Introduction to Shared Ownership Life Insurance for Business Owners

This week we are taking a closer look at insurance and investment options for business owners. Business owners have typically one thing in common with each other: they have placed their retirement funds inside their business. Now the trick is how to get the money out of the company in the most tax-effective way.

“Shared Ownership” is Not a Product

Rather, it is a financing arrangement between two or more parties to share the benefits and costs associated with an exempt life insurance policy. The arrangement consists of a life insurance policy, a shared ownership agreement, and a special transfer of a portion of this policy. There are no explicit provisions in the Canadian Income Tax Act (the “ITA”) that address the various tax issues relating to shared ownership arrangements. The concept derives from the wording in various provisions in the ITA which refer to “an interest in a life insurance policy”.

Common Strategies

The most common use of the Shared Ownership strategy involves a private Canadian corporation and the shareholder(s) of that corporation. Generally underlying this strategy is the corporation’s need to purchase life insurance to protect against financial losses arising from the premature death of a key shareholder / employee. Where additional funds are available inside the corporation and not currently needed to invest in the underlying business, the Shared Ownership strategy not only satisfies the need for life insurance coverage, but creates a tax-deferred investment vehicle that can benefit the shareholder / employee during retirement years.

The Shared Ownership strategy can be integrated with a business succession strategy, key-person life insurance coverage or the buy-sell / share redemption component of a shareholders agreement. It can also be used to fund estate liabilities. However, it is important to carefully plan and document all the terms and conditions. It is highly recommended that the financial, legal, accounting, and tax advisors of the parties are involved.

• See our Shared Ownership Worksheet Example