Why Corporately Owned Life Insurance Should Name the Corporation as Beneficiary | Life Insurance Questions Answered

Why Corporately Owned Life Insurance Should Name the Corporation as Beneficiary

Corporate-owned life insurance is a vital tool for business owners, providing liquidity for debt repayment, funding buy-sell agreements, and supporting estate planning objectives. However, a key decision (who to name as beneficiary) can have significant tax and legal consequences.

The general guideline is simple: if a corporation owns the policy, it should also be the beneficiary. Deviating from this can result in unintended tax traps and complex administrative issues.

Why Keep the Corporation as Beneficiary?

When the corporation is both policy owner and beneficiary:

  • The death benefit flows to the corporation and is credited to the Capital Dividend Account (CDA), enabling tax-free distributions to shareholders.
  • The arrangement avoids taxable shareholder or employment benefits.
  • It provides liquidity to the business for operations, debt repayment, or succession planning.

This structure satisfies most business owners' planning needs without adding unnecessary complexity.

What Happens if You Name Your Spouse/Child/Estate as a Beneficiary?

When a shareholder's estate or family member is named as beneficiary of a corporate-owned policy, CRA considers the premiums paid a taxable shareholder benefit under subsection 15(1) of the Income Tax Act (ITA). This amount is included in the shareholder's income annually, and there's no deduction for the corporation.

 

Solutions for Estate Planning Challenges

When naming someone other than the corporation as beneficiary is desired for estate equalization or succession planning, consider:

  • Life Insurance Shares: Special preferred shares can track the policy's cash value or death benefit, allowing targeted distribution of insurance proceeds to heirs without triggering taxable benefits.
  • Best Practice: Life insurance shares should ideally be created before the policy is put in place. Issuing them later could be seen as conferring a taxable benefit to the new shareholder unless fair market value is paid. Establishing them early keeps the share value minimal and avoids potential CRA scrutiny

Key Takeaways:

  • Always align policy ownership and beneficiary designations.
  • Avoid naming individuals or related corporations as beneficiaries unless supported by robust tax and legal planning.
  • Consider life insurance shares or restructuring for complex estate goals.
  • Engage tax and legal advisors

 

Lessons from Harding v. The Queen

The Harding v The Queen case illustrates the consequences of improper structuring. In this case, the court ruled that naming a beneficiary other than the policy owner (a corporation) could result in taxable shareholder benefits under subsection 15(1) ITA. The ruling reinforced the importance of aligning ownership and beneficiary designations to avoid tax surprises.

Final Thoughts

Beneficiary designations in corporate-owned life insurance are more than an afterthought. Naming the wrong beneficiary can trigger annual taxation, shareholder benefits, or reduce CDA credits – undermining the value of the insurance.

As seen in Harding v The Queen, improper planning can lead to tax exposure. Keeping the corporation as both owner and beneficiary remains the simplest, most tax-efficient structure.

Want to review your corporate life insurance structure? Let's connect to ensure it works as intended—when it matters most.