If you own an incorporated business in Ontario, you may have heard about corporate-owned life insurance (COLI) as a way to fund a shareholder agreement, provide liquidity for an estate, support business succession, or build long-term value within a corporation.

Corporate-owned life insurance can be a legitimate and useful planning tool. But it is not a simple tax deduction, and it is not the right solution for every business.

At The TaxForce, our role is not to automatically say yes or no to a strategy. Our role is to look at how the strategy fits into your business, your tax situation, your financial statements, and your long-term plans.

With corporate-owned life insurance, the details matter. Here are some of the questions we want answered before you commit to a policy.

It’s Not a Simple “Tax Strategy”

One of the most common misconceptions about corporate-owned life insurance is that the premiums are simply a business tax deduction. Generally, they are not.

There are limited circumstances where a portion of life insurance premiums may be deductible when a policy is assigned as collateral for a qualifying business loan from a restricted financial institution. The deduction is subject to specific limits and requirements.

So if a policy is being presented primarily as a way to reduce your taxes today, that’s a good reason to slow down and look at the numbers.

The more important question is: How does this policy fit into your overall business and tax plan?

ACB and CDA Need to Be Modelled — Not Guessed

Two terms that are important when discussing corporate-owned life insurance are Adjusted Cost Basis (ACB) and the Capital Dividend Account (CDA).

When a private corporation receives life insurance proceeds as a result of the death of the insured, the amount that can generally be added to the corporation’s CDA is based on the net proceeds, which generally means the insurance proceeds less the policy’s ACB.

That CDA balance can potentially allow a private corporation to pay a capital dividend to Canadian-resident shareholders without personal income tax, provided the corporation meets the requirements and makes the appropriate election.

The important point is that the CDA credit is not automatically equal to the full death benefit.

The policy’s ACB can change over time depending on the policy and its transactions. That’s why we want to see realistic projections rather than relying on a single number from an insurance illustration.

If you’re considering COLI, ask to see how the ACB and potential CDA credit are expected to change over the life of the policy.

Accessing Cash Value Can Have Tax Consequences

Some corporate-owned life insurance policies have a cash surrender value.

That value may be an important part of the policy’s long-term planning, but accessing it is not necessarily tax-free.

Withdrawals, partial dispositions, policy loans, or other transactions involving the policy can have tax consequences depending on the circumstances, including the policy’s ACB and the type of transaction.

For a Canadian-controlled private corporation (CCPC), investment income can also affect the corporation’s access to the federal small business deduction. The business limit is reduced when the corporation and its associated corporations have adjusted aggregate investment income between $50,000 and $150,000.

That does not mean that every policy withdrawal or policy loan automatically becomes passive income. The tax treatment depends on the specific transaction and circumstances.

That’s exactly why we want to understand how you expect to fund, use, and eventually access the policy before it is purchased.

Your Life Insurance Policy Also Affects Your Accounting

Corporate-owned life insurance is not only an insurance and tax issue. It can also affect your company’s financial statements.

For private enterprises reporting under ASPE, Accounting Guideline AcG-21 — Accounting for Life Insurance Contracts with Cash Surrender Value became effective for fiscal years beginning on or after January 1, 2026, with earlier application permitted.

When the enterprise is both the owner and beneficiary of a life insurance policy with cash surrender value, the cash surrender value is recognized as an asset and measured based on the amount that would be immediately realized if the policy were terminated before the insured’s death.

The guideline also provides requirements for how policy premiums and changes in cash surrender value are presented and disclosed.

In other words, the policy does not simply sit in your insurance file.

It can be part of your company’s financial reporting, and it needs to be accounted for properly.

Ownership, Premium Payments and Beneficiaries Need to Be Intentionally Structured

Another important consideration is who owns the policy, who pays the premiums, and who is entitled to receive the proceeds.

These elements do not necessarily have to be identical, but they need to be deliberately structured and properly documented.

This becomes particularly important when there are multiple corporations, shareholders, holding companies, operating companies, or related-party transactions involved.

A change in ownership or a transfer of a life insurance policy can also have tax consequences.

Before a policy is implemented, we want to understand the corporate structure and make sure the insurance arrangement fits the broader legal and tax plan.

The insurance policy, corporate structure, accounting records and legal documents should all tell the same story.

Don’t Assume It’s Easy to Unwind

Corporate-owned life insurance is generally a long-term commitment.

If your business changes, you sell the company, restructure your corporations, transfer the policy, or decide that the policy no longer fits your plans, there can be tax and financial consequences.

A life insurance policy can have value, but that does not necessarily mean that value can be accessed or transferred without consequences.

That’s why the best time to review the strategy is before the policy is purchased, rather than years later when you’re trying to change it.

Why We Recommend Coordination — Not Resistance

At The TaxForce, we are not against corporate-owned life insurance.

In the right circumstances, it can be an effective tool for business succession planning, funding certain shareholder or buy-sell arrangements, providing estate liquidity, and supporting long-term corporate planning.

What we don’t recommend is purchasing a policy based on a single tax benefit or an attractive illustration without understanding the bigger picture.

Before you commit to a corporate-owned life insurance policy, we want to understand:

• How the policy is expected to affect your ACB over time
• How the potential CDA credit is expected to develop
• How cash value may be accessed and the potential tax consequences
• Whether passive investment income rules could become relevant to your corporation
• How the policy will be reflected in your financial statements
• Who will own the policy and who will receive the proceeds
• How the policy fits into your shareholder, estate and business succession plans
• What happens if your business structure or plans change

Ideally, your accountant, insurance advisor and lawyer should be part of the conversation before the paperwork is signed, not after.

The Bottom Line

Corporate-owned life insurance is not a shortcut.

It can be a powerful planning tool, but its value depends on how well the policy fits your business, tax position, corporate structure and long-term goals.

At The TaxForce, we look beyond the initial tax pitch to understand what the strategy could mean for your business today — and years from now.

If you’re considering corporate-owned life insurance, or you already have a corporate policy and aren’t sure how it is structured, talk to your accountant before making your next move.

📞 226-776-1219
🌐 www.thetaxforce.ca

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This article is for general information purposes only and is not tax, legal, accounting or insurance advice for a specific situation. Corporate-owned life insurance should be reviewed based on the specific policy, corporate structure and circumstances involved.

• CRA — Capital Dividend Account: CRA: Capital Dividend Accounts 
• CRA — Life insurance proceeds received by a private corporation: CRA: Life Insurance Proceeds and Private Corporations 
• CRA — T2 Corporation Income Tax Guide: CRA: Passive Income and the Small Business Deduction 
• CPA Ontario — ASPE: CPA Ontario: ASPE Updates 
• BDO Canada — AcG-21: BDO: Accounting for Life Insurance Contracts with Cash Surrender Value