No business plan is complete without a shareholder or partnership agreement containing buy/sell provisions that allow for the orderly transfer of ownership interests upon retirement, disability, death or disagreement. Business advisors generally agree that life insurance is the most efficient means of providing buy/sell funding on the death of a shareholder or partner.
The question that must be answered is whether it is more tax efficient to use corporate or partnership-owned rather than personally-owned life insurance.
The premiums on a life insurance contract are generally not deductible for income tax purposes. Therefore, it may be advantageous for incorporated business owners to have the insurance owned at a corporate level in order to have the corporation pay the premiums, particularly where the corporation is in a lower tax bracket than the individual. Otherwise, the money would have to be paid out to the individual and taxed at a higher rate before being available to pay premiums.
Another advantage to corporate-owned insurance is the ease of ensuring its compliance with the buy/sell agreement. Since the corporation is paying the premiums, the policies are less likely to lapse due to non-payment of premiums. This applies equally to partnership-owned insurance.
Where there are several shareholders or partners who are parties to the buy/sell agreement, it may become expensive and confusing for each individual to own policies on the lives of all the others. The requirement would be reduced to one policy on the life of each shareholder or partner where business-owned insurance is used. This could lead to lower aggregate premiums and a leveling of premiums to take into account the differences in age, sex, smoking status and general health of the various individuals. The shareholders or partners will have to decide whether this leveling of premiums is the fairest way to allocate the cost of the insurance.
While there are several advantages to corporate or partnership-owned life insurance, there are also concerns about creditor protection, the effects of provincial family legislation and the complexity of tax consequences. Your financial and legal advisors can help you determine which approach is appropriate for your circumstances.