Personal vs Corporate Life Insurance

Executive Summary

Choosing between personal and corporate ownership of life insurance depends on three questions:

• What's the purpose? Why are you buying the insurance?
• Where are proceeds needed? Who should receive the death benefit?
• Where are funds available? Where will premium payments come from?

Here's what matters:

• After-tax cost: Corporate ownership often costs less when premiums come from corporate funds
• Estate value: Corporate ownership can reduce taxes at death through CDA credits and lower share valuation
• Creditor protection: Personal ownership may provide better protection from creditors
• Beneficiary flexibility: Personal ownership offers more flexibility for non-shareholder beneficiaries
• Future changes: Consider whether you might sell the business or change residency

This article explains the key considerations for each ownership structure and when each makes sense.

Mindset: Ownership as a Long-Term Decision

Before diving into the technical details, let's think about ownership from a long-term perspective.

Life insurance ownership affects:

• How much it costs to pay premiums
• How proceeds flow to beneficiaries
• How taxes are handled at death
• How assets are protected from creditors
• What happens if your situation changes

The right choice depends on your specific situation. What works for one person may not work for another. The goal is to match ownership to your purpose, beneficiaries, and available funds.

This is about making a decision that works over decades, not just today.

Three Key Questions

Before choosing ownership, answer these three questions:

1. What's the Purpose?

Why are you buying life insurance? Common purposes include:

• Funding a buy-sell agreement
• Key person protection
• Estate strategy and wealth transfer
• Paying capital gains tax at death
• Replacing lost income
• Paying off business loans

The purpose helps determine where proceeds should go and who should own the policy.

2. Where Are Proceeds Needed?

Who should receive the death benefit?

• Inside the corporation (for buy-sell, key person, or business needs)
• In your estate (for estate strategy or family needs)
• Directly to a beneficiary (for income replacement or specific purposes)

The ownership structure should allow proceeds to flow tax-efficiently to where they're needed.

3. Where Are Funds Available?

Where will premium payments come from?

• Corporate funds (if the corporation has cash)
• Personal funds (if you have personal savings)
• Both (if you want to split costs)

If premiums come from corporate funds, corporate ownership often costs less after-tax.

After-Tax Cost: Corporate vs Personal

When premiums come from corporate funds, corporate ownership usually costs less after-tax.

The Basic Math

Life insurance premiums are paid with after-tax dollars. The question is: which structure requires less pre-tax income to pay the premiums?

Example: You need $1,000 per month for premiums. Your personal tax rate is 50%. Your corporation's tax rate is 30%.

If you pay personally:

• You need $2,000 of pre-tax income
• Pay $1,000 in tax
• Keep $1,000 for premiums

If the corporation pays:

• The corporation needs $1,429 of pre-tax income
• Pays $429 in tax
• Keeps $1,000 for premiums

Corporate ownership costs less in this case.

The Full Picture

If premiums must come from corporate funds, compare three options:

1. Corporation owns and pays: After-tax cost equals the premium
2. Corporation pays dividend to you; you own: Corporation pays more because dividends are taxed
3. Corporation pays salary to you; you own: Corporation pays more because salary creates tax at both levels

Corporate ownership is usually cheapest when premiums come from corporate funds.

When Personal Funds Matter

If you have personal funds available and won't use them for other purposes, the tax on those funds is already paid. In this case, after-tax cost may be less important than other factors like creditor protection or beneficiary flexibility.

Estate Value Impact: CDA and Valuation

Corporate ownership can increase estate value through two mechanisms:

Capital Dividend Account (CDA) Credits

When a corporation receives life insurance proceeds, it gets a credit to the Capital Dividend Account (CDA) equal to the proceeds minus the policy's adjusted cost basis.

The corporation can then pay capital dividends from the CDA, which are received tax-free by shareholders.

This means:

• Insurance proceeds are received tax-free by the corporation
• Proceeds (minus ACB) can be distributed tax-free to shareholders
• This provides tax-efficient access to insurance proceeds

Lower Share Valuation at Death

When you die, your shares are deemed disposed at fair market value. For corporate-owned life insurance, the policy is valued at cash surrender value (not death benefit) for this purpose.

This can reduce:

• Capital gains tax on your shares at death
• The value subject to probate
• Estate administration taxes

Important: This benefit applies when you own all or most shares. If you own minority shares or fixed-value shares, the benefit may be limited.

Creditor Protection

Personal ownership may provide better creditor protection than corporate ownership.

Personal Ownership

With personal ownership, you can:

• Designate beneficiaries directly
• Use provincial insurance legislation protections
• Protect proceeds from personal creditors (subject to limitations)

Proceeds paid directly to beneficiaries generally bypass your estate and creditors.

Corporate Ownership

With corporate ownership:

• Proceeds are received by the corporation
• They're subject to corporate creditors
• They must flow through the corporation to reach beneficiaries

If the corporation has creditors or financial difficulties, proceeds may be at risk.

Exception: If you use a holding company to own the policy and the holding company has no creditors, this can provide protection.

Beneficiary Considerations

The ownership structure affects how proceeds reach beneficiaries.

Corporate Ownership for Personal Needs

If you want proceeds to benefit individuals but own the policy corporately:

• The corporation receives proceeds
• Proceeds create a CDA credit
• The corporation can pay capital dividends tax-free to shareholders
• Proceeds flow through your estate to beneficiaries

Considerations:

• Proceeds may be subject to probate
• Estate creditors may have claims
• Executor must coordinate corporate and estate distributions
• More complex than direct beneficiary designation

Personal Ownership

With personal ownership:

• You designate beneficiaries directly
• Proceeds bypass your estate
• Proceeds go directly to beneficiaries
• Simpler structure for personal needs

Considerations:

• No CDA credit (if that matters)
• May cost more if premiums come from corporate funds
• Less flexibility if you want proceeds in the corporation

Future Changes: Sale of Business and Emigration

Consider what might change in the future.

