Corporate-Owned Life Insurance Explained — The Hidden Advantage
For many Canadian business owners, insurance isn’t just about protection — it’s a strategic financial tool.
Corporate-Owned Life Insurance (COLI) can provide tax-efficient growth, protect shareholders, and fund future obligations — all while keeping assets inside your corporation.
Importantly, understanding how COLI works can reveal opportunities to reduce taxes, create liquidity, and support long-term wealth transfer.
1
What Is Corporate-Owned Life Insurance?
Corporate-Owned Life Insurance is a policy owned by a corporation rather than an individual. The corporation pays the premiums and is also the policy beneficiary.
Additionally, when the insured individual (typically a key shareholder or executive) passes away, the corporation receives the tax-free death benefit.
Key advantage: The death benefit (minus the policy’s adjusted cost base) is credited to the Capital Dividend Account (CDA), allowing the proceeds to be distributed to shareholders tax-free.
2
Why Business Owners Use COLI
COLI helps business owners achieve multiple objectives at once:
- Protect key shareholders or executives from unexpected loss
- Fund buy-sell agreements without draining corporate cash
- Provide tax-advantaged growth within the corporation
- Build an internal investment portfolio sheltered from passive income rules (depending on policy type)
Definitely, it’s one of the few tools that can address both business continuity and estate tax exposure simultaneously.
3
How COLI Supports Tax-Efficient Succession Planning
When a shareholder dies, their shares are typically deemed disposed of, creating a capital gain and potential tax liability.
With a COLI policy in place, the corporation receives the insurance payout tax-free, which can be used to:
Purchase the deceased shareholder’s shares (funded buy-sell).
Pay estate taxes without selling company assets.
Provide liquidity for estate equalization among heirs.
This ensures the business can continue operating smoothly while the family’s wealth is preserved.
4
Permanent vs. Term COLI
While both term and permanent policies have corporate applications, permanent insurance (whole or universal life) is typically preferred for its cash value accumulation and long-term tax advantages.
| Type | Coverage Duration | Tax Benefits | Ideal For |
|---|---|---|---|
| Term COLI | Fixed term (10–30 years) | Lower cost, no cash value | Short-term protection (key person) |
| Permanent COLI | Lifetime coverage | Cash value growth, CDA credit | Long-term succession and estate funding |
5
Compliance and Considerations
As with any financial strategy, COLI should be structured carefully.
Premiums must be reasonable and the corporation must be the beneficiary.
The purpose must align with legitimate business or estate needs.
The adjusted cost base (ACB) of the policy should be monitored for accurate CDA reporting.
Working with a qualified advisor ensures CRA rules are followed and the structure remains compliant and efficient.
Additional Tips for Business Owners
- Start early — wealth transfer planning works best when initiated before retirement.
- Revisit your plan annually to adapt to changes in tax legislation or family structure.
- Combine insurance, trust, and corporate tools for maximum tax efficiency.
Conclusion
Corporate-Owned Life Insurance can be a powerful hidden advantage in your wealth and estate strategy — turning insurance premiums into a legacy-building asset.
At Eagle Wealth Partners, we help Canadian business owners integrate COLI into their broader tax, succession, and risk management plans for lasting impact.
Learn how COLI fits into your corporate plan.
Eagle Wealth Partners
Markham, Ontario, Canada
+1 647 289 4847
sami@theabccanada.com