For various reasons a small business owner or incorporated professional may wish to enter into a life insurance contract via their corporation. But, are the premiums deductible for tax purposes? This depends, there are generally two scenarios in which premiums may be deductible:
Employer paid premiums for employee:
If an employer pays life insurance premiums for an employee and the benefit of the insurance is for the employee or his/her family (e.g. the beneficiaries being the employee’s children, spouse, or estate) then the premiums can usually be deducted by the employer. However, the premiums form a taxable benefit to the employee.
Life insurance as collateral for a loan:
Small business corporations and professional corporations often need leverage but do not have sufficient hard assets that potential lenders can use as collateral. In cases such as these financial institutions will normally require an owner-manger to enter into a life insurance contract and assign the policy to them as a form of collateral.
In situations such as these, where the loan is used to earn income from a business or property, provisions in the Income Tax Act exist to allow the deduction of the life insurance premiums from taxable income.
One must be careful though as only the “net cost of insurance in respect of the year” under the policy is deductible. This “net cost” is determined by using actuarial principles as set out in the Income Tax Regulations but will approximate the cost of the pure life insurance (think a term-life policy rather than a whole-life or universal-life policy).
Further, the deduction may be limited to the amount that “can reasonably be considered to relate to the amount owing from time to time during the year” under the loan. E.g. if you have a $100,000 life insurance policy but you only owe $50,000 to the financial institution then you would be able to deduct 50% of the lesser of the premiums payable and the net cost of pure insurance under the policy for the year.
Is there a requirement for the insurance policy to be taken out at the same time as the borrowing? No, the CRA states that the assignment of an existing policy can qualify as well.
Life insurance can be an effective tool in a small business owner’s financial plan but can add an element of complexity to their tax plan. The partners at Campanella McDonald LLP have been helping small business owners and incorporated professionals plan their tax and financial situations since 2002 and have assisted entrepreneurs in structuring their insurance policies for estate planning, risk management, and tax planning purposes for years.
Campanella McDonald LLP is a full-service accounting firm based in Oakville Ontario. The firm’s partners and staff concentrate on helping small businesses, independent professionals, and real estate investors maximize their bottom lines by providing specialized accounting, assurance, tax compliance, tax planning and financial advisory services.
Questions about Tax Efficient Strategies and how to deduct Life Insurance Premiums in your corporation?
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