9.2 Business Continuation Contracts, CDA, Split-Dollar / Shared Ownership, Corporate vs Personal Ownership

Nature of business continuation insurance

CISRO 2.1 business contents are the contracts, not a second needs analysis. An earlier chapter asked why a firm needs dollars on death (who writes the cheque; how large). This section asks which contract delivers those dollars, who owns it, how the capital dividend account (CDA) works, how split-dollar / shared ownership splits one policy, and how policy values are taxed. This is independent OpenExamPrep teaching of industry and ITA patterns for the Life module — not legal or tax advice. Confirm current wording in the approved e-book.

Business continuation insurance is life insurance purchased so the firm or the surviving owners can keep operating and complete a planned purchase when a shareholder, partner, or key person dies. It is a purpose wrapped around term, whole life, Term-100, or universal life. The chassis still has to fit duration and cash-value need; the distinguishing exam skill is ownership, beneficiary, and tax path.

Buy-sell insurance: purpose, cross-purchase, share redemption, funding

The purpose of a buy-sell agreement is to name the buyer, the price or formula, and the death trigger so shares or units do not drift to uninvolved heirs. Using life insurance to fund that agreement means the death benefit lands in the pocket that must write the cheque, in an amount that tracks fair market value of the block.

Reuse Northline Precision Ltd.: Amira Patel and Benoit Tremblay each own 50%, FMV $2,400,000, so each block is $1,200,000.

Cross-purchase (criss-cross) contract. The surviving person is the buyer. Amira should own and be beneficiary of the $1,200,000 policy on Benoit (and the reverse). Premiums are generally not deductible. The death benefit is generally received tax-free by Amira personally. There is no CDA, because a CDA is a corporate notional account. Three equal shareholders need six personal policies; that scaling friction is a contract-analysis point, not a reason to skip the agreement.

Share (unit) redemption contract. The corporation or partnership is the buyer. Northline should own and be beneficiary of $1,200,000 on each life. Premiums are generally not deductible. The death benefit is generally tax-free to the corporation. The mortality gain can credit the CDA, which is why redemption is often the preferred corporate structure on this module when the tax path matters.

Key person insurance as a contract

Key person coverage is still a purpose: replace contribution, recruit, and, where relevant, satisfy a lender. The contract is usually corporately owned, corporately paid, corporation as beneficiary. Premiums generally not deductible. A spouse as beneficiary of a company-paid policy leaves the operating need unmet even if a cheque is issued. Term often funds a defined recruiting window; permanent is the usual chassis when the firm also wants CSV, collateral, or a later CDA-rich death benefit. Insurable interest exists because the firm would suffer a measurable loss; financial underwriting still has to believe the face amount.

Role of the capital dividend account

The CDA is a notional account that tracks amounts a private corporation may distribute as a tax-free capital dividend to Canadian-resident shareholders (ITA subsection 83(2) election). It is not a bank account at CRA.

When the corporation is beneficiary and receives life insurance proceeds, the CDA is generally credited with:

CDA credit (mortality gain) = death benefit proceeds received − policy ACB immediately before death

If a policy loan is outstanding, the insurer pays a net death benefit; the CDA starting point is the amount actually received, and ACB is reduced by the loan mechanics — confirm the e-book. Negative ACB is treated as nil for this subtraction.

Worked numbers (not a quote). Northline receives $1,200,000 on Benoit. ACB immediately before death is $80,000.

Northline may elect to pay $1,120,000 as a capital dividend to Amira tax-free (if she is a Canadian-resident shareholder and the election is made correctly). The $80,000 ACB slice is not CDA. Extracting it as an ordinary taxable dividend is taxable to her. Paying a capital dividend larger than the CDA balance can trigger a punitive Part III tax — another reason the ACB file belongs with the corporate accountant, not on a sticky note.

As a permanent policy ages, net cost of pure insurance (NCPI) generally grinds ACB down, so the CDA fraction of a later death benefit often grows. That is a product-analysis fact when comparing a young, high-ACB UL dump with an older participating whole life.

Split-dollar / shared ownership and contract analysis

Shared ownership (the curriculum also says split-dollar arrangements for employer/key employee) means two parties split interests in a single life insurance contract. It is not joint tenancy of the whole policy and not two separate policies. CRA has acknowledged that rights under one contract may be split. There is no tidy ITA “split-dollar code”; documentation of who owns death benefit versus cash value, and who pays which premium slice, is the contract.

A common Canadian pattern for a key employee or shareholder:

• The corporation owns (and pays for) the death-benefit / insurance interest it needs for key person or redemption — often priced off yearly term, T-100, or NCPI.
• The employee or shareholder owns (and pays for) the cash value / investment account (especially unbundled universal life).

Each party pays only for what it will use. The employee’s deposits into CSV are not a hidden bonus if they are paying fair value for that interest; an employer-paid CSV dump can be a taxable employment or shareholder benefit. Reverse splits exist (employee owns death benefit for family; corporation owns CSV for collateral). Participating whole life is harder to split because base coverage, PUAs, death benefit, and CSV are entangled; UL’s unbundled account is the cleaner teaching chassis.

Contract analysis on this sub-component is practical: match current offerings to the need. A five-year recruiting gap does not need a 10-pay participating whole life. A lifetime buy-sell plus estate extraction often does want permanent corporate ownership and a CDA path. Shared ownership is a fit when one life must serve two payers with two different interests. If the marketplace product cannot split interests cleanly, recommend two contracts rather than a muddy co-ownership.

Corporately owned versus personally owned; policy values

Personally owned: premiums generally not deductible; death benefit generally tax-free to the named beneficiary; no CDA; policy gain on a live disposition ≈ proceeds − ACB; a policy loan from the insurer can itself be a disposition to the extent it exceeds ACB; a third-party loan secured only by collateral assignment is generally not a disposition of the policy (ITA excludes an assignment to secure a debt other than a policy loan).

Corporately owned: same non-deductible premium pattern for pure life coverage (a limited deduction can exist where the policy is assigned as required collateral for a genuine income-earning loan, generally limited to NCPI relating to the amount owing — confirm). Death benefit tax-free at the corporation; CDA for the mortality gain; extracting value to a shareholder is salary, taxable dividend, capital dividend, or a loan, not a tax-free gift.

Policy values the curriculum names:

• Collateralization: assignment to a bank for a business loan. Security tracks the debt; residual death benefit remains for the beneficiary. Generally not a disposition.
• Policy loans: insurer credit against CSV. Can trigger gain if the loan exceeds ACB. Interest may or may not be deductible depending on use of borrowed money.
• Dividends and benefits purchased via dividends: policy dividends on participating life (cash, premium reduction, accumulation, PUAs, term) are not CDA capital dividends. PUAs increase death benefit and CSV and change ACB over time.
• Gain calculations: on a disposition (surrender, certain withdrawals