Corporate vs Personally Owned Life Insurance in Canada

Introduction

A business owner purchasing permanent life insurance faces an ownership decision at the outset. The policy can be held personally, or it can be held by the corporation.

The decision is frequently made by default rather than by analysis. The corporation has the money, so the corporation buys the policy.

That default is often correct, but not always, and it is considerably harder to reverse than to get right the first time. Moving a policy between the corporation and the shareholder later is a taxable event with no deferral available in either direction.

The Case for Corporate Ownership

The strongest argument for corporate ownership is the cost of funding premiums.

Life insurance premiums are generally not deductible regardless of who pays them. The question is therefore not about deductions but about what each dollar of premium costs in pre-tax income.

A corporation paying premiums from income taxed at small business rates requires substantially less pre-tax income than a shareholder paying the same premium from personal after-tax income, who must first extract the funds as salary or dividends.

Over a premium paying period measured in decades, that difference compounds into a meaningful amount.

The second argument concerns what happens at death. Where the corporation owns the policy and receives the death benefit, most of the proceeds become available to distribute to shareholders without further tax. That is a route out of the corporation that few other assets offer.

The Case for Personal Ownership

Personal ownership has advantages that are easy to overlook when the funding comparison dominates the discussion.

A personally owned policy is simpler. The death benefit goes directly to the named beneficiary, outside the corporation and generally outside the estate, which avoids both the corporate distribution step and probate exposure.

It is also insulated from the business. A policy owned by an operating corporation is an asset of that corporation and is exposed to its creditors. A personally owned policy is not.

Personal ownership avoids the structural questions entirely. There is no shareholder benefit exposure, no beneficiary designation to coordinate across a group, and nothing to revisit when the corporate structure changes.

Finally, a personally owned policy survives a sale of the business without any transaction being required.

The Factors That Actually Decide It

The comparison turns on a handful of considerations:

• Whether premiums can be funded more cheaply inside or outside the corporation
• Whether the death benefit is needed by the corporation, the estate, or the surviving family directly
• The likelihood that the business will be sold, wound up or restructured
• The level of creditor risk in the operating business
• Whether cash value will be accessed during life, and by whom

Most of these are knowable at the outset. The difficulty is that the funding advantage is quantifiable and immediate, while the others are qualitative and distant, so the funding comparison tends to win arguments it should not always win.

Accessing Value During Life

Where the policy is held to be drawn on during life, the analysis shifts.

Accessing cash value produces a taxable amount in either case, measured by the excess of what is taken over the cost basis of the policy. That part is the same.

The difference is where the money lands. A personally owned policy delivers the funds to the owner directly. A corporately owned policy delivers them to the corporation, and getting them to the shareholder is a second transaction with its own tax cost.

For an owner who intends to draw on the policy personally, corporate ownership adds a layer that partly offsets the funding advantage that justified it.

Creditor Exposure

This consideration is often decisive and rarely raised early enough.

An operating business carries risk. A policy owned by the operating corporation sits among the assets available to its creditors, and a policy with significant accumulated value is a meaningful asset.

Where corporate ownership is otherwise preferred, a holding company is frequently a better owner than the operating company. It keeps the funding advantage while moving the policy away from operating risk.

That structure introduces its own considerations around where premiums are funded and where the distribution credit is most useful, which is why the ownership question benefits from being settled at the planning stage rather than at the application stage.

The Cost of Changing Your Mind

The practical reason to decide carefully is that reversing the decision is expensive.

Moving a policy out of a corporation to its shareholder is a disposition. The corporation may realize a taxable amount, and where the transfer is made as a dividend in kind, the shareholder is taxed on the fair market value of the policy, which is generally far higher than its cash surrender value.

Moving a policy into a corporation is also a disposition, with its own consequences and with potential effects on the amount the corporation can later distribute without tax.

No rollover is available in either direction. A policy is not like other property in this respect, and the usual reorganization provisions do not assist.

When Circumstances Change

Even a well made decision can be overtaken by events.

A business is sold and the policy needs to come out. A corporation is wound up. A holding company is inserted above an operating company. Shareholders separate.

In each case the policy should be dealt with as part of the transaction rather than discovered afterward. Policies are easy to miss in a reorganization because they generate no entries that demand attention and nothing about them appears to change.

Where a corporation is being sold, the treatment of any policy it owns should be addressed in the agreement rather than left to be resolved after closing.

There Is No Universal Answer

A business owner with a stable business, a long term insurance need, and no intention of drawing on the policy during life is usually well served by corporate ownership, often through a holding company.

A business owner in a high risk industry, or one likely to sell within the planning horizon, or one who intends to access the cash value personally, may be better served by personal ownership despite the higher funding cost.

The honest position is that the funding advantage is real but is one factor among several, and it should not settle the question on its own.

Common Planning Mistakes

Several errors recur.

Choosing corporate ownership purely on the premium funding comparison, without weighing creditor exposure or the likelihood of a sale.

Having the corporation pay premiums on a policy owned personally, which creates shareholder benefit exposure rather than achieving the funding advantage.

Placing the policy in the operating company when a holding company would have served the same purpose with less risk.

Leaving ownership and beneficiary designations unreviewed after a reorganization.

Assuming the decision can be revisited later without cost.

Conclusion

Corporate ownership generally funds premiums more efficiently, because the corporation uses income taxed at lower rates than the shareholder would face in extracting the same amount personally. It also provides a route to move the death benefit out to shareholders largely without tax.

Personal ownership is simpler, keeps the policy away from business creditors, delivers the death benefit directly to the beneficiary, avoids shareholder benefit questions, and survives a sale of the business without any transaction.

Where cash value will be accessed during life by the shareholder personally, corporate ownership adds a second extraction step that reduces its advantage.

Because moving a policy in either direction is a taxable event with no deferral available, the decision should be made deliberately before the policy is issued, and revisited whenever the corporate structure changes.

Tax Partners can assist you in structuring your affairs properly and ensuring full compliance while optimizing your tax position.

This article is written for educational purposes.
 

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at info@taxpartners.ca, or by visiting our website at www.taxpartners.ca.
 

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