Tax Treatment In Canada

Key Person Life Insurance

Life insurance premiums are generally not tax deductible. At the same time, any life insurance death benefits are generally not taxable.

So life insurance premiums paid from the corporation would not be considered a tax deduction. Should a benefit be paid however, those benefits are paid to the company and are not taxed. Should there be a need to get those benefits out to shareholders, then the death benefits can be paid into a notional account called the 'Capital Dividend Account'. The capital dividend account can then pay out dividends to shareholders with no taxes involved (well, technically there may be a very small amount of taxes). So – no tax deduction on the premiums, but the benefits are not taxed, and can be distributed to shareholders if needed, without consequential taxes. In the case of key person insurance however, we would assume that the benefits would remain inside the corporation.

There is an exception when life insurance premiums can be used as a tax deduction – when it's required for a loan. The CRA has about 4 or 5 defined requirements that must be met but they boil down to two things. First, the loan must be from a recognized bank or credit union (private lenders don't qualify). Secondly, they must require the life insurance as a condition of the loan – you need a letter from them on file. With those two requirements met, you can likely deduct the life insurance premiums. If the key person insurance is meant to cover a loan, then you may be able to deduct the premiums. Otherwise, you cannot.

In terms of tax treatment, we will consult with our tax experts and provide you a proposal. However all tax information provided must be approved by your tax expert - your accountant.