Leveraged Life Insurance – Corporate Ownership
Leveraged Life Insurance: Corporate Ownership


In this article, we will explore the ins and outs of a corporation obtaining leveraged life insurance. We’ll specifically look at how the corporation can use the policy’s cash value as collateral for loans from banks in the future. By digging deep into this situation, we want to help you understand the benefts, issues, and financial considerations that arise in these transactions. Our goal is to give you a clear understanding. If you have any questions or need more information, please reach out to our team.



Exempt Life Insurance Policies

A company can buy a special type of life insurance called permanent life insurance for different reasons, such as protecting important employees, paying off debts, handling agreements to buy or sell shares, or covering taxes on profits. When a permanent life insurance policy is considered an “exempt policy,” the money it grows over time is not taxed until it’s withdrawn, and the money received when the insured person dies is not taxed at all. The growth of the policy’s value is not taxed every year unless the policy is sold. If a company deposits the maximum amount allowed by the law into the exempt policy, a significant amount of money can grow without being taxed. These deposits can be used to pay for the insurance and expenses in the future, while remaining protected from taxes.


Accessing the Cash Value

If you have a life insurance policy and want to access the money it has accumulated (it’s cash value), there are a few ways to do it. One option is to surrender the policy, either fully or partially, which means giving it up to the insurance company. When you surrender the policy, you may have to pay taxes on any profit you made from it. The profit is calculated by subtracting the amount you received from the insurance company from the amount you paid into the policy. The same calculation is done for partial surrenders, but the amount is adjusted based on how much money you withdrew. 

Another way to access the money is by requesting a “policy loan” from the insurance company if your policy allows it. A policy loan is like an advance on the benefits you would receive from the policy. The insurance company doesn’t have the right to demand repayment like a regular loan, so it’s not exactly the same. However, for tax purposes, taking a policy loan is considered a disposition of the policy, and any loan amount that exceeds what you paid into the policy is taxable income. 

You can also use your life insurance policy as collateral for a bank loan. This means the policy serves as a guarantee for the loan. The good news is that using your policy as collateral doesn’t count as a disposition, so you won’t have to pay taxes on any gains. You can keep accumulating money in the policy without worrying about taxes, and the policy can still pay out tax-free when you pass away.


Leveraged Life Insurance

When a company uses a life insurance policy as collateral, it’s often called “Leveraged Life Insurance.”

Here are the general steps involved in leveraging a life insurance policy owned by a company:

  1. The company buys a special type of life insurance policy that allows for tax-deferred growth of the money inside it. They try to deposit as much money as allowed by the law into the policy.
  2. Over time, the money inside the policy grows without being taxed, creating an asset that can be used later.
  3. When the company needs funds, they get a loan from a bank and use the policy as collateral. This means the policy acts as a guarantee for the loan. The loan can be taken by either the company or one of its shareholders, using the policy as security. The borrowed money is often used for investments, paying dividends, or giving salaries to shareholders/employees.
  4. The loan can have different payment options. It can be set up so that only interest is paid regularly, or both the interest and part of the loan amount are paid. Alternatively, the bank may allow the policyholder to borrow the interest amount and add it to the total loan amount. Most banks have a limit on the loan balance, which should not exceed a certain percentage of the policy’s cash value (this percentage is called the “margin”).
  5. If the loan is being managed well (meaning the loan balance doesn’t exceed the bank’s limit based on the policy’s cash value), the repayment may not be required until the insured person dies. When the insured person passes away, the proceeds from the life insurance policy will be used to repay the outstanding loan, either directly or indirectly. Any remaining money from the policy’s death benefit will be given to the named beneficiary or stay with the company.

Presentations or explanations about leveraged life insurance aim to show the financial benefits of using a policy in this way in the future. However, it’s important to disclose the financial and tax risks associated with this strategy and show how sensitive the results can be to these risks.


Financial Risks

When thinking about using a life insurance policy as collateral for a loan in the future, there are important financial risks to keep in mind. These risks include:

  • The assumptions made in presentations about leveraged life insurance may not match what actually happens in real life.
  • The performance of the life insurance policy may not turn out as expected or projected.
  • The interest rates set by the bank for the loan may be different from what was originally projected.
  • The bank’s practices and policies can change over time, which may affect the terms and conditions of the loan.
  • If you’re using accounts based on the value of your property or assets (like stocks or real estate) to secure the loan, the amount you can borrow may be reduced based on certain rules or limits.
  • The actual life expectancy of the insured person may be different from what was assumed or predicted, which can impact the repayment of the loan.

These risks are important to consider because they can affect the success and outcomes of using a life insurance policy as collateral for a loan.


Cash Value Life Insurance as a Corporate Asset

The corporate leveraged life insurance concept means that a company owns a life insurance policy with money that grows inside it. This policy is considered an asset of the company, which means it can affect how much provincial capital tax the company has to pay and if the company qualifies for a small business deduction.

If the company decides to sell shares, an individual shareholder’s ability to claim a tax exemption on the profits they make from selling those shares may be affected by the company’s life insurance policy.


The Deductibility of Interest Expense

To claim a deduction for interest expenses, certain conditions must be met. The interest must be paid or payable on borrowed money used for business or property income. However, interest on funds borrowed solely for investments that generate capital gains is not deductible.

If a corporation borrows to pay a shareholder’s bonus, the interest can be deducted. Borrowing for dividends or share redemption is accepted if it fills the capital gap and meets certain conditions.

If a shareholder borrows using a company-owned life insurance policy as collateral, interest is not deductible for personal expenses but may be deductible for investment purposes.

It’s important to note that only simple interest is deductible, not compound interest. Strategies to avoid compound interest include paying the interest out of pocket or selling income-generating assets to cover the interest and then repurchasing the assets with a new loan.

Overall, meeting the specific criteria and understanding the limitations are essential when considering interest deductions.


Applicability of the Retirement Compensation Arrangement (RCA) Rules

If a corporation uses leveraged life insurance to give a shareholder a bonus, there are rules called RCA rules that may apply. These rules are about providing benefits and using a life insurance policy to fund them. If the RCA rules apply, the corporation has to pay an insurance deposit and a refundable tax to the Canada Revenue Agency (CRA). Here are some important things to know about an RCA and life insurance:

  • The cash value in the exempt policy is not taxed.
  • If the policy is sold and there is a gain, it’s taxed at 50%.
  • The death benefit received by the RCA is tax-free.
  • Any payment from the RCA is taxable, including the death benefit.
  • The refundable tax is returned to the RCA as payments are made, with $1 refunded for every $2 paid.

These rules have a big impact on the benefits and costs of using corporate life insurance.

There are tests to see if the RCA rules apply. If the recipient of the bonus is a controlling shareholder, there may be no obligation to provide benefits since the shareholder has control. The rules may also depend on minority shareholders or non-shareholder employees. The specific circumstances matter in determining obligations and the purpose of the life insurance policy.

In some cases, if a bonus is paid before employment ends without a big change in services, it may not be an RCA and may be under different rules that require immediate tax inclusion for the employee. The details and intentions of the plan are extremely important.


Issues Arising in Shareholder Borrowing Structures

When a corporation owns leveraged life insurance and the shareholder uses it as collateral to borrow personally, there are some important issues to think about regarding this arrangement.


Shareholder Benefit Issue

One key issue is whether the shareholder receives a taxable benefit. The law requires any benefit from a corporation to a shareholder to be included in their income. This applies during the loan period and at repayment upon the shareholder’s death.

A benefit may be assessed if the loan amount increases due to interest or if the loan terms become more favourable due to corporate security. The Canada Revenue Agency (CRA) has discussed the taxable benefit of a corporation guaranteeing a bank loan for a shareholder. Generally, unless the shareholder cannot repay the loan, no benefit is assessed. However, honouring the guarantee is considered a taxable event.

Repayment of the bank loan can trigger a taxable benefit if it comes directly from the life insurance policy. This occurs when the corporation is entitled to the insurance funds but they are used for the shareholder’s personal loan. It can happen through forced withdrawal or if the death benefit is paid directly to the bank. In both cases, a taxable benefit equal to the loan balance is assessed, causing financial hardship.

