Corporate-owned life insurance: when your company should own the policy

Summary

You can own life insurance on your own life personally, or you can have your corporation own the policy and collect the payout, which is what “corporate-owned life insurance” means. Every policy has three roles, and they don’t have to belong to the same person: a policyholder (who owns the policy and pays the premiums), a life insured (whose death triggers payment) and a beneficiary (who receives the money).

Three points cover the decision.

1. Premiums aren’t deductible, by your corporation or by you personally, apart from one narrow exception where a bank demands the policy as security for a loan.
2. The saving comes from somewhere else. A premium is always paid with money that has already been taxed, so what matters is whose tax got paid first. An Ontario corporation taxed at the reduced small business rate, about 11.7% in 2026 on its first $500,000 of yearly business profit, needs about $11,325 of profit before tax to fund a $10,000 premium. Paying you enough salary to buy the same policy takes about $21,519 of that profit.
3. When the life insured dies, the death benefit arrives in your corporation and no tax is charged on it. Most of it can then reach your family tax free, as what the tax rules call a capital dividend. How much depends on the policy’s adjusted cost basis (roughly premiums paid, less the cost of coverage used up so far).

Where the need for coverage is permanent, and the payout is needed by the business itself (e.g. to repay a bank loan or buy out a co-owner), we’d hold the policy in the corporation, with the same company as both policyholder and named beneficiary. That recommendation flips if you expect to sell your shares. A permanent policy, meaning one that pays out whenever you die rather than expiring on a set date, builds up savings inside itself. Enough of those savings will cost you the lifetime capital gains exemption, which frees up to $1,275,000 of gain on qualifying small business shares from tax, once per shareholder.

Who owns the policy, and who gets paid

For an incorporated owner one arrangement works cleanly. Your corporation is the policyholder, your corporation is the named beneficiary, and you’re the life insured. Two departures from that shape are common, and both cost money.

Some owners have two companies: an operating company that runs the business, and a holding company above it that owns its shares. The first mistake is having the operating company pay the premiums on a policy the holding company owns. In 2024 the Federal Court of Appeal upheld tax on facts of that shape, treating the premiums as a benefit conferred on the holding companies that owned the policies, and taxing those companies on the value.¹

The second mistake is naming your spouse as beneficiary on a policy your corporation owns and pays for. Your family gets the money, but your corporation never does, so nothing is added to your corporation’s capital dividend account, the running tally described below that lets corporate money reach your family tax free.

Deductibility of the premiums

Life insurance premiums aren’t deductible in most cases, whether you pay them personally or through your corporation. A business reason for buying coverage doesn’t itself make the premiums deductible, and the limited collateral-insurance exception below needs all of its own conditions met.²

One exception exists, and it’s narrower than it sounds. Where a bank requires the policy as security before it will lend (e.g. before it renews your day-to-day line of credit), part of the premium becomes deductible. Only the part buying the death protection itself qualifies, and only in proportion to what’s still owing on the loan, so the deduction is real but small.³ A loan from a family member, or from whoever sold you the business, doesn’t qualify at all, because the lender has to be a bank or a similar regulated institution.

What it costs to fund a premium from inside the corporation

Since neither route earns a deduction, what matters is which pot of already-taxed money pays. Your corporation pays a reduced rate of tax on profit from running the business, on the first $500,000 of it each year, where profit it earns on investments it holds is taxed far more heavily. The federal part is 9%, and Ontario charges its own tax on the same profit on top of it: 3.2% for days before July 1 2026 and 2.2% for days after. For a financial year ending December 31 2026 that adds up to about 11.7% in total.⁴ Funding a $10,000 annual premium out of that profit takes about $11,325 of profit before tax. Profit above the $500,000 line doesn’t get the reduced rate, and two other rules can shrink the $500,000 itself, so the figures here assume your corporation sits under it.⁵

Funding the same premium personally means your corporation has to pay you first. Salary is deductible to your corporation, so no corporate tax applies to it, but it’s taxed in your hands. At Ontario’s highest personal rate, 53.53% in 2026 once federal and provincial tax are added together, leaving you $10,000 after tax takes about $21,519 of the same profit.⁶ At the top of the personal scale, then, your corporation buys the same coverage with roughly half the earnings. That top rate only reaches income above about $258,000, so if you draw well below it your own rate is lower and the gap narrows.

