Hi everyone,
Your expert advice is needed in the below scenario
Mr. X is considering owning the life insurance for Mr. X and Mrs. X with the corporation as a beneficiary. In this case, the corporation bears the expense of the premiums and in the event of the death, the corporation will get the payout. Can he deduct the life insurance premiums? Also, in order to deduct the premiums is it necessary for the policy to be assigned as collateral for the loan?
Thank you
Why would Mr. X own the policy? If the corporation is paying for the policy on the life of Mr. x and is also the benefiary, the he would have to claim the premiums as income. Speak to a couple Life Insurance Advisors who specialize in Business and corporate owned life insurance. The insurance companies have specialized people for this scenario.
I apologize. Let me rephrase the sentence.
Mr. X is considering the corporation to own the life insurance for its owners (Mr. X and Mrs. X) with the corporation as a beneficiary. In this case, the corporation bears the expense of the premiums and in the event of the death, the corporation will get the payout. Can he deduct the life insurance premiums? Also, in order to deduct the premiums is it necessary for the policy to be assigned as collateral for the loan?
Thank you
You have 2 issues to deal with - accounting and tax.
For accounting purposes, premiums can only be deducted if the corp is both the owner and the beneficiary. If the policy generates cash surrender value, it is recorded yearly as a debit to a long-term asset account and a credit to life insurance expense. If both conditions are not met, it’s a personal expense charged to the shareholder loan account and dealt with as a dividend or salary. At that point, it’s easier just to have the individual pay the premiums rather than the corp.
For tax purposes, premiums can only be deducted if the policy is a requirement of a financing agreement, is assigned to the lender, and is in an amount not exceeding the financing balance. Additionally, only the cost of “pure insurance” can be deducted. That number has to be generated by the insurer. If your client has voluntarily bought a policy, you cannot deduct the premiums. It has to be a requirement of the financing. And, unless the insured amount is tied to the outstanding financing, you have another calculation to make. It gets messy if you want to do it right. If the premiums can’t be deducted for tax purposes, on schedule 1, you deduct the premiums paid and add back the increase in the cash surrender value of the policy. When the insured dies, you credit an income account for the proceeds and wipe out the accumulated cash surrender value. For tax purposes, you add the proceeds less the adjusted cost base to the capital dividend account. Adjusted cost base has to be calculated by the insurer. It’s basically the premiums paid since inception less the cost of pure insurance. I have almost never found insurers or their agents willing to do the calculations.
So, for accounting purposes, the issues aren’t too bad. For tax purposes, they are more complex. Have a look at Preparing Your Corporate Tax Returns by Wolters Kluwer and also CRA. The rules are clear. Implementation might be a dog’s breakfast.
I think you already answered your own question. There is exception, and you are trying to find way to fit into the exception, which is not allowed under ITA.
You will want to talk to the insurance company tax expert also. Life Insurance benefits are normally non taxable, depending on who and how the premiums are paid and if premiums are paid with pre tax or after tax dollars.
Every Insurance company, Canada Life, Sun Life, Equitable etc. have tax experts on staff to answer these questions and make sure advisors are providing the proper solution for the client.
Use them
Thanks everone for your great support. Much appreciated.