To avoid issues, the repayment should be structured to prevent direct payment from the policy. Releasing the policy’s collateral security allows funds to be paid to the corporation. The bank may require temporary alternative security before releasing the policy’s security. If repayment is due to forced withdrawal, the corporation pays a taxable dividend to the shareholder. If repayment occurs upon the shareholder’s death, the corporation pays a tax-free capital dividend to the estate.

If the bank insists on direct repayment from the insurance proceeds, a taxable benefit occurs. This results in a significant tax obligation. Therefore, it is crucial for all parties involved to understand the intended structure to avoid unintended tax consequences.


Use of the Capital Dividend Account

When a shareholder uses a life insurance policy owned by the corporation to secure a loan, the capital dividend account is used to repay the loan when the shareholder passes away. In this case, the insurance money goes to the corporation, which then pays a dividend to the shareholder for loan repayment. To avoid paying taxes on the dividend, it is usually treated as a capital dividend, which reduces the available capital dividend account for future distributions to the shareholder. This is different from when the corporation borrows against the policy, as the loan repayment comes from the insurance money directly, and the capital dividend account remains fully available for future distributions to the shareholder.


Impact on Estate Freezes

When a shareholder considers an estate freeze, they need to be careful not to set the value too low compared to the future loan balance. When the shareholder passes away, the money from the life insurance policy should go through the corporation to the shareholder. This is usually done as a special payment called a capital dividend to avoid paying too much tax. If the shareholder has certain types of shares that were frozen, the money would be given to the shareholder by redeeming those shares, which creates a pretend payment called a deemed dividend. This deemed dividend is usually considered a capital dividend, depending on how much money the corporation has available. However, if the loan amount is larger than the value of the shares being redeemed, it becomes difficult to get enough money to the shareholder in a way that minimizes taxes and can be used to repay the loan effectively.


Valuation of Shares

The corporate-owned life insurance policy and any associated borrowing can affect how the shares owned by a deceased shareholder are valued for capital gains purposes. Normally, when valuing shares at the time of an individual’s death, the value of the life insurance policy is considered to be its cash surrender value. 

When a corporation uses a life insurance policy as collateral for a corporate loan, the cash value of the policy increases the value of the shares, while the loan amount decreases the value of the shares. On the other hand, when an individual uses a corporate-owned life insurance policy as collateral for a personal loan, the cash value of the policy still increases the value of the shares, but the loan, being to the individual and not the corporation, does not reduce the share value.

This consideration should be taken into account when deciding whether a specific leveraged arrangement should involve corporate borrowing or shareholder borrowing.


Variations in Structure of Shareholder Borrowing

The discussion above assumes that when a shareholder borrows money, they use the company’s life insurance policy as collateral for a personal loan. Now let’s consider a situation where the borrowed money is invested in things like debt or different types of company shares.

At first glance, this arrangement seems to address some of the earlier issues regarding capital dividend accounts, estate freezes, and share valuation. The debt or redemption owed to the shareholder could be paid using life insurance proceeds, without requiring a capital dividend. The outstanding debt or redemption amount could offset the portion of the insurance policy’s value used for the personal borrowing. However, it’s unclear if this setup completely avoids potential issues related to shareholder benefits.

Could this arrangement increase the risk of the General Anti-Avoidance Rule (GAAR)? In addition to addressing some of the mentioned issues, there would be an immediate and obvious tax benefit. Deducting interest at high personal tax rates (around 50% in many provinces) instead of offsetting it against lower corporate tax rates (averaging around 27%) on business income. Since the company ends up borrowing from or being obligated to redeem shares held by the shareholder who used the company’s asset as loan collateral, the series of transactions could be seen as lacking a business purpose other than obtaining the tax benefit. However, it’s important to remember that taxpayers are generally allowed to structure their affairs in a tax-effective manner within the boundaries of tax laws.


Applications of the Concept

Examples of where the corporate-owned leveraged life Insurance concept is used include:

  • bonus payments using corporate borrowing
  • retirement redemption using corporate borrowing
  • personal borrowing to supplement lifestyle
  • living buyout using personal borrowing


Bonus Payments using Corporate Borrowing

In a company, let’s say there’s one owner who is also the main employee. The company wants to make sure it has money to keep going if the owner/employee dies. So, the company gets a special life insurance policy for the owner/employee, and the company is named as the beneficiary.

