Canada: How To Extract Tax-Free Corporate Funds Using Life Insurance—At Least For Now…

Last Updated: January 29 2014
Article by Marissa Verskin

Maximizing your life insurance policy...

Life insurance gives a level of financial security for family members of the deceased. However, having a policy also has investment purposes or provides future liquidity. The decision as to who should own life insurance (whether personally or corporately) should be relevant to your circumstances. Over time, these circumstances may change and there may be a desire to change the holder of the policy.

In the absence of special rules, where a person (the transferor) transfers an asset to another person or entity, he/she is generally considered to have received fair market value (FMV) consideration in exchange for the asset. Thus, he/she will incur an income tax liability to the extent that the FMV exceeds the tax cost (value) of the asset to the transferor.

The rules surrounding the income tax treatment of life insurance are complex, and one such special rule currently applies to the transfer of life insurance between non-arm's length persons. Specifically, a transfer of a life insurance policy is considered to take place for proceeds equal to the cash surrender value (CSV) of the policy and not at the FMV of the policy.

In contrast to the FMV, the CSV represents the amount that the life insurer would pay if the policyholder were to cancel his/her policy before its maturity. The FMV may be substantially higher than the CSV if, for example, the insured has health problems that have resulted in a reduced life expectancy. Where this is the case, there may be an opportunity to extract tax-free corporate funds.

Consider the following example. Let's assume that Mr. Smith personally holds a life insurance policy that he has held for many years. Mr. Smith is in poor health. Let's assume that the cost of the policy is zero, the CSV is zero, but the FMV is $1 million because of Mr. Smith's reduced life expectancy.

Mr. Smith transfers the policy to his wholly owned corporation (SmithCo) in exchange for a demand promissory note of $1 million. Although Mr. Smith has received FMV consideration, he is deemed to dispose of the policy for no proceeds (i.e. at CSV) for income tax purposes. Consequently, since the proceeds of disposition in respect of the transferred policy are equal to the cost of the policy to Mr. Smith, no income tax will result on the transfer. At the same time, SmithCo may immediately repay the promissory note to Mr. Smith without any further income tax implications.

When Mr. Smith passes away, SmithCo will receive life insurance proceeds (on a tax-free basis) of $1 million. These funds will be added to SmithCo's capital dividend account (CDA), which is a notional account from which funds can be distributed to shareholders in a tax-free manner.

Because of this planning, Mr. Smith is able to both receive the life insurance proceeds on a tax-free basis (by way of the CDA) and extract $1 million cash from his company (by way of repayment of the promissory note) on a tax-free basis.

Mr. Smith was able to derive a tax benefit to the full FMV of the policy, but this may not always be the case. When the FMV of the life insurance policy exceeds its CSV, a similar set up will generally yield an income tax benefit. In summary, you can realize the greatest income tax benefits when the FMV is significantly higher than the CSV. In Mr. Smith's case, the CSV was nil resulting in the extent of the benefit being fully maximized.

The rules surrounding the tax treatment of life insurance are complex and the facts pertaining to a particular situation must be carefully and holistically considered to ensure that negative tax (or other) consequences are adequately considered. For example, there may be a loss of creditor protection by having the life insurance policy in the corporation, and/or a loss of a shareholder's ability to claim the lifetime capital gains exemption in respect of the shares of the corporation. In the right situation, however, careful planning may result in significant tax benefits.

The life insurance taxation system has recently been under heightened scrutiny by the Department of Finance and several changes to the taxation of life insurance products have already been enacted. It is possible that the rules allowing this particular tax benefit will change in the future. Consequently, if you personally hold a life insurance policy with a high FMV and lower CSV, immediate consideration of this planning opportunity is warranted.

As always, each situation is different, we recommend consulting with your Crowe Soberman professional advisor and your life insurance broker.

This article was prepared by Marissa Verskin who is a senior manager in Crowe Soberman's Tax Group.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Marissa Verskin
Similar Articles
Relevancy Powered by MondaqAI
Collins Barrow National Incorporated
Grant Thornton
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Collins Barrow National Incorporated
Grant Thornton
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions