Life insurance can be a cost-efficient tool to fund various needs upon the death of a
shareholder or key employee. For example, it can provide the necessary cash to
surviving shareholder(s) to purchase the shares of their deceased partner. Or, it can
provide funding to assist the corporation in the transition when a key employee has
been lost. Life insurance can be cost effective, in part, because policies are offered
preferential tax treatment under the Canadian tax code. In addition to most death
benefits being tax-free, proceeds received by a corporate beneficiary can, depending
on tax planning used, flow through a notional tax account called the Capital
Dividend Account “CDA”. Dividends received by a taxpayer from a corporate CDA
(called capital dividends) are free of tax. The ability to generate tax-free dividends
on a tax-free insurance payout makes insurance desirable in the corporate context.
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