What happens to company-owned life insurance when I sell my business?

If your company owns a life insurance policy, ask early how the sale treats it. The policy is something the sale agreement should address, and your lawyer can tell you how the deal structure and the written agreement affect it. This page sets out the questions to settle and some of the Income Tax Act rules that can apply if the policy is moved out of the company. It does not say whether to keep, move or cancel a policy.

If you sell shares

In a share sale the buyer acquires your shares in the company. None of the sources used here says what happens to a policy the company owns when its shares change hands, so do not assume. Ask your lawyer who owns the policy after closing, and whether the share purchase agreement addresses it. If the policy is to be taken out of the company first, read the next section and the page on moving a company policy to you before a sale.

If you sell assets

In an asset sale the buyer takes the assets the agreement lists. Whether the policy is on that list is a matter for the sale agreement. Ask your lawyer to confirm in writing whether the policy is included or excluded, so neither side assumes the other way.

Some tax rules if the policy leaves the company

Section 148(7) of the Income Tax Act applies where a policyholder’s interest in a life insurance policy is disposed of (other than under paragraph 148(2)(b)) by way of a gift, by distribution from a corporation or by operation of law only to any person, or in any manner whatever to a person not dealing at arm’s length with the policyholder. The policyholder is then deemed to become entitled to receive proceeds equal to the greatest of the amounts the subsection lists, and the person who acquires the interest because of the disposition is deemed to acquire it at a cost equal to that amount. Subsections 148(8), (8.1) and (8.2) apply despite 148(7) to certain transfers to a child, or to a spouse, common-law partner or former spouse or common-law partner. Section 15(1) can also include the amount or value of a benefit a corporation confers on a shareholder in the shareholder’s income, subject to the exceptions in that subsection.

The policy’s value in the share tests

Section 110.6(15) sets how a corporate-owned policy’s value is counted for the small business corporation tests where the insured person owned shares of that corporation or a connected one. See corporate life insurance and the capital gains exemption.