What corporate ownership costs you

The savings building up inside a permanent policy are a corporate asset your business creditors can reach, which is the argument for holding the policy personally if you carry heavy liability exposure. What those savings will grow to is the insurer’s projection rather than a promise, and you’re committing corporate money to it for decades. Moreover, the death benefit lands inside the company first, and your family only gets it once the company pays it out, which needs a tax filing and depends on who controls the company by then.

The bigger problem is a sale of your shares. The lifetime capital gains exemption is only available on shares of a company whose assets are almost all used in the business, tested twice: 90% of their value at the moment of sale, and more than half throughout the previous 24 months.⁷ Investments sit on the wrong side of both tests, and a policy your corporation owns counts at its cash surrender value (i.e. what the insurer would pay for cancelling it today). Enough savings inside the policy will disqualify your shares, so we’d want the policy out of the company well before a sale process starts, and how much earlier is judgement rather than a rule.

Getting a policy back out is expensive both ways. Cashing it in can produce income where the proceeds exceed the policy’s adjusted cost basis, taxed at the corporation’s investment-income rate. Moving it to you personally instead counts as a sale at the highest of the policy’s value, its adjusted cost basis and whatever you pay for it, so a taxable policy gain can arise even though no money changes hands.⁸

What happens when the life insured dies

Your corporation receives the death benefit and no tax is charged on it, because a death benefit isn’t income to whoever receives it. Naming your corporation as the beneficiary is what matters for the step after. The money reaches your family through the capital dividend account, a running tally of amounts your corporation received tax free and can pass on to Canadian-resident shareholders tax free. What gets added to the tally is the death benefit received, less the policy’s adjusted cost basis immediately before the death.⁹ Before paying a capital dividend your corporation has to file a form with the CRA electing to treat the payment as one, and paying without filing carries a penalty. Both the account and that election are covered in our guide to the capital dividend account.

Adjusted cost basis is the number owners most often get wrong. Each year the premiums paid are added to it, and the insurer’s cost of that year’s death coverage is subtracted. Early on the premiums are the bigger number, so the figure climbs, and once the cost of coverage overtakes them it falls back toward nil.¹⁰ Whatever is left on the day of death is the slice of the payout that can’t come out as a capital dividend. Your family can still be paid that slice, but as an ordinary dividend taxed at their personal rates. Every insurer projects the figure over the life of the policy, so ask for yours before you buy.

How often this changes

The insurance rules move rarely: the denial of the deduction, the capital dividend account addition and the way adjusted cost basis is worked out haven’t changed since 2016, and as at August 2026 we found nothing enacted or announced that changes them. Rules next door did move, though: a 2026 budget bill extended relief an estate can claim where a corporation buys back a deceased shareholder’s shares, for deaths on or after August 12 2024.¹¹ Re-run your own decision when your corporation’s profit rises durably above the $500,000 limit, when a share sale becomes likely, or when a co-shareholder joins or leaves. Otherwise a look every three years, with your insurer’s current projection of adjusted cost basis in front of you, is enough.

Closing thoughts

Almost every argument in this area turns out to be an argument about permanence. If the need for coverage ends in fifteen years, when a mortgage is paid off and the children have jobs, the answer is term insurance, which covers a set number of years and then stops. Ownership only earns its complexity on a policy that will still be in force on the day you die, so working out honestly which of the two you’re buying comes before any of the mechanics above.

How we handle it

We check ownership and beneficiary designations on existing policies when we prepare your corporation’s annual accounts and tax return, and flag any case where one of your companies is paying premiums on a policy another one owns, which is the arrangement the court taxed above. We also ask your insurer for its projection of the policy’s adjusted cost basis, so the tax-free amount your family can expect isn’t a guess.