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Did you know of the approximately 1.2 million businesses in Canada, 97.9% of them are small businesses?1 Because they create the vast majority of jobs in Canada, small businesses are vital players in our economy. Identifying ways for small businesses to thrive and pass on a growing business to future generations can help more business owners and their families achieve lifetime financial security.

Like many people, business owners want to reduce the amount of tax they pay and protect their legacy. Individuals and businesses can take their planning to the next level with permanent insurance.


If you have high net worth clients who operate private corporations, they may be generating excess cash over and above what’s needed to run their day-to-day business. If they’ve set up a holding company, it may be receiving that money as tax-free intercorporate dividends. The challenge is that the investment growth from these assets is taxed each year, and any dividend distribution is taxed as well.

Canada’s tax laws discourage corporations from owning investments that aren’t actively used in the business by taxing the income those passive investments earn at the highest corporate rates. And, at death, the tax liabilities can become more of a burden. When a shareholder dies, they are deemed to have disposed of all their assets including the shares in their company, at fair market value (FMV). Any tax resulting from that disposition is paid on the shareholder’s final tax return. If the shareholder’s estate doesn’t have enough cash to pay the tax, it may need sell the shares or withdraw the money from the company. That withdrawal is then treated as a taxable dividend to the estate.

If the shareholder’s final tax liability can be paid without using corporate funds, the company’s shares can be passed to the estate’s beneficiaries without touching corporate-owned investments. So is there a more tax-effective way to hold and distribute these assets? The answer is yes, and it’s a solution more business owners are using to maximize the legacy they leave behind.


The Corporate Investment Strategy (CIS) offers a significant advantage over taxable investments. A corporation can direct the excess cash flow or assets to pay the premium for a permanent life insurance policy on a shareholder. Participating life insurance products are ideal options to use with this strategy, since they offer both guaranteed premiums and death benefits.

The life insurance policies feature cash value accumulation, but unlike other company assets, there’s no tax payable on the growth of the policy cash value as long as it remains in the policy. At the shareholder’s death, the life insurance policy pays a tax-free death benefit to the corporation as the beneficiary. An amount equal to the death benefit, minus the policy’s adjusted cost basis (ACB) at the time of the shareholder’s death, can be posted to the corporation’s capital dividend account (CDA). Capital dividends can be paid tax-free. The shareholder’s representative could use them to help pay the final taxes owing at death. And since more money can pass to the estate compared to taxable investments, life insurance helps increase the value of the deceased’s estate.


The purchase of a permanent life insurance policy can be an extremely valuable business tool for corporations looking to build tax-efficient channels from their companies. But there are a few considerations to keep in mind.

While the CIS can dramatically increase an estate’s value, it can also increase the tax liability.

Shareholders of qualifying small business corporations benefit from the lifetime capital gains exemption. However, qualifying the company for the exemption is very important. One of the requirements is that, at the time the gain is realized, 90% of the fair market value (FMV) of the corporation’s assets must be used in an active business carried on in Canada. Life insurance policy cash values are passive assets, and don’t count towards this requirement. The Canada Revenue Agency (CRA) uses the policy’s cash surrender value to measure the value of a life insurance policy when determining eligibility for capital gains exemption purposes.

While corporate-owned life insurance can increase the after-tax value to the estate, it may also increase the tax liability on the shareholder’s terminal tax return. Shares of a closely held corporation are deemed to be disposed of at death for their FMV immediately before death. The value of all the assets, including the cash value of any life insurance policies the corporation owns, helps determine the FMV of the orporation’s shares. The significant cash value growth of the insurance policy may exceed what would otherwise have accumulated in the taxable investment. This may increase the tax liability on the terminal return and reduce the advantage of the corporate-owned insurance. Careful planning should be done with the client’s tax advisor to minimize this risk.


Starting for policies issued on or after January 1, 2017, the Income Tax Act rules around the tax-preferred accumulation of cash value and related life insurance items will be changing. Funding room may be lower over the lifetime of a policy, and the ACB will be higher for a longer period of time. This could affect the amount available to be posted as a credit to the corporation’s CDA. Business owners may want to buy permanent insurance policies—or convert their existing term policies to permanent coverage—before the end of the year, in order to be grandfathered under the current regulations.


The details concerning corporate-owned life insurance can be very complex. Be sure to consult with legal, tax and accounting specialists to determine whether your clients may benefit from including life insurance as part of their tax strategy. Start the conversation now to make sure any applications for new policies or changes to existing ones are implemented before the end of the year.

To learn more about how businesses can maximize their estate:

  • Read the Financial Advisor bulletin about the Corporate Investment Strategy,
  • Across its Insurance and Wealth business, Sun Life Financial’s Advanced Planning services deliver professional expertise and insights through a team of chartered accountants and lawyers. Talk with a Sun Life Sales Director to get more details.

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1 SME Research and Statistics, Statistics Canada June 2016 Report as of December 2015.