top of page

Life Insurance Shares: What are they? And When to use them?

In recent years corporate owned life insurance has become an important planning tool in meeting the estate planning objectives and goals of business owners. In certain circumstances it may be desirable to have the death benefit from a policy directed to a specific individual. Issuing “life insurance shares” can resolve distribution problems in the context of family business succession. In the following article I will delve into the many characteristics of these special class of shares and the main situations in which they are used as well as tax and non-tax issues that may arise from using them.

Like other classes of shares, life insurance shares can be specified in the articles of incorporation. If these shares are not already included in the articles of incorporation, an amended can be made to add this new class of preferred shares. These are preferred shares whose redemption value tracks the cash surrender value and/or the death benefit of the life insurance contract. The corporation is the owner and beneficiary of the policy.

Life insurance shares do not carry voting right and the holder doesn’t participate in the profits or the surplus of the corporation. The shares are generally meant to stream insurance proceeds to specific individuals. These shares are usually issued to the client’s heirs or family trust. The shares are usually issued prior to the life insurance policy being put in place so to keep the value low and to avoid creating a taxable shareholder benefit to the recipient of the shares (assuming they did not pay fair market value for these shares). Prior to death, the holder may or may not have the right to receive a redemption amount equal to the cash surrender value of the policy (CSV). Upon death, of the life insured, the shares’ characteristics normally entitle the holder to receive a redemption amount equal to the tax-free capital dividend to the extent of any CDA credit arising from the life insurance proceeds.

Why use life insurance shares:

One of the main purposes is to ensure estate equalization among members of a family business. It can provide member who are not involved in the family business financial compensation. In a typical estate freeze scenario, the freezer takes back preference shares representing the fair market value of the company while common shares are issued to successors directly or to a family trust of which the successors are beneficiaries. Life insurance shares may also be issued to a family trust which includes non-successor as beneficiaries or directly to non-successors at the time of the freeze.

Life Insurance shares can also be used to direct capital dividends created by corporate owned life insurance proceeds to Canadian residents. With many families that have cross border connection, planning may be essential to determine which beneficiaries are best suited to take advantage post-mortem distributions: specifically, tax free capital dividends. In the case of non-residents, capital dividends will attract a withholding tax.

Life insurance shares can also be issued to eliminate the potential for conflict of interest experienced by executors. Shares can be issued to the business owner to fund the tax liability arising from their interest in the corporation on death. The executor can cause the corporation to redeem the life insurance shares without any conflict of interest” due to the executor also being a director of the corporation.

Life insurance shares have also been useful in resolving some of the discussions surrounding the impact of cash surrender values have on various post-mortem strategies (see June 15 article for more detail). When a corporation owns a life insurance policy with a substantial cash surrender value, there may be significant tax payable on death of the shareholder/life insured as result of section 70(5.3),…deemed disposition rules which trigger capital gains taxes. By having the life insurance tracking shares issued to someone other than the shareholder/life insured, the policy’s CSV will not increase the fair market value of the shares held by the deceased shareholder/life insured. The reason for this is that the CSV is reflected in the redemption amount of the life insurance shares held by someone other than the deceased.

Tax and non-tax issues associated with the use of life insurance shares:

One concern is whether there’s a “benefit conferred” at the time of the issuance. This can result in situation where a corporate owned life insurance policy already exists. Generally, if an estate freeze is done at the time of the issuance, it can be argued that there’s no cause for concern since the existing value of the life insurance policy is already reflected in the fixed preferred shares. Also, there’s the issue regarding “value shifting”. This can occur even if the policy didn’t exist at the time of new shares being issued. Is there a shifting of value away from the common shareholder by using existing value, earning or assets to purchase life insurance that will benefit someone other than the common shareholder? So long as the funding comes from post life insurance share issuance earnings, assets or value, there should be no cause for concern (similar to what you see when and estate freeze is undertaken).

Since the corporate owned life insurance is an asset of the corporation, it will be subject to creditors. Life insurance shares will only accomplish the distribution of the proceeds to the holder. A policy with CSV may be looked to by creditors in the event of corporate insolvency.

If the holder of a life insurance share predeceases the life insured, the life insurance share would be deemed disposed at fair market value. Although, it’s generally understood that the value assessed equals the policy’s cash surrender value, CRA has not provided much guidance in confirming this point. This can be avoided by passing this share to the spouse (or spousal trust) via the holder’s Will on a rollover basis or by having the share owned within a family trust to allow distribution to other family members.

Life insurance shares can be very useful in channeling proceeds from a corporate owned life insurance policy to a specific individual, or to attributing the cash surrender value of a policy to a specific class of shares. However, care should be taken to fully contemplate the tax and the non-tax issues associated with the issuance of these shares.

Tony Gallippi, B.A.S (Hons.) CFP CLU

Advanced Case Consultant


This communication reflects the views of Qualified Financial Services Inc. as of the date published. The information in this publication is for general information purposes only and is not to be construed as providing individual legal, tax, financial or other professional advice. Qualified Financial Services Inc. assumes no responsibility for any errors or omissions in the information contained herein nor for any reliance placed on such information. Please seek independent professional advice before making any decisions.


bottom of page