Does company-owned life insurance affect the lifetime capital gains exemption?

Section 110.6 of the Income Tax Act defines qualified small business corporation shares. Whether a company’s shares qualify depends in part on tests about the company’s assets, so a life insurance policy the company owns can matter. This page covers only how the Act counts such a policy in those tests. It does not give an exemption amount or say whether your shares qualify.

What a qualified small business corporation share is

Under section 110.6(1), a qualified small business corporation share of an individual (other than a trust that is not a personal trust) must at the determination time be a share of a small business corporation owned by the individual, the individual’s spouse or common-law partner or a partnership related to the individual, and throughout the 24 months immediately before it must not have been owned by anyone other than the individual or a person or partnership related to the individual. It must also meet the asset test in paragraph (c) of the definition throughout the part of those 24 months it was so owned, subject to paragraphs (d) to (f) of the definition and the rules in sections 110.6(14) and (15). Section 248(1) defines a small business corporation, subject to section 110.6(15), as a Canadian-controlled private corporation all or substantially all of the fair market value of whose assets is attributable to assets of the kinds the definition lists.

What section 110.6(15) does with a policy

Section 110.6(15)(a) applies for those definitions, among others, where a person whose life was insured under a policy owned by a corporation owned shares of that corporation or of a corporation connected with it in the ways the paragraph sets out. Before the insured’s death, the fair market value of the policy is deemed to be its cash surrender value, as section 148(9) defines it, which is computed without regard to policy loans, certain policy dividends payable or interest on them. The paragraph also has a separate rule: subject to the assets it excludes, the total fair market value of assets of those corporations that are the proceeds of the policy of which the corporation was a beneficiary (or the right to them, or attributable to them), and are used, directly or indirectly, to redeem, acquire or cancel the shares the insured owned immediately before death within the 24-month period beginning at death, or a longer period the Minister considers reasonable on written application by the corporation within that period, is, to the extent not in excess of their fair market value immediately after the death, deemed not to exceed the policy’s cash surrender value immediately before the death until the later of that redemption, acquisition or cancellation and the day 60 days after the proceeds are paid.

What to ask your accountant

Ask whether the insured person owns shares, how the policy’s cash surrender value is counted in the asset tests for your company, and whether the 24-month holding requirement is met. For the exemption itself, see what the exemption allows.