Corporate owned life insurance: premiums not deductible, payout to CDA

Who owns, pays and collects decides the tax result

Three facts drive every answer: which entity is the policyholder, which entity pays the premiums, and who is the beneficiary. Line them up before you look at anything else.

The corporate tax return confirms the starting point: T2 Schedule 1 has a dedicated addition on line 123 for non deductible life insurance premiums canada.ca. The CRA's business guide says the same thing in plain words: in most cases life insurance premiums can't be deducted, with a limited exception when the policy secures a business loan canada.ca.

The corporation pays because its premium dollar costs less. A calendar 2026 Ontario CCPC pays a blended 11.70% on small business income, the 9% federal rate canada.ca plus Ontario's 3.2%, cut to 2.2% from July 1, 2026 ontario.ca, so a $10,000 premium uses about $11,325 of pretax corporate income against about $21,519 of salary for a shareholder at the 53.53% top 2026 combined federal and Ontario rate with surtax canada.ca canada.ca. The trade off is creditor protection: a policy the corporation owns and collects on is generally a corporate asset within reach of the corporation's creditors, while Ontario's Insurance Act exempts the contract and the insurance money from execution or seizure while a spouse, child, grandchild or parent of the life insured is the designated beneficiary ontario.ca.

Only the collateral slice of the premium is deductible under 20(1)(e.2)

Paragraph 20(1)(e.2) lets the corporation deduct part of the premium when three conditions all hold: an interest in the policy is assigned to a restricted financial institution in the course of a borrowing from it, the interest on that borrowing is or would be deductible, and the lender requires the assignment as collateral for the loan laws-lois.justice.gc.ca. A restricted financial institution is a bank, a licensed trust company, a credit union, an insurance corporation, or a corporation whose principal business is lending money to arm's length persons, among others laws-lois.justice.gc.ca. A loan from a shareholder or a related company doesn't qualify.

The deduction is the least of three amounts: the premiums payable for the year, the net cost of pure insurance for the year on the assigned interest, and the portion of the lesser of those two that can reasonably be considered to relate to the amount owing to the lender in the year laws-lois.justice.gc.ca. The net cost of pure insurance is determined by the insurer under the regulations laws-lois.justice.gc.ca, so ask the insurer for the figure each year.

On the T2, add the full $6,000 back on Schedule 1 line 123 and claim the $2,250 as a separate deduction. Allocating by loan balance over coverage is one reasonable way to apply the third limb, and it fits the case where the bank takes the whole policy but lends only half its face value. If the loan is repaid in June, the third limb drops accordingly.

How does the death benefit reach shareholders tax free?

The corporation doesn't pay tax on the death benefit. A payment made because of the death of the insured under an exempt policy (or a policy acquired before December 2, 1982) is carved out of the definition of a disposition in subsection 148(9), so no income arises under 148(1) laws-lois.justice.gc.ca.

Paragraph (d) of the capital dividend account definition then adds the proceeds received because of the death, minus the adjusted cost basis of the policy laws-lois.justice.gc.ca. For deaths after March 21, 2016, the ACB deducted is the policyholder's ACB immediately before death, whether or not the corporation receiving the proceeds was the policyholder canada.ca. That closed the old structure where Holdco owned the policy and Opco collected a full credit as beneficiary.

The ACB is not the premiums paid. Premiums add to it and the annual net cost of pure insurance comes off it laws-lois.justice.gc.ca, which is why a policy held for decades can show an ACB far below the $180,000 paid. Get the insurer's letter before you set the dividend.

To pay the $940,000 as a capital dividend, file Form T2054 on or before the earlier of the day the dividend becomes payable and the first day any part of it is paid canada.ca. When the CDA balance includes life insurance, Part 7 asks for the insured, the beneficiary, the policy number, the ACB, a breakdown of the proceeds and a letter from the insurer saying whether the policy was taxable or non taxable canada.ca. Election timing, the 60% Part III tax on an excessive election and the late penalty are on the capital dividend account page.

Collateral assignments don't cost the CDA credit. The debtor corporation can still add the net proceeds if it remains the beneficiary or policyholder, and since October 27, 2010, proceeds paid straight to the lender can count when they're applied to the debt, under conditions the CRA sets out canada.ca.

When the corporation pays for a personal policy, the shareholder is taxed

The CRA's audit manual lists "shareholder's life insurance premiums paid by the corporation" among its examples of benefits conferred on a shareholder canada.ca. Subsection 15(1) puts the amount or value of a benefit a corporation confers on a shareholder into the shareholder's income laws-lois.justice.gc.ca.

The corporation can't deduct the premium either: the audit manual says a personal expense run through the company is not deductible under 18(1)(a) and is taxable to the shareholder under 15(1) canada.ca. That's double tax on the same dollar, which is worse than paying the premium personally out of salary or a dividend. The full valuation rules are on the shareholder benefit page.

Check the beneficiary designation, not only the policyholder line. A policy the corporation owns that names the shareholder's spouse or children as beneficiary sends the death benefit to them, so the coverage serves the family rather than the company. Change the designation to the corporation, or move the premiums out of the corporation.

Group term coverage the corporation provides to its staff is a different regime with its own calculation; see employer paid group term life.

Moving a policy in or out of the corporation is taxed at the greatest of three values

Subsection 148(7) applies when a policy is disposed of by gift, by distribution from a corporation, by operation of law, or in any manner to a person the policyholder doesn't deal with at arm's length laws-lois.justice.gc.ca. A shareholder and the corporation they control are caught.

For dispositions after March 21, 2016, the policyholder's proceeds are the greatest of the policy's value (its cash surrender value), the fair market value of any consideration received, and the policyholder's ACB immediately before the transfer. The buyer is deemed to acquire the policy at that same amount laws-lois.justice.gc.ca. The excess of those proceeds over the ACB is income under 148(1), not a capital gain.

Before March 22, 2016, only the cash value counted, so a sale like this produced $15,000 of income while $150,000 came out of the company. The rule now taxes the full extraction, and Opco's $150,000 cost goes into the ACB that 89(1)(d) subtracts at death, shrinking the future CDA credit. For transfers between 2000 and March 21, 2016, subparagraphs 89(1)(d)(v) and (vi) can also reduce the CDA credit on a death after March 21, 2016 canada.ca.

Going the other way, a policy the corporation hands to a shareholder for nothing is deemed sold at the greater of its cash surrender value and the corporation's ACB, and the shareholder's cost equals that amount laws-lois.justice.gc.ca. The shareholder can also have a 15(1) benefit: the audit manual values a sale below fair market value as fair market value minus the price paid canada.ca. The rollovers at ACB in 148(8) and 148(8.1) cover transfers to a child or a spouse, not to or from a corporation laws-lois.justice.gc.ca.