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Corporate Estate Bond – always made sense and still does!

Florence Marino, B.A., LL.B, TEP

Head of Tax, Retirement and Estate Planning, Individual Insurance, Canada

Florence Marino is the Head of Tax, Retirement and Estate Planning Services, and she provides tax, retirement, estate and insurance planning support and consultation to advisors regarding complex cases in the affluent and business markets. She leads a team of professionals providing this type of support and consultation across the country.

The Corporate Estate Bond concept is a simplified analysis that compares corporate-owned life insurance to a taxable alternative investment. It doesn’t do a complete job of post-mortem tax planning options. It makes a simple assumption – the same amount going into a life insurance policy vs. an alternative investment and looks at net estate values assuming the amount at death is paid out of the corporation as a dividend in each scenario.  

Change is constant - and tax legislation is no exception. Given this backdrop, does the Corporate Estate Bond concept still make sense? Corporate Estate Bond always made sense and still does, but why?

Tax-exempt life insurance

A life insurance policy that qualifies as an “exempt policy” has a unique set of tax attributes. The policy is not subject to taxation unless there is an actual or deemed disposition of an interest in the policy. Any growth in policy values is exempt from annual accrual taxation provided the policy meets the limits prescribed by the Income Tax Act (the Act) and the Regulations. Accessing the policy’s cash value by way of a surrender, withdrawal or policy loan is a disposition and can bring about tax consequences. Death benefits are received by the policy beneficiary, tax-free. The framework is powerful. This is why there are limits on how much funding can be contributed to an exempt policy and how much growth can be retained within an exempt policy.

Corporate-owned life insurance

A life insurance policy owned by a corporation enjoys these same tax attributes. And, corporate tax rules accommodate and integrate these tax attributes into the corporate setting. The internal growth in value of an exempt life insurance policy is not considered passive income for purposes of the reduction in the small business limit for adjusted aggregate investment income in excess of $50,000. However, where there is a disposition of a policy, any taxable policy gains are considered passive income.

Upon death, life insurance proceeds are received tax-free by a corporate beneficiary. The death benefit received, less the adjusted cost basis of the policy, credits a private corporation’s capital dividend account. Private corporations are able to distribute some, or all of the life insurance proceeds tax-free to shareholders as a capital dividend. The value of corporate-owned life insurance contributes to the value of the shares of the corporation for purposes of the deemed disposition of at the death of the shareholder.

Repositioning corporate surplus into life insurance 

The profits or surplus cash of a corporation earning active business income (for example, an operating company or a professional corporation) are often retained in the corporation and reinvested. This can take the form of reinvesting in the operating business but can also be invested in taxable investments. Sometimes this surplus is distributed to an investment holding company and invested in taxable investments. In either case, significant amounts of surplus can accumulate inside private corporations. Particularly where these passive investments or a portion of them are viewed as never needing to be distributed to the shareholder while living, this may not be the most advantageous way for the corporation to invest it’s surplus. The distribution of this surplus to the shareholder would trigger current personal dividend tax. An efficient alternative is to reposition surplus into an exempt life insurance policy.  

Comparing life insurance to an alternative taxable investment

In comparing life insurance to an alternative investment, it is helpful to consider the internal rate of return (IRR) of the policy to that of the alternative investment. This is the rate of return that would have to be earned on the amounts paid into the policy in order to provide the same lump-sum death benefit (after tax) as is provided by the policy. Very often, life insurance will provide a very high IRR relative to an alternative investment. This makes it a very attractive vehicle for accumulating, tax-sheltering and eventually transferring wealth that will not be needed during the lifetime of the insured person.

The need for liquidity should also be considered when comparing life insurance to an alternative investment. If the owner needs to access some of this wealth during the insured’s lifetime, consideration should be given to how this might be done (withdrawals, policy loans, collateral loans etc.), the tax consequences of doing so, and how this compares to an alternative investment.