Over time, the insurance policy builds up savings, and once a good amount is accumulated, the company might want to give the owner/employee a bonus without hurting the company’s cash flow. To do this, the company can borrow the needed money from a bank and use the insurance policy as collateral for the loan. The interest on the loan might be tax-deductible for the company because the borrowed money is used for business earnings. If the company doesn’t have an obligation to provide benefits to the owner/employee, certain tax rules won’t apply.

If the owner/employee passes away, the company gets the insurance money without paying taxes, and it uses that money to repay the bank loan.


Retirement Redemption using Corporate Borrowing

In this scenario, two shareholders own a company together. One of them plans to retire in the future, and according to their agreement, the company will buy back their shares over several years. If the retiring shareholder dies before all the shares are bought back, the company will purchase the remaining shares from their estate.

To make sure the company has enough funds for this, they get a life insurance policy on the retiring shareholder’s life. The policy’s coverage matches the value of the shares to be bought back. The company makes regular deposits to the policy, and the money in the policy grows without being taxed.

When the shareholder retires, the company takes out loans from the bank each year to buy back the shares as agreed. They use the life insurance policy as collateral for the loans. If the funds from issuing the shares were used to generate business income, the company might be able to deduct the interest on the loans for tax purposes.

If the shareholder passes away, the company receives a tax-free payout from the life insurance policy. They use this money to repay the outstanding loans. If the shareholder dies before all the shares are bought back, the company will use a portion of the insurance payout to purchase the remaining shares from their estate.


Personal Borrowing to Supplement Lifestyle

A corporation has a single owner who is very important to the company. To make sure the company can keep running if something happens to the key person, the corporation gets a special life insurance policy on the owner’s life. The corporation pays money into the policy, and the cash value grows over time without being taxed.

Sometimes the owner may need extra money for personal expenses. If there is a lot of cash value in the insurance policy, the owner can use it as collateral to get a personal loan. The loan money is received tax-free by the owner. However, the interest on the loan cannot be deducted for taxes because it is not being used for business or property.

When the owner passes away, their estate replaces the insurance policy as collateral with another valuable asset. This allows the bank to release the policy as collateral. The insurance payout is received tax-free by the corporation. The corporation gets a credit in its account, which it can use to pay a tax-free dividend to the owner’s estate. This dividend is used to repay the outstanding loan. Any remaining money after paying off the loan stays in the estate.


Living Buyout using Personal Borrowing

Two shareholders own a company. One of them wants to sell their shares to the other when they retire, which will happen gradually over time. If the retiring shareholder dies before retiring, their estate should still receive full payment for the shares. To take advantage of tax benefits, the retiring shareholder wants the remaining shareholder to buy their shares using company funds.

The company gets a special life insurance policy where the company is the beneficiary. Money is deposited into the policy until the retiring shareholder reaches retirement age. The value of the policy grows without being taxed.

When the retiring shareholder reaches retirement age, the remaining shareholder buys their shares and pays with a promissory note that will be paid over time. The retiring shareholder has a capital gain on the sale, but they can use a tax exemption to reduce the tax owed on a portion of the gain.

The remaining shareholder borrows money to make the yearly payments on the promissory note. The loan is secured by using the company’s life insurance policy as collateral. Since the loan is used to buy shares, the interest on the loan may be tax-deductible. The remaining shareholder needs to show that similar loan terms would be available if the loan were secured with other assets or shares of the company instead of using the life insurance policy as collateral.

If the retiring shareholder passes away, the remaining shareholder replaces the life insurance policy as collateral with other assets. This allows the bank to release the policy. The insurance payout is received tax-free by the company. The company receives a credit in its account, which it can use to pay a tax-free dividend to the remaining shareholder. This dividend is used to repay the outstanding bank loan and any remaining balance on the promissory note.



Leveraged life insurance strategies using corporate owned insurance can offer significant financial benefits. However, it’s important to understand the associated financial and tax risks. To learn more about these strategies and how they can be tailored to your specific needs, we recommend that you contact Evergreen Wealth Advisory for expert guidance. We can provide detailed information and help assess the sensitivities to these risks.

Disclaimer: Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, you have the responsibility of repaying the loan and all interest even if your investment doesn’t perform. The use of borrowed funds will magnify losses in situations where the value of your investment declines.