When a corporation owns a life insurance policy on a key employee or shareholder, special ITA rules apply:
Capital dividend account (CDA): a private corporation's CDA tracks certain tax-free amounts, including life insurance proceeds. When an exempt life insurance policy on a corporate-insured pays a death benefit to the corporation, the death benefit in excess of the policy's ACB is credited to the corporation's CDA. The corporation can then pay a capital dividend to its shareholders from the CDA, which the shareholders receive tax-free.
This is the primary tax advantage of corporate-owned life insurance as an estate equalization tool for shareholders of private corporations: the death benefit flows through the CDA and out to surviving shareholders tax-free, rather than being taxable as a regular dividend.
Deductibility of corporate premiums: premiums for life insurance held by a corporation for risk management or collateral purposes are generally not deductible as a business expense. Life insurance is not an ordinary business expense.
Recall: What is the capital dividend account and how does corporate-owned life insurance interact with it? Are life insurance premiums generally deductible by a corporation?