A corporate-owned life insurance policy – like any other investment – will be subject to the claims of the corporation’s creditors. In some cases, use of a holding corporation can mitigate this issue for both life insurance and alternative investments.

The issuance of a corporate-owned insurance policy will require both medical and financial underwriting. The individual who is insured under the policy will have to submit to medical underwriting, and the corporation will have to provide evidence of its financial need for the insurance, its insurable interest in the life insured, and its financial position. Depending on the amount of insurance, the corporation may have to provide documents including financial statements, credit reports, information on shareholders and officers of the corporation, and information on its relationship to the insured.

When comparing different corporate-owned investments, it is important to consider not only the IRR on the investment, but also the tax characteristics of the investment and the impact it has on the value of the shares at death. Depending on the type of shares the insured owns, a corporate-owned life insurance policy will often result in a lower tax liability arising on the deemed disposition of the shares of the corporation at death and/or the subsequent distribution of the corporation’s assets as compared to an alternative corporate owned investment with a similar value.

The simplistic approach of the Corporate Estate Bond concept to comparing the estate value arising from a corporate-owned life insurance policy and an alternative corporate-owned investment is to assume that, at death, the corporation pays the death benefit from the life insurance, or the proceeds from the sale of the alternative investment as a dividend to the estate. Under this assumption, since the life insurance death benefit typically generates a large CDA credit to the corporation, most of the life insurance proceeds are received by the estate tax-free. 

In contrast, a taxable investment will typically generate some CDA (from untaxed portion of capital gains arising on the taxable investment), but the rest of the dividend will be a taxable. As a result, the tax arising on the distribution of the proceeds from the taxable investment will generally be higher, and therefore, the estate value will be lower, even if the value of the investment is comparable to the life insurance death benefit. Of course, this all depends on the assumptions chosen and there are scenarios where an alternative investment could beat the life insurance scenario (i.e., 100 per cent deferred capital gains until death, with a high rate of return assumption.) 

Taxes arise on death as a result of the deemed disposition of the shares.  Post-mortem planning procedures are often used to minimize the taxes arising at death. These include redemption and loss carry-back planning and pipeline planning. As noted earlier, the cash value of a corporate-owned life insurance policy (immediately before death) is generally included in the valuation of common shares for purposes of the deemed disposition at death rules. Arguably, the capital gains tax arising on the value of the shares attributable to the cash value of the life insurance policy should reduce the net estate value said to arise from the policy. 

However, there is also post-mortem planning that can be done to reduce the tax burden on the shares and stop-loss rules that should be taken into account. These possibilities are not taken into account in the simple approach of the Corporate Estate Bond concept. The Corporate Estate Bond concept may be just the starting point for a conversation about the benefits of accumulating wealth inside a corporate-owned life insurance policy. 


The Corporate Estate Bond concept continues to make sense in the current tax environment and can be an attractive alternative to taxable investments for a corporation with excess liquid assets that are not set aside for a specific purpose or needed for operations. Recent developments have made this even more true. With current corporate tax rates (including refundable taxes) on passive investment income in the 50 per cent range and with the demise of “non-CCPC planning[i]” as a result of the 2022 Federal Budget, corporate-owned life insurance for accumulating and ultimately transferring wealth remains a solid alternative.

More information: 

Accumulating and transferring wealth through the use of life insurance – Corporate ownership (manulife.ca)

Dealing with private company shares at death – post-mortem and insurance planning (manulife.ca)

[i] Planning to avoid being a Canadian Controlled Private Corporation (CCPC) (commonly referred to as non-CCPC planning, or in the budget documents as substantive CCPCs) resulted in investment income being taxed at the general rate for active business income (in the range of 27%) rather than the rate for investment income in a CCPC, providing greater tax deferral.  Draft Legislation to implement the 2022 Federal budget measures was released on August 9, 2022.  The measures applicable to taxation years after April 7, 2022.   

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