism is the one owners tend to miss. A benefit under subsection 15(1) is included in the shareholder's income at ordinary rates, like salary, but it carries none of salary's compensating features. Paragraph 18(1)(a) restricts a corporation's deductions to an outlay or expense made or incurred for the purpose of gaining or producing income from the business or property, and a premium paid on a contract the shareholder owns for the shareholder's own reasons is not such an outlay. The corporation pays from income already taxed at the corporate level, and the shareholder is taxed again on the same amount. That is two inclusions and no deduction, not a saving.

The pitch built on the reverse assumption is the reason this page exists. "Have your corporation pay for your personal policy with pre-tax dollars" describes a result the Act does not produce. The corporation gets no deduction, so the dollars are not pre-tax, and the shareholder is taxed on them a second time under subsection 15(1). Which of the four positions below a particular corporation is in decides everything that follows, and it is decided by the names on the insurer's file, not by what anyone intended.

What happens when the corporation owns, pays and is the beneficiary?

No benefit arises. The corporation is policyholder, premium payer and beneficiary, the shareholder receives nothing from the contract during life, and there is nothing for subsection 15(1) to include. At death the proceeds are paid to the corporation, and the excess over the adjusted cost basis is credited to its capital dividend account.

This is the ordinary corporate arrangement, and it is the one described on the corporate-owned life insurance page, which this page does not repeat. The premium is paid from corporate income taxed at the corporate rate, which for a Canadian-controlled private corporation earning active business income is lower than the rate most shareholders pay personally. The premium is still not deductible; the corporate rate is the only difference, and it is a deferral of personal tax rather than an escape from it.

The death benefit is where the arrangement earns its place. Paragraph (d) of the definition of capital dividend account in subsection 89(1) of the Income Tax Act credits the account with the proceeds of a life insurance policy received by the corporation in consequence of the death of a person, reduced by the adjusted cost basis of the policy to the corporation immediately before the death. The corporation can then elect to pay a capital dividend, which the shareholders receive without including it in income for as long as the account balance covers it and the election is properly made. How that account works, and what erodes it, is on the capital dividend account page.

Where the contract is a participating whole life contract, the corporation also holds the accumulating value, and any policy dividends are the corporation's. Policy dividends are not guaranteed; they are declared by the insurer's board each year and can be reduced or omitted. The strategy is the Canadian application of the approach known as The Infinite Banking Concept®, originated by R. Nelson Nash; the mark belongs to Infinite Banking Concepts, LLC, with which this practice has no affiliation. Inside a corporation the strategy uses a contract the corporation owns and is the beneficiary of, and every position that departs from that pattern is the subject of the rest of this page.

What happens when the corporation pays for a contract the shareholder owns?

A benefit arises each year, equal to the premium. The shareholder owns the contract, so every right under it belongs to the shareholder personally. When the corporation pays the premium it confers a benefit of that amount, and subsection 15(1) includes the amount in the shareholder's income for the taxation year in which the premium was paid.

The result repeats every year the arrangement continues. A premium of ten thousand dollars paid by the corporation on a contract the shareholder owns produces ten thousand dollars of income to the shareholder in that year, and ten thousand more in each following year, with no deduction to the corporation under paragraph 18(1)(a). Those figures are arithmetic and nothing else. A Chartered Professional Accountant would set that against salary or a taxable dividend paid to the shareholder, who then pays the premium personally: salary is deductible by the corporation, a dividend carries a dividend tax credit, and a subsection 15(1) benefit carries neither.

The position often arises without anyone having chosen it. A contract issued to the owner personally before incorporation, with the premium moved to the corporate account for convenience, is in this category. So is a contract the corporation is said to have taken over, where it has paid the premium for years but the ownership was never assigned to the corporation with the insurer. In both cases the bookkeeper records a premium expense, the corporation's accountant sees a non-deductible outlay, and the shareholder's return may show nothing at all, which is the file the Canada Revenue Agency is looking for.

