Corporate Life Insurance Estate Transfer

Building on Tax Efficiency: The Estate Transfer Question

The previous pages showed how capital gains provide better tax deferral than interest or dividends over 50 years in Québec and Ontario corporations. But for estate transfer, there's another option: corporate-held life insurance.

This page compares two strategies for transferring corporate wealth to your estate:

1. Capital gains portfolio (the most tax-efficient investment approach)
2. Corporate-held life insurance (tax-free wealth extraction through the CDA)

The Two-Path Comparison

When you have corporate after-tax surplus, you face a choice: invest it or use it to fund life insurance. Each path has different tax implications for estate transfer.

Strategy 1: Capital Gains Portfolio (Tax-Deferred Growth)

As we saw in the 50-year comparison, a capital gains portfolio provides:

• Tax deferral: Investment grows tax-free until sold
• Better outcomes: More cash stays in the corporation to compound
• CDA benefit: One-third of capital gains flows tax-free through the CDA

For estate transfer:

• Capital gains are realized (either before or at death)
• Tax is paid on the capital gains
• Remaining value is distributed to shareholders (with CDA portion tax-free)
• The corporation's fair market value (FMV) includes the investment portfolio

Result: Better than interest or dividends, but still involves tax on realized gains and may increase the corporation's FMV, potentially increasing capital gains tax on death.

Strategy 2: Corporate-Held Life Insurance (Tax-Free Extraction)

Corporate-held permanent life insurance provides:

• Tax-exempt growth: Cash value grows tax-free inside the policy
• Tax-free proceeds: Death benefit is received tax-free by the corporation
• CDA credit: Death benefit (net of adjusted cost base) is credited to the Capital Dividend Account
• Tax-free distribution: CDA balance can be distributed to shareholders tax-free

For estate transfer:

• Life insurance proceeds are received tax-free by the corporation
• Full amount (net of adjusted cost base) is credited to the CDA
• CDA balance can be distributed to shareholders tax-free
• The corporation's FMV may be reduced (premiums paid reduce corporate assets)

Result: Tax-free wealth extraction through the CDA, potentially reducing the corporation's FMV and capital gains tax on death.

The Key Difference: Tax-Free vs. Tax-Deferred

Capital Gains Portfolio

• During life: Tax-deferred growth (tax paid when gains are realized)
• At death: Capital gains tax may apply on deemed disposition
• Distribution: CDA portion is tax-free, but taxable portion faces personal tax
• FMV impact: Investment portfolio increases corporation's FMV

Corporate Life Insurance

• During life: Tax-exempt growth (no tax on policy growth)
• At death: Death benefit received tax-free by corporation
• Distribution: Full CDA credit can be distributed tax-free to shareholders
• FMV impact: Premiums paid may reduce corporation's FMV

Reducing Fair Market Value (FMV)

One advantage of corporate-held life insurance is its potential to reduce the corporation's FMV:

How it works:

• The value of your shares is based on the FMV of the corporation's assets
• Redirecting surplus from business income into life insurance premiums (rather than taxable investments) reduces the assets in the corporation
• This may reduce the capital gains tax payable on death

Important: FMV reduction depends on how the policy is structured and valued. Work with your CPA and insurance advisor to understand the specific impact for your situation.

The Estate Transfer Comparison: Actual Numbers

The following comparison is based on a specific illustration for a 50-year-old male, non-smoker in Québec, investing $1,000,000 over 5 years ($200,000 per year from ages 51-55) in either:

• A corporate-held whole life insurance policy, or
• A deferred capital gains portfolio earning 6% annually

The comparison shows the net amount to shareholders at different ages, assuming death occurs at the comparison age.

When Life Insurance Makes Sense for Estate Transfer

Corporate-held life insurance may be appropriate when:

1. Estate tax strategy is a priority: You want to maximize after-tax wealth transfer to beneficiaries
2. CDA optimization matters: You want to build CDA balance for tax-free distributions
3. FMV reduction is valuable: Reducing the corporation's FMV can reduce capital gains tax on death
4. Liquidity is needed: Life insurance provides guaranteed liquidity exactly when the estate needs it
5. Tax-free extraction is the goal: You want to extract corporate wealth tax-free to shareholders

These considerations apply to incorporated business owners in both Québec and Ontario. The CDA mechanism works the same way in both provinces, making life insurance an effective estate transfer strategy for Montréal and Toronto business owners alike.

