Is Life Insurance Taxable in Canada For Small Businesses?
The vast majority of companies in Canada are considered small businesses. And for many of those small businesses, life insurance provides peace of mind and financial security not just for owners but employees and their families.
But is small business life insurance taxable in Canada? Let’s take a closer look at the life insurance available in Canada for small businesses and their related tax information.
What is Small Business Life Insurance?
In many ways, life insurance options for small businesses are similar to personal life insurance. They can cover debts, provide for beneficiaries and ensure financial stability for owners, partners, and employers.
There are several main types of life insurance policies available for small businesses. A personal life insurance policy for a business can offer debt protection and income replacement, especially if you do not have regular employee benefits as part of your small business, such as retirement plans or group life insurance.
Term life insurance owned by a business offers the same type of payout that’s covered under personal life insurance. If you, a key employee or business partner covered by a policy die within the life insurance term, there is a payout to help you continue business operations.
Another option for small business owners is permanent or whole life insurance, a policy that doesn’t have a set term but lasts for a lifetime and offers guaranteed premiums.
Personal life insurance can also be owned to cover the tax bill that comes with the disposition of your company shares upon your death. Small businesses can use life insurance to secure operating expenses and even buy out the estates of business partners or shareholders.
Taxes and Small Business Life Insurance
There are many tax benefits to owning whole life insurance as a business, whether it covers you personally as an owner, accounts for business partners, and offers security for your family related to your company.
In Canada, most life insurance is classified as non-taxable; your designated beneficiaries — business partners, family members — can collect the full benefit. They won’t need to pay income tax when you die.
Both term and permanent life insurance policies are considered non-taxable plans. Since it’s non-taxable, you don’t need to report the interest on your death benefit when you file your yearly tax return. Death benefits are considered a lump-sum amount that can be used to pay off anything from a mortgage or replacement for lost income.
The size of the policy and the designated beneficiary is not a factor in the taxability of your life insurance. Beneficiaries or heirs also do not have to pay a death tax or estate inheritance tax.
When You May Have to Pay Taxes on Life Insurance
There are a few instances in Canada where taxes are required in relation to your life insurance. Primarily, if your policy and get its cash value, you’ll pay taxes based on the increased value of your investments.
If your designated beneficiaries also received interest from the policy, that would be considered taxable income as well. Another route that you can take is using life insurance as an estate planning tool to better optimize how you pay your tax.
Benefits Of Business-Owned Life Insurance
Generally, life insurance owned by businesses small and large in Canada is a tax-effective approach to your current finances, and your and your family’s future wealth. Particularly beneficial is the fact that your heirs or beneficiaries can eventually access that wealth and not pay taxes.
Business-owned life insurance policies offer other tax advantages. There is a lower tax rate for paid premiums with corporate after-tax money compared to a personal tax rate.
Overall, that can help you pay less in personal taxes. You can also invest some of your business profits into a permanent life insurance policy that is exempt from taxes.
Other Tax Options for Small Business Life Insurance
In fact, business owners who offer group life insurance — policies that cover several executives, business partners, and employees under one plan — and pay the premium for the group may be able to make their expenses tax-deductible.
In Canada, if you pay group life insurance premiums, you can deduct the cost as a business expense on your business income and expenses statement, but you cannot deduct group term insurance or the optional dependent life insurance costs. However, if you cover premiums regularly and the rate does not vary, business owners can deduct the entire life insurance premium costs as a business expense.
Permanent life insurance for small businesses also includes an option for a cash accumulation fund. Investments in a cash accumulation fund are tax-preferred. With a business-owned permanent life insurance policy, you can divert business funds from certain taxable investments into the permanent life insurance policy. That move helps business owners lower their annual taxable investment income.
On the other side, if you decide to invest in key person life insurance, which covers someone considered invaluable to the success of your small business, that policy is usually not tax-deductible; after-tax dollars pay for key person insurance premiums.
Your Guide For Small Business Life Insurance
With different types of life insurance for small business owners to take advantage of — and tax policies to navigate — it literally pays to have an advisor to help you along the way.
Sim Gakhar, a life insurance agent and investments advisor working throughout Ontario, Canada, can help you make sure you’re making the right life insurance choices for yourself and your business.
Both Life License Qualification Program licensed and a designated Certified Health Insurance Specialist, Gakhar brings decades of experience working with dozens of life insurance companies as part of HUB Financial to each and every small business client she works with. She listens and understands the ins and outs of your business — and helps you reach all of your financial goals.
Gakhar knows how challenging it can be to run a small business. She also knows how important a comprehensive and tailored life insurance plan can be to small business owners, their families, and their employees.
To solidify your business’ success and develop a life insurance plan that works best for you, simply reach out to Gakhar via email at [email protected] or over the phone at 647-889-7290.
Essential Planning for Financial Security
Helping business owners and self-employed professionals grow retained earnings tax-free, pass more wealth to the next generation, and protect their biggest asset – themselves, the key person of the business.
Other FAQs Regarding Life Insurance as a Business Owner
- How can I Protect a Business Loan with Life Insurance?
- How Does Life Insurance Policy Work for Business Partners?
- What Are Some Myths Business Owners Believe About Life Insurance?
- How Can I Protect My Employees With Life Insurance?
- What Are The Benefits of Life Insurance For My Business?
- How Much Does Life Insurance Cost for Small Business Owners?
- Why Should I Choose Term Life Insurance As a Business Owner?
- Can My Business Pay for My Life Insurance?
- Does Whole Life Insurance Accumulate a Cash Value for My Business?
- What Are My Life Insurance Needs As a Business Owner?
- As a Business Owner, Why Should I Select Whole Life Insurance?
- How Does Key Person Life Insurance Work?
- How can Life Insurance can Help Me as a Small Business Owner?
- How can Whole Life Insurance Help my Small Business?
- How can my Business Benefit from a Universal Life Insurance Policy?
- Why is Life Insurance Important as a Business Owner?
- What Types of Life Insurance is Available to Me as a Business Owner?
- Can I Purchase a Group Life Insurance Policy for My Company?
- Are There Any Strategies That I Should Follow When Purchase Life Insurance for My Business?
- What are The Best Life Insurance Products Available to Business Owners?
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