The benefit is the premium, not the contract's value, and it is separate from any later transfer of the contract. Where the shareholder assigns the contract to the corporation to correct the position, that assignment is its own disposition under section 148, and the honest limits section below returns to it. What this section establishes is narrower: a corporation paying for what it does not own creates income for the person who owns it, year after year, for as long as it pays.

What happens when the corporation owns the contract but a shareholder is the beneficiary?

A benefit arises, and the corporation loses the capital dividend account credit as well. The corporation pays, so it bears the cost; the shareholder's family will receive the death benefit, so the shareholder enjoys the value. Subsection 15(1) reaches that value, and because the corporation is not the beneficiary, the definition in subsection 89(1) credits nothing.

The mechanism follows from the two provisions read together. Subsection 15(1) asks whether a benefit was conferred on a shareholder, and a corporation carrying the cost of insurance whose proceeds go to the shareholder's spouse or children has conferred one. The Canada Revenue Agency has long taken the position that a benefit arises in this situation and has generally measured it by the premium the corporation paid. The measurement is an administrative position rather than a figure the Act fixes, and its details have been restated over the years, so a Chartered Professional Accountant confirms the current position and how it is measured before any return is filed.

The second loss is the more expensive one. Paragraph (d) of the capital dividend account definition credits the account with proceeds of a life insurance policy received by the corporation in consequence of a death. Proceeds paid to a shareholder's family are not received by the corporation, so nothing is credited. The family receives the death benefit as a beneficiary, and section 148 does not include a death benefit received by a beneficiary in income, but the corporation that paid every premium has nothing to show for it in its capital dividend account, and the surviving shareholders have no room to pay a capital dividend from those proceeds.

This position is chosen more often than the previous one, and usually for a reason that sounded sensible: the owner wanted the death benefit to go straight to the family without passing through the corporation. The intent is reasonable, and the result is a shareholder benefit each year plus the loss of the capital dividend account credit. The route that reaches the family without the benefit is the ordinary arrangement of the previous section followed by a capital dividend, and a Chartered Professional Accountant compares the two on the actual file rather than in the abstract.

What changes when the person insured is an employee and not a shareholder?

A different provision applies and the result is different. Where the corporation pays a premium on an individual contract for an employee who is not a shareholder, paragraph 6(1)(a) of the Income Tax Act includes the value of the benefit in the employee's income from employment, and the corporation may deduct the premium as a cost of employment.

Paragraph 6(1)(a) includes in income from an office or employment the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer, or by a person who does not deal at arm's length with the taxpayer, in respect of, in the course of, or by virtue of the office or employment. It lists exceptions, and one of them is a benefit derived from the employer's contributions under a group term life insurance policy, which subsection 6(4) handles separately by a prescribed amount. An individual contract paid for by the employer for an employee is not on the exception list.

The difference between the two provisions is who is taxed and whether the payer deducts. An employment benefit under paragraph 6(1)(a) is remuneration, so the corporation deducts it as it would salary, and the employee is taxed once. A shareholder benefit under subsection 15(1) is taxed to the shareholder with no deduction to the corporation. The same premium, on the same contract, produces one inclusion and one deduction in the first case, and one inclusion with no deduction in the second.

An owner who is also an employee sits on the line between the two provisions, and the question asked is in which capacity the benefit was received. A benefit given to an owner who manages the business, on terms not offered to other employees in comparable positions, is generally treated as received in the capacity of shareholder. That is a question of fact on each file, it is not answered by a page, and it belongs to a Chartered Professional Accountant before the arrangement is put in place rather than after the return is assessed.

What are the honest limits of a corporately owned contract?

A corporate contract is a corporate asset, and everything that follows from that fact is a limit. It stands behind the corporation's debts, it is sold with the corporation or removed before the sale, and moving it out to the shareholder later is a disposition under subsection 148(7) of the Income Tax Act at a deemed price.

The first limit is creditor exposure. A contract owned by an individual who has named a spouse, descendant or ascendant as beneficiary may be exempt from seizure under provincial law, depending on the province and the designation. A contract owned by a corporation that is its own beneficiary has no family beneficiary, so no such exemption is engaged, and the contract sits in the same pool as every other corporate asset when a secured creditor or a receiver arrives. That is the price of the ordinary arrangement, and it is a real one.

