Page 63 - A Canuck's Guide to Financial Literacy 2020

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Corporate Insurance

Corporate life insurance is one of the most important insurance solutions for business
owners to have as part of their financial plan. The corporation can be a named beneficiary
on a life insurance policy and would be responsible in paying the premiums for the policy.
The insurance premiums are not typically tax deductible. Upon death of the insured person,
the company would receive insurance proceeds which could be used towards minimizing
taxes, transferring ownership, maximizing corporate assets and much more.

Beneficiary Designation

With a personal life insurance policy, the policyholder has more flexibility in naming the
beneficiary. The beneficiary could be family members, spouses, friends, charities, etc.
However, with a corporate life insurance policy, the named beneficiary would the
corporation itself. Upon death of the insured, there would be a death benefit, less the
adjusted cost base (ACB), credited to the corporation's Capital Dividend Account. The
adjusted cost base is a complex formula that takes into account all deposits, withdrawals,
loans, dividends, and cost of insurance charges of a policy. The adjusted cost base could
vary between term insurance and permanent insurance. With term insurance it could as low
as zero but with permanent insurance, the individual would have to take into account
various loans and dividends.

Capital Dividend Account

For example, if the corporation were to receive a death benefit of $1,000,000 and the
adjusted cost base of the policy at the time of the insured holder's death is $100,000,
there will be $900,000 credited to the corporation's Capital Dividend Account. The
$900,000 would be paid tax-free to the share holders while the $100,000 would be
paid to shareholders as a taxable dividend.

The capital dividend account is a special corporate tax account under the Income Tax Act,
designated to allow tax-free amounts received by a private corporation to be distributed tax
free to shareholders of the corporation. All private corporations in Canada including, non-
Canadian controlled are eligible to have a capital dividend account.

Non-Resident Shareholders
A capital dividend paid to a shareholder who is a non resident is subject to federal
withholding tax of 25% or lower if a tax treaty is present with the country that the
shareholder is residing in and Canada. If a Canadian private corporation has international