No. Corporate owned life insurance premiums are not tax deductible in Canada. A corporation may deduct a limited part of the premium only when a qualifying lender requires the policy as collateral for a business loan.
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Why Is Corporate Owned Life Insurance Not Tax Deductible?
Corporate owned life insurance premiums are not tax deductible because life insurance premiums are generally not an allowable business expense in Canada. This applies to term life insurance, whole life insurance and universal life insurance that a corporation owns and pays for.
For example, if a corporation pays $10,000 each year for a policy on a shareholder, it cannot deduct the $10,000 from its taxable income simply because the corporation owns the policy.
When Is Corporate Owned Life Insurance Tax Deductible?
Corporate owned life insurance may be partly tax deductible if a restricted financial institution requires the policy as collateral for a business loan. The loan must be used to earn business or property income and the loan interest must be deductible.
The insurance assignment must be required by the lender as part of the borrowing arrangement. A corporation cannot create a deduction by voluntarily assigning an existing policy after the loan is already in place.
A restricted financial institution can include:
- A bank
- A credit union
- A trust company
- An insurance company
How Much of a Corporate Owned Life Insurance Premium Is Deductible?
Only part of a qualifying corporate owned life insurance premium may be deductible. The deduction is limited to the lesser of the annual premium and the policy’s net cost of pure insurance, adjusted for the portion that reasonably relates to the outstanding loan.
The corporation cannot deduct the full premium unless the full amount qualifies under that calculation.
For example, a corporation may pay a $12,000 annual premium on a policy that secures a $200,000 business loan. Its deduction may be lower than $12,000 because it is also limited by the policy’s net cost of pure insurance.
What Is Net Cost of Pure Insurance?
Net cost of pure insurance, or NCPI, is the annual tax cost of the pure life insurance protection under a policy. It is not the same as the premium, cash value or death benefit.
An insurer can provide the policy’s NCPI. For permanent insurance, NCPI may be lower than the premium because part of the premium can support the policy’s cash value or other features.
Does a Collateral Assignment Make Life Insurance Premiums Deductible?
No. A collateral assignment does not make life insurance premiums deductible by itself. The lender must require the assignment, the lender must be a restricted financial institution and the loan must satisfy the requirements for deductible interest.
If a business owner voluntarily assigns a policy to a lender, the corporation does not automatically qualify for a premium deduction.
Are Corporate Owned Life Insurance Death Benefits Taxable?
No. A life insurance death benefit received by a corporation is generally not taxable income to the corporation.
If a private corporation receives the death benefit, the net proceeds may be added to its Capital Dividend Account. The amount is generally the policy proceeds less the policy’s adjusted cost basis immediately before death.
A corporation can elect to pay a capital dividend from its Capital Dividend Account. Canadian resident shareholders generally receive a properly elected capital dividend tax-free.
For the broader rules that apply to individual policyowners and named beneficiaries, see Is Life Insurance Taxable in Canada?
Should a Corporation Buy Life Insurance for a Tax Deduction?
No. A corporation should not buy life insurance because it expects to deduct the premiums. The deduction is limited to specific collateral loan arrangements and may cover only part of the premium.
Corporate owned life insurance should have a defined business purpose, such as key person protection, debt repayment, shareholder buyout funding or business succession planning. It can form part of broader business owner tax planning, but the policy should not be purchased solely for a potential premium deduction.
