Key Person Insurance in Canada: What It Costs, What It Protects, and What Most Business Owners Miss

The Risk That Most Entrepreneurs Acknowledge and Almost Nobody Plans For

Every serious business has at least one person whose absence would materially damage the operation. It might be the founder whose relationships drive revenue. It might be a technical specialist whose expertise is irreplaceable. It might be a rainmaker whose departure would unravel client contracts. The risk is real, acknowledged by most business owners, and addressed by very few — at least not in any structurally meaningful way.

Key person insurance is the financial instrument designed to address this risk. The corporation takes out a life or disability insurance policy on the life of the key individual. The corporation pays the premiums, owns the policy, and is named as the beneficiary. If the key person dies or becomes disabled, the corporation receives the insurance benefit — providing capital to absorb the financial shock, recruit and train a replacement, satisfy lenders or investors who were relying on that individual, and stabilize the business through the transition.

The Tax Treatment: Why Structure Determines Everything

The tax implications of key person insurance in Canada are not fixed — they depend entirely on the type of policy and the intent of the coverage. This is where most business owners receive incomplete advice. The default assumption is that because insurance premiums are a business expense, they must be tax-deductible. For key person insurance, this assumption is only partially correct and can lead to a structure that is tax-inefficient in the long run.

For term-based key person insurance where the policy has no cash value and the corporation is the beneficiary, the CRA's general position is that premiums are deductible as a business expense, but the death benefit received by the corporation is fully taxable as income. This creates a symmetrical tax treatment: deduct the premium, pay tax on the benefit. For a high-value policy, the tax on the incoming benefit can be substantial.

With traditional term-based key person insurance, you deduct the premiums but pay full corporate income tax on the death benefit. With a participating whole life structure, you do not deduct premiums — but the death benefit is largely tax-free through the CDA.

The Participating Whole Life Alternative: A Superior Structural Outcome

When the key person policy is structured as a corporate-owned participating whole life policy — as in the InfiniCap System™ — the tax treatment shifts substantially. Premiums are generally not deductible as a business expense, because the corporation is accumulating cash value and the instrument is functioning as a capital asset, not purely a risk transfer mechanism. This appears, at first glance, to be a disadvantage. It is not.

In exchange for the non-deductibility of premiums, the corporation receives a policy that accumulates tax-deferred cash value, generates contractually guaranteed growth, remains accessible through policy loans without triggering taxable events, and — upon the death of the insured — pays a benefit that flows largely into the Capital Dividend Account. The CDA credit allows the corporation to distribute that capital to shareholders as a tax-free capital dividend. In other words, the death benefit does not just protect the business. It funds a tax-free wealth transfer to the surviving shareholders.

The comparison is not between a deductible premium and a non-deductible one. It is between a taxable death benefit and a tax-free one — with compounding cash value access throughout the policy's life as an additional benefit of the participating whole life structure.

What to Ask Before Structuring Key Person Coverage

Before deciding on the structure of any key person policy, three questions determine the optimal design. First: is the primary objective risk protection or capital accumulation? If the business is in early stage with thin cash flow, a term-based structure may be more appropriate in the near term. If the business has meaningful retained earnings and a multi-decade horizon, the participating whole life architecture is almost always more structurally efficient.

Second: is the insured individual a shareholder or a non-shareholder key employee? The tax and structural considerations differ based on the beneficiary's ownership position. Third: what is the CRA documentation position for your specific corporate structure? Ensure any key person insurance arrangement is supported by proper corporate resolutions and a written insurance plan that documents the business purpose. These are the conversations that need to happen at the design level — not after the policy has been issued.