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Life insurance inside a corporation: 5 tax questions owners should understand

Short answer

A private corporation that receives life insurance proceeds as beneficiary can add the proceeds, minus the policy's adjusted cost basis, to its capital dividend account. Capital dividends can be paid to shareholders tax-free by election. That is the rule, and it is narrower than it sounds. The adjusted cost basis reduces the amount, and the election must be filed properly. An excess election is taxed at 60%. Moving a policy between a shareholder and the corporation has its own consequences. Premiums are generally not deductible.

Rex Tax Inc. · Information checked against official sources. Last updated October 3, 2026 · Published October 3, 2026

Who this is for

Owners of private corporations who have been shown a policy owned by the company. Also owners who already have one and are not sure what it does at death. This is an explanation of the tax mechanics, not a recommendation. It needs review by both the tax practitioner and the licensed insurance provider before it is relied on.

The five questions

  1. Who owns the policy, and who pays? The corporation can own a policy on a shareholder’s or key person’s life and pay the premiums. Premiums are generally not deductible to the corporation, apart from narrow cases such as insurance a lender requires as collateral. Paying personal insurance through the company without the company owning it is a shareholder benefit.

  2. Who is the beneficiary? For the capital dividend account rule to apply, the corporation must receive the proceeds as beneficiary. If the beneficiary is a person, the corporation paid premiums for a benefit it did not receive. The CRA treats that as a taxable benefit to that shareholder.

  3. What is the adjusted cost basis? Every policy has an adjusted cost basis under the Income Tax Act. Broadly, it is the premiums paid less the cost of the pure insurance each year, with other adjustments. The insurer calculates it. The capital dividend account addition is the proceeds minus this figure immediately before death. On some policies it is small; on others it is not.

  4. How does the money reach shareholders? The corporation files Form T2054 to elect that a dividend is a capital dividend. Shareholders receive it without including it in income. If the corporation elects more than its capital dividend account balance, the excess is taxed at 60%. A further election can treat it as an ordinary dividend instead. Timing and paperwork matter.

  5. What happens if the policy moves? Transferring a policy from a shareholder to the corporation, or the other way, is a disposition. It has tax consequences for the transferor and sets the corporation’s cost. The rules were tightened in 2016. Do not move a policy without the numbers worked out first; we will set them out before any transfer, not after.

What this is not

It is not a way to take money out of the company tax-free while you are alive. Cash value belongs to the corporation and is taxed on withdrawal above the policy’s cost. Borrowing against a policy is a loan, with interest, and does not change the account rules. The CRA has publicly warned about arrangements that dress up withdrawals as insurance transactions.

How the pieces connect

Corporate-owned insurance connects to three other decisions. One is salary or dividends, because the company, not you, pays the premium. Another is succession, because the proceeds can fund a buy-out or the tax on the shares at death. The third is the shareholder’s personal coverage, which the corporate policy does not replace. Each of those is a separate conversation.

One thing many people do not realize

The capital dividend account gets the proceeds minus the adjusted cost basis of the policy, not the whole death benefit. On a policy with a large cash value or many years of premiums, the adjusted cost basis can be substantial. That part of the proceeds cannot come out as a capital dividend. ‘The whole payout comes out tax-free’ is the sentence to be suspicious of.

What to prepare

  • The policy illustration, showing premiums, cash value and the projected adjusted cost basis
  • Who is proposed as owner, payor and beneficiary
  • The corporation’s shareholders and any shareholders’ agreement
  • Existing personal coverage on the same life

When professional help may make sense

Any time this is proposed. The tax treatment, the insurance suitability and the legal agreements are three different disciplines, and a proposal that covers only one of them is incomplete.

How Rex Tax may be able to help

We explain the capital dividend account mechanics for your corporation. We file the T2054 election when a capital dividend is paid. We also keep the account balance tracked year to year. Parminder Singh Oberoi handles the insurance side through Punjab Insurance Agency Inc. Shareholders’ agreements need a lawyer.

Official sources

Related guides

This guide is general information, not advice about your situation. It reflects the rules for the 2026 tax year. It has not yet been reviewed by a practitioner. The information was checked against the official sources listed above on the date shown. Rules change. Check the official sources above or ask us. How we prepare these guides.

Being offered corporate-owned insurance?

Bring the proposal. We explain the tax treatment and the capital dividend account; Parminder Singh Oberoi can discuss the insurance side through Punjab Insurance Agency Inc. This guide has not yet been reviewed by the tax practitioner or the licensed provider.

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