Are Policy Premiums Tax-Deductible? The Complete Answer for Canadian Business Owners

The Most Common Misunderstanding in Corporate Insurance Planning

The question of whether life insurance premiums are tax-deductible comes up in nearly every initial conversation with an incorporated entrepreneur who is evaluating a corporate-owned policy. And the reason it comes up so early is telling: most business owners have internalized the assumption that expenses are deductible if they are business-related, and they assume that an insurance policy held by a corporation for a business purpose must qualify.

This assumption is incorrect — at least in the context of participating whole life insurance structured as a capital accumulation vehicle. Understanding why requires a brief explanation of what CRA looks for when evaluating the deductibility of insurance premiums, and why the location of the tax advantage has moved.

CRA's General Position on Corporate Life Insurance Premiums

Under paragraph 18(1)(a) of the Income Tax Act, a business expense is deductible only if it was incurred for the purpose of earning income from a business or property. Life insurance premiums paid by a corporation are generally not deductible under CRA's administrative position — primarily because the corporation is typically both the premium payer and the policy beneficiary. The premium does not generate income; it funds a future benefit that will flow back to the corporation (or its shareholders).

There is a narrow exception: when a financial institution requires a life insurance policy as collateral for a business loan and the premium satisfies the conditions of subparagraph 20(1)(e.2) of the ITA, a portion of the premium may be deductible based on the net cost of pure insurance (NCPI). This exception applies in specific, well-defined circumstances and does not generally apply to the InfiniCap System™ architecture, which is not structured as a lender-required collateral arrangement.

CRA's general position is that corporate life insurance premiums are not deductible where the corporation is both payer and beneficiary. The lender-required collateral exception is narrow and highly specific.

Why Non-Deductibility Is Not a Disadvantage in This Architecture

The initial reaction to learning that premiums are not deductible is often disappointment — as if the strategy has been diminished by this constraint. This reaction reflects a misunderstanding of where the structural advantage actually lives in the InfiniCap System™. The tax benefit of the architecture is not in the deduction of the premium. It is in what happens after the premium is paid.

Growth inside the policy accumulates on a tax-deferred basis — not subject to the passive income tax that would apply to the same capital sitting in a corporate investment account. Access to capital through policy loans does not trigger income tax. The eventual death benefit flows into the Capital Dividend Account, creating a tax-free extraction mechanism. These three structural advantages — tax-deferred growth, non-taxable access, and CDA credit — are far more valuable in the long run than a premium deduction would be.

The total tax advantage generated by tax-deferred growth, non-taxable policy loans, and the CDA credit over a 20-year horizon typically exceeds what a premium deduction would have saved by a factor of five to ten.

The Comparison That Clarifies the Trade-Off

Consider the alternative: a corporate investment account where premiums are replaced by investment contributions. If those contributions earn a return and generate passive income, that income is taxed at approximately 50% annually. The deductibility of the contribution is irrelevant — the ongoing tax erosion of the passive income makes the account structurally inferior over time.

The participating whole life policy, with non-deductible premiums, grows on a tax-deferred basis with no annual passive income tax drag. The premium deduction that is forfeited represents a one-time tax saving of approximately 9% to 26% of the premium (at the corporate tax rate). The ongoing tax deferral advantage represents a compounding benefit over decades. The trade-off is not even close.