Sale of Business

If you might sell your corporation:

• Corporate-owned policies may need to be transferred
• Transfers trigger tax on policy gains (cash value minus ACB)
• Personal ownership avoids this issue

If you want to keep the policy after selling the business, personal ownership may be better.

Emigration from Canada

If you might leave Canada:

• Personal ownership: Policy is excluded from deemed disposition rules
• Corporate ownership: Cash value is included in share value, triggering capital gains tax

Personal ownership may be better if emigration is possible.

US Estate Tax

If you're a US person:

• Personal ownership: Proceeds included in your estate
• Corporate ownership: Proceeds included if you own all shares
• Special trusts (ILITs) may be needed to avoid estate tax

US estate tax strategy requires specialized advice.

Buy-Sell Funding Considerations

When insurance funds buy-sell agreements, ownership affects tax treatment:

Personal Ownership (Criss-Cross Method)

• Surviving shareholders purchase shares directly
• Deceased shareholder's estate receives capital gains treatment
• Surviving shareholders' adjusted cost base increases
• More complex with multiple shareholders

Corporate Ownership (Redemption or Promissory Note)

• Corporation receives proceeds and CDA credit
• Can pay tax-free capital dividends
• Deceased shareholder's estate may receive dividend treatment (depending on method)
• Simpler administration with multiple shareholders

The right method depends on your tax situation, number of shareholders, and preferences.

How to Apply: Steps for Choosing Ownership

If you're deciding between personal and corporate ownership:

Step 1: Answer the Three Questions

• What's the purpose of the insurance?
• Where are proceeds needed?
• Where are funds available?

Step 2: Compare After-Tax Costs

If premiums come from corporate funds:

• Calculate after-tax cost of corporate ownership
• Calculate after-tax cost of personal ownership (dividend or salary)
• Compare the costs

Step 3: Consider Estate Value Impact

If you own all or most shares:

• Corporate ownership may reduce taxes at death
• CDA credits allow tax-free distribution
• Lower share valuation reduces capital gains tax

Step 4: Evaluate Creditor Protection

• Do you need creditor protection?
• Are corporate creditors a concern?
• Would personal ownership provide better protection?

Step 5: Think About Beneficiaries

• Who should receive proceeds?
• Do they need to bypass your estate?
• Is simplicity important?

Step 6: Consider Future Changes

• Might you sell the business?
• Might you emigrate?
• Are there US estate tax considerations?

Step 7: Coordinate with Your Team

Work with your:

• Insurance advisor to structure ownership
• CPA to understand tax implications
• Lawyer to understand legal and estate considerations

Worked Example: Corporate Ownership

Let's say you're a sole shareholder considering $1 million of life insurance for estate strategy. Premiums are $12,000 per year.

Situation:

• Premiums come from corporate funds
• You own 100% of shares
• Proceeds should go to your estate
• No significant creditor concerns

Corporate ownership:

• Corporation pays $12,000 per year
• After-tax cost: $12,000 (corporation has cash)
• At death: Corporation receives $1 million
• CDA credit: $1 million (assuming nil ACB)
• Corporation pays capital dividend to your estate: $1 million tax-free
• Share valuation: Policy valued at cash surrender value (not $1 million)
• Result: Tax-free proceeds, lower share valuation

Personal ownership:

• Corporation pays you $20,000 salary
• You pay $10,000 tax, keep $10,000
• After-tax cost: $20,000 (more expensive)
• At death: You receive $1 million directly
• No CDA credit
• Share valuation: Includes cash value of policy
• Result: Direct proceeds, but higher cost and no CDA benefit

In this case, corporate ownership provides better after-tax results.

Decision Checklist

Corporate ownership might make sense if:

• [ ] Premiums come from corporate funds
• [ ] You own all or most shares of the corporation
• [ ] Proceeds are needed in the corporation or can flow through it
• [ ] You want CDA credits for tax-free distribution
• [ ] You want to reduce share valuation at death
• [ ] Creditor protection is less important than tax efficiency

Personal ownership might make sense if:

• [ ] Premiums come from personal funds (already taxed)
• [ ] Proceeds should go directly to beneficiaries (bypass estate)
• [ ] Creditor protection is important
• [ ] You might sell the business and want to keep the policy
• [ ] You might emigrate from Canada
• [ ] Simplicity and direct beneficiary designation matter

If several factors point in one direction, that structure may be better for your situation.

Important Notes

This is educational information. Life insurance ownership decisions require coordination with insurance advisors, CPAs, and lawyers. Tax implications depend on your specific situation. Always consult with your professional team.

Every situation is unique. Ownership structures, tax implications, and estate strategy considerations depend on many factors including corporate structure, share ownership, beneficiary needs, and future plans. What works in one case may not be appropriate for your circumstances.

Tax rules are complex. CDA calculations, share valuations, and tax treatment depend on specific provisions of the Income Tax Act. Work with your CPA to understand how rules apply to your situation.

Insurance is offered through iAssure Inc. Insurance products and related services are provided through iAssure Inc., an independent firm in the insurance of persons and in the group insurance of persons. These activities are neither the business nor the responsibility of WhiteHaven Securities Inc.

Next Steps

If you're considering life insurance ownership:

• Answer the three questions: Purpose, where proceeds needed, where funds available
• Compare costs: Calculate after-tax costs for each structure
• Consider long-term: Think about estate value, creditor protection, and future changes
• Coordinate with your team: Discuss with your insurance advisor, CPA, and lawyer
• Review regularly: Ownership needs may change as your situation evolves

If you'd like to discuss your specific situation, request a structure review to see if there's a fit.