The second limit is the sale of the company. A purchaser buying shares buys the contract along with them, and either prices it or requires it removed before closing. Removing it means transferring it from the corporation to the shareholder, and subsection 148(7) governs that transfer. Where an interest in a life insurance policy is disposed of by way of a gift, by distribution from a corporation or by operation of law only to any person, or in any manner whatever to a person with whom the policyholder was not dealing at arm's length, the policyholder is deemed to receive proceeds equal to the greatest of the value of the interest at that time, the fair market value of any consideration given for it, and the adjusted cost basis of the interest immediately before the disposition. Any excess of those proceeds over the adjusted cost basis is income to the corporation under subsection 148(1), and the distribution to the shareholder is a benefit or a dividend on top of that.

The third limit is the passive income the accumulating value may generate for the corporation, which is the subject of the retained earnings and passive income rule page, and the fourth is the one every page of this site repeats: participating whole life insurance is insurance, it is not an investment, and its value to a corporation is the death benefit and the capital dividend account credit, not a rate of return. Sizing any of the exposures described in this section is the work of a Chartered Professional Accountant, and no product is offered here as the answer to any of them.

What is a shared ownership arrangement, and what does it require?

A shared ownership arrangement splits one contract between the corporation and the shareholder by written agreement, so that each party owns, pays for and is beneficiary of its own part. It is the structure built to avoid the shareholder benefit, and it holds only where the split is documented and supported by a valuation.

In outline, the corporation owns and pays for the death benefit and is the beneficiary of it, and the shareholder owns and pays for the accumulating value and the rights attached to it, or the roles are reversed. Each party pays the share of the premium that its interest is worth. Where the shares are set at fair market value and each party pays its own, neither is conferring a benefit on the other, and subsection 15(1) has nothing to include. The accumulating value, and any policy loan taken against it, belongs to whichever party the agreement assigns it to, and the general mechanics of a policy loan are on the policy loans page.

The warning is the whole of the arrangement. Where the corporation's share of the premium exceeds what its interest is worth, the excess is a benefit conferred on the shareholder under subsection 15(1), which is exactly what the structure was built to avoid. The valuation of each interest is an actuarial and accounting exercise, the agreement is drafted by a lawyer or notary, and the insurer must record the split on its file. An arrangement that exists only in the accountant's working papers, or only in a conversation, is not a shared ownership arrangement; it is one of the two benefit positions above under a better name.

The Act does not describe shared ownership arrangements by name, and the Canada Revenue Agency's treatment of them is administrative and has been stated with conditions. That is why this page gives the outline and not the design. The design is a Chartered Professional Accountant's work alongside a lawyer or notary, and the insurance professional's contribution is the contract mechanics, the insurer's requirements for recording the arrangement, and the current values on the insurer's statement.

Who this suits, and who it does not

This page suits an incorporated owner whose corporation pays a premium on a contract in the owner's name and has never asked whether it should. It suits an owner whose corporate contract names a spouse or a child as beneficiary because that seemed simpler, and an owner offered a corporate premium as a cheap way to fund a personal contract.

It does not suit an owner looking for confirmation that a corporation can pay a personal premium without a tax cost, because subsection 15(1) says otherwise and no wording on a contract changes it. It does not suit a reader whose insurance is entirely personal and whose corporation pays nothing, because nothing here reaches them. And it does not suit a reader wanting to know the value of a benefit on their own file, which a Chartered Professional Accountant computes and a page does not.

Everything here is written by a person paid by commission from an insurer when a contract is issued, which is stated at the foot of every page. Insurance is insurance, not an investment, and the position in the second section is the ordinary one; the others are errors the Act prices every year they continue. Infinite Financial Sovereignty® describes the state of holding the highest practical level of control over the capital-flow function in one's own affairs, and a corporation that owns, pays for and is the beneficiary of its own contract is exercising that control within the Act rather than around it. Whether any of this fits a particular corporation is a question for its Chartered Professional Accountant and its lawyer or notary.