A great streaming tool for corporate owned life insurance proceeds that come with tax considerations
Corporate-owned life insurance has become an important tool in meeting the planning
goals and objectives of private company shareholders. Corporate-owned life insurance is often
purchased for a variety of reasons, including:
- Funding terminal tax liabilities
at the business owner’s death;
- Facilitating business succession objectives;
- Assisting in achieving estate equalization goals.
Life insurance shares can be a tool to achieve these
objectives by streaming corporate-owned life insurance
proceeds and related capital dividends to the holder of
When a common shareholder dies, the value of
corporate-owned life insurance on that shareholder or
any person related to a shareholder when the policy
was issued is deemed to be its cash surrender value
(CSV) for purposes of the deemed disposition of the
deceased shareholder’s shares . However, subsection
70(5.3) does not allocate the value of a life insurance
policy across classes of shares, and the value of frozen
preferred shares should not change with fluctuations
in cash surrender values. Generally speaking, 70(5.3)
impacts shareholders who own a class of growth shares
or common shares in a corporation at the time of death.
What are life insurance shares?
From a legal perspective, life insurance shares must be authorized share capital in a corporation’s articles of
incorporation. If life insurance shares are not already contemplated in the articles, an amendment would be
needed to create them as a new class of shares.
Typically, life insurance shares are non-voting and non-participating in the profits of the corporation.
The redemption amount of the life insurance share typically tracks life insurance death benefit proceeds
and/or the increase in the capital dividend account (“CDA”) arising from life insurance received by the
corporation when the insured person dies. The life insurance share redemption amount may track to the
proceeds of a specific life insurance policy or all life insurance policies held by the corporation.
The share attributes would also normally (but not always) entitle the holder to be paid the redemption amount as a tax-
free capital dividend to the extent of any CDA credit arising from the life insurance proceeds.
Depending on the legal drafting, life insurance shares may or may not entitle the holder to receive a
redemption amount equal to a life insurance policy’s CSV prior to the death of a life-insured person.
Prior Canada Revenue Agency (“CRA”) Commentary
At the 2005 APFF conference, the CRA addressed the
allocation of the CSV on the shareholder’s death in
some specific circumstances via responses to a series
of questions. At the 2021 Canadian Life and Health
Insurance Association (CLHIA) Tax Conference, the
CRA confirmed these prior views.
These questions and the response from the CRA
outlined the specific insurance share attributes in
each scenario and determined how the policy’s CSV
should be allocated between the common shares
and the life insurance shares when the common
In one scenario , these were the life insurance share
- Redeemable for $1 at any time
by the corporation, and
- Entitling the holder to receive a dividend equal
to the proceeds of life insurance received by the
corporation on the death of the life-insured,
In this scenario, the common shareholder held 100%
of the common shares and the life insurance share
(issued to them for $1). The CRA confirmed that in the
context of these share attributes at the shareholder’s
death “the overall value of the corporation that would
be attributed to the special share immediately before
the death would be nominal. Accordingly, the value
of the common shares immediately before the death
would include almost the entire cash surrender value
of the life insurance policy.”
Based on this commentary, the corporation could
stream the life insurance proceeds to a child from the
deceased shareholder’s first marriage by passing the
life insurance share to their child in their will. The
common shares could pass to their second spouse on
a rollover basis. On the rollover to the spouse, the
would be no capital gains tax liability for the cash
value of the policy since that value would be included
in the value of the common shares that roll over to
The other scenario involved these life insurance share
- Entitling the holder to receive a dividend equal to
the death benefit under the policy after the death
of the life insured, common shareholder;
- Redeemable by the corporation at any time after
the insured’s death for an amount corresponding
to the death benefit less any dividend declared on
- Redeemable by the life insurance shareholder
before death for an amount corresponding to the
CSV at that time with payment deferred until the
corporation receives the death benefit, and
- Entitling the holder to CSV on a winding-up of
In this scenario, the common shareholder’s adult child
purchases the life insurance share for $1. When the
common shareholder dies, the CRA confirmed that
the CSV of the life insurance would track to the life
insurance share and not contribute to the value of the
At the 2021 CLHIA CRA Roundtable, the CRA
confirmed these prior views about how to allocate
the CSV across different classes of shares. They were
careful to state that their views were only relevant in
the context of subsection 70(5.3) and only where the
share attributes were as specifically described in these
The question of benefit conferral
Although this confirmation by the CRA of its
previous views is positive, there is still a proverbial
“elephant in the room”. These comments are helpful
for the purposes of allocating a deemed value (CSV)
on death between the common shares and the life
insurance shares in specific scenarios. However,
these comments did not address the issue of whether
these shares could result in benefit conferral due
to inadequate consideration being paid for the
life insurance share, or impoverishment of the
corporation when it pays premiums.
At the 2022 CALU CRA Roundtable , the question
of benefit conferral under several Income Tax Act
provisions was posed. The following fact situation was
- A currently owns all the outstanding shares in
Opco, a Canadian-controlled private corporation.
- A has two children: B who is involved in, and C
who is not involved in the business.
- It is A’s intention that B will eventually assume
control of Opco.
- A would like to ensure that C is fairly treated
under the estate.
- A is considering undertaking an estate freeze in
which Opco would issue a life insurance share
to C that is redeemable and retractable for $1
prior to the death of A, and that entitles the
holder to a dividend equal to the death benefit
on the life insurance policy to be acquired on A’s
life (which policy would be owned and funded by
Opco as the beneficiary of the policy).
- Opco would also be obligated under the terms
of the life insurance share issued to C to elect
that the dividend paid to C be treated as a
capital dividend to the extent of the credit
to the capital dividend account arising from
the receipt of the life insurance proceeds by Opco.
The question also posed an alternative where no freeze
is completed, and the life insurance share as described
is issued to C prior to Opco acquiring insurance on A.
The CRA could not confirm that any income
inclusions would arise because of shareholder benefits
, indirect payments , or benefit conferred on a person
in either scenario without looking at all the facts and
Unfortunately, the elephant in the room remains.
Furthermore, even in the best-case scenario – a freeze
prior to issuance of the life insurance share and the
life insurance policy – the CRA would not provide
any comfort. That said, initiating a freeze before
the issuance of a life insurance share and the life
insurance policy is one of the best ways to ensure that
the freezor’s shares represent and contain the current
value, and that only future growth in value of the
corporation can be attributed to newly-issued shares.
As a rule of thumb, life insurance shares that stream life insurance proceeds to the holder of the share and
that do not shift existing value to the life insurance shareholder should not be a cause for concern.
Where the payment of premiums comes from future growth in value and does not erode existing
value in the corporation, again, there should be no cause for concern. It is where there is erosion
(“impoverishment” as the CRA terms it) that there could be complications. ©
Published with permission from CLU Comment.
Hemal Balsara, CPA, CA, CFP, TEP, FEA –
AVP Regional Tax & Estate Planning, Manulife.
1 Subsection 70(5.3) of the Income Tax Act (the Act)
is the provision that deems this value to be CSV.
2 See 2005-0138361C6
3 See 2005-0138111C6
4 See #2021-0854291C6 and #2021-0884301C6
5 See #2022-0928851C6
6 Subsection 15(1)
7 Subsection 56(2)
8 Subsection 246(1)