Corporate-Owned Life Insurance and the Capital Dividend Account

Think of it as two buckets: the company's and yours. Money moves from the company's bucket to yours as salary or dividends, and it gets taxed on the way. Money left inside the company and invested can be taxed at high rates on the investment income it earns. And when an owner dies, the shares of the company can trigger a large tax bill of their own.

When the corporation owns a permanent life insurance policy on an owner:

• The company pays the premiums with corporate dollars, which are often taxed at a lower rate than money you'd pay yourself personally
• Inside a permanent policy, the cash value can grow on a tax-advantaged basis, within limits set by tax rules
• When the owner dies, the company receives the death benefit tax-free
• Much of that death benefit can then be credited to the company's capital dividend account and paid out to the shareholders, often the family or the estate, as a tax-free capital dividend

The capital dividend account, or CDA, is a tracking account that records certain tax-free amounts a private corporation receives, such as the non-taxable half of capital gains and life insurance death benefits, less an amount called the policy's adjusted cost base. The balance can be paid out to shareholders who live in Canada as a tax-free capital dividend, once the proper election is filed with the Canada Revenue Agency.

• Paying the tax bill at death on the shares of the company
• Leaving a larger, more tax-efficient estate to the family
• Funding a buy-sell agreement between owners
• Making an inheritance fair when one child is taking over the business and another isn't
• In some cases, using the policy's cash value as collateral for a loan, giving the business access to capital while the coverage stays in place

It tends to fit best when the company has surplus cash it doesn't need for day-to-day operations, the owners are insurable, and there's a long-term goal like passing wealth to the family. It's a long-term commitment, so it isn't the right home for money you might need back soon. We design it together with your accountant and lawyer.