All About Estates

Private company shares and life insurance

It is not unusual to see a corporate beneficiary of a life insurance policy collect the insurance on the death of the insured shareholder. Depending on the circumstances, there are creative ways to use the insurance to benefit the deceased’s estate or other shareholders of the company.

The receipt of life insurance by the company is not taxable, in fact, the amount received is added to the corporate capital dividend account and may be paid a a tax-free capital dividend to a shareholder (there is a technical calculation to determine the capital dividend payment which I will address in a subsequent blog).

Let’s say the company shares (which the deceased acquired on incorporation) held by the deceased had increased in value such that the deceased had to report a capital gain on their final return from the deemed disposition of the shares. In certain circumstances, the shares now held by the estate may be redeemed or purchased for cancellation by the company on or before the one-year anniversary of death. This action will likely trigger two outcomes – a dividend and a capital loss. The company directors may chose to treat the dividend as a capital dividend (to the extent of the capital dividend account) the result of which the receipt is tax-free to the estate. Where the insurance arrangement is grandfathered the capital loss may be carried back and applied to reduce the capital gain as reported on the deceased’s final return.

In a subsequent blog I will discuss the parameters of a grandfathered life insurance arrangement as a way to further reduce the terminal tax liability.

About Derek de Gannes
Derek A. de Gannes: Director, Domestic & International Tax of RSM Canada. RSM Canada is committed to the highest level of integrity, quality and professionalism and provides clients with solutions in the area of Audit, Tax and Transaction Services. Email: derek.degannes@rsmcanada.com