Corporate insurance is one of the most important insurance solutions for business owners to have as part of their financial plan. The corporation can be a named beneficiary on a life insurance policy and would be responsible in paying the premiums for the policy. The insurance premiums are not typically tax deductible. Upon death of the insured person, the company would receive insurance proceeds which could be used towards minimizing taxes, transferring ownership, maximizing corporate assets and much more.
Beneficiary Designation
With a personal life insurance policy, the policyholder has more flexibility in naming the beneficiary. The beneficiary could be family members, spouses, friends, charities, etc. However, with a corporate insurance policy, the named beneficiary would the corporation itself. Upon death of the insured, there would be a death benefit, less the adjusted cost base (ACB), credited to the corporation’s Capital Dividend Account.
The adjusted cost base is a complex formula that takes into account all deposits, withdrawals, loans, dividends, and cost of insurance charges of a policy. The adjusted cost base could vary between term insurance and permanent insurance. With term insurance it could as low as zero but with permanent insurance, the individual would have to take into account various loans and dividends.
Capital Dividend Account
- 💡 For example if the corporation were to receive a death benefit of $1,000,000 and the adjusted cost base of the policy at the time of the insured holder’s death is $100,000, there will be $900,000 credited to the corporation’s Capital Dividend Account. The $900,000 would be paid tax-free to the share holders while the $100,000 would be paid to shareholders as a taxable dividend.
The capital dividend account is a special corporate tax account under the Income Tax Act, designated to allow tax-free amounts received by a private corporation to be distributed tax free to shareholders of the corporation. All private corporations in Canada including, non Canadian controlled are eligible to have a capital dividend account.
Non Resident Shareholders – A capital dividend paid to a shareholder who is a non resident is subject to federal withholding tax of 25% or lower if a tax treaty is present with the country that the shareholder is residing in and Canada. If a Canadian private corporation has international shareholders in addition to domestic, it’s recommended to create two share classes so capital dividends can be paid to domestic shareholders only.
Buy-Sell Insurance
A buy-sell agreement is an agreement between business partners to ensure the longevity of their company. A buy-sell agreement comes into conversation when a business partner passes away. The business owners would enter into an agreement that the surviving owner will purchase the business interest of the deceased owner. Each business owner would purchase a life insurance policy on the other owner and would name themselves as a beneficiary.
Upon death, the insurance would company would provide a death benefit in which the proceeds could be used to redeem the shares of the company from the deceased’s holder’s estate. To avoid future confusion, the buy-out sell agreement should be documented in the shareholder’s agreement.
Key Person Insurance
Key Person insurance is different type of corporate insurance purchased by the business on the life of a person whose expertise and knowledge are vital to the company’s survival. The beneficiary of such a policy would be the business and the premiums would be paid by the business to the insurance company. On the death of the insured individual, the business would get the working capital needed to continue operating the company and perhaps facilitate in training programs for the new hire. Key person insurance is also available if the individual were to suffer a disability.
Corporate Insurance Loan Protection
Often in small sole proprietorship businesses, lenders will typically require that key personnel are insured before they could provide a loan. The insurance coverage would typically be for the duration of the loan. With life insurance, businesses would have an advantage in obtaining financing.
Business Overhead Insurance
Business overhead expense insurance is meant to help you cover the costs of running your business if you suffer a disability. This type of insurance benefit would pay the ongoing business expenses such as wages, electricity, heating, etc. This insurance strategy is especially useful when a business relies heavily on a single individual, such as in a single proprietorship. In partnership agreements, the other business owner may be able to help pay a portion of the expenses.