Coordination with Other Strategies

Life insurance doesn't replace all investments:it complements them:

• Growth assets: Capital gains portfolios for long-term growth and tax deferral
• Fixed income: Life insurance can serve as part of the fixed-income allocation
• Estate liquidity: Life insurance provides guaranteed liquidity for estate tax strategy
• CDA building: Both capital gains and life insurance build the CDA, but life insurance does so tax-free

The goal is to structure a portfolio that balances growth, tax efficiency, and estate strategy needs. This applies whether your corporation is in Québec or Ontario. See our Montréal and Toronto pages for province-specific portfolio coordination strategies.

Frequently Asked Questions

How does life insurance reduce the corporation's FMV?

When premiums are paid with corporate after-tax dollars, those dollars leave the corporation. If the policy is structured appropriately, the corporation's assets are reduced by the premium payments, potentially reducing the FMV of the corporation and the capital gains tax on death.

Is life insurance better than capital gains for estate transfer?

It depends on your goals. Life insurance provides tax-free extraction through the CDA, while capital gains provide tax-deferred growth. Many portfolios use both: capital gains for growth during life, and life insurance for tax-free estate transfer.

What about the cost of life insurance?

Life insurance has costs (premiums, fees, mortality charges). The question is whether the tax benefits and estate strategy advantages justify those costs. This requires modeling your specific situation.

Can I access the cash value during life?

Yes, through policy loans or withdrawals, though this may reduce the death benefit and CDA credit. Some strategies use collateralized lending against the policy for tax-efficient retirement funding.

How does this coordinate with my existing investments?

Life insurance should be viewed as part of your overall corporate portfolio strategy. It can serve as the fixed-income component while providing estate strategy benefits that investments alone cannot match.

Do these comparisons apply to Ontario corporations?

Yes, the principles apply to Ontario corporations. The tax-free flow through the CDA works the same way in both provinces. Ontario tax rates differ slightly from Québec (~0.5–1% in most brackets), which may produce slightly different dollar amounts, but the relative advantages of life insurance over capital gains portfolios remain consistent. See our Toronto corporate investing page for Ontario-specific estate strategy context.

How do Québec and Ontario differ for corporate life insurance estate transfer?

Both provinces follow the same federal tax rules for life insurance:

• CDA rules: Identical in both provinces:death benefit (net of ACB) flows tax-free through CDA
• Tax rates: Slightly different provincial rates may affect exact dollar amounts, but not the tax-free mechanism
• Estate strategy: Québec's civil law system and Ontario's common law system create different legal considerations, but the tax benefits are the same

The key insight: while legal structures may differ, the tax-free wealth extraction through the CDA works identically in both provinces. See our Montréal and Toronto pages for province-specific estate strategy details.

Related Articles

• Tax Deferral Over 50 Years: How Capital Gains Compound Faster : See how capital gains perform over long periods
• How Investment Income Flows Through Your Corporation : Understand the tax flow for different income types
• CDA 101: The Capital Dividend Account Explained : Deep dive into how the CDA works
• The Sovereign Shield: Life Insurance as a Corporate Asset Class : Comprehensive guide to corporate life insurance strategies
• Corporate Investing in Montréal : Québec-specific corporate investing and estate strategy guidance
• Corporate Investing in Toronto : Ontario-specific corporate investing and estate strategy guidance

Fact Check & Sources

This article is informed by publicly available guidance and commentary from:

• Canada Revenue Agency (CRA)
• Revenu Québec (for Québec-specific tax rates)
• Ontario Ministry of Finance (for Ontario-specific tax rates)
• Major Canadian financial institutions
• Professional tax and accounting resources
• Insurance regulatory bodies (AMF for Québec, FSRA for Ontario)

Rules and interpretations change over time. Individual circumstances matter. Always consult with qualified professional advisors before implementing any strategy. See our Montréal and Toronto pages for province-specific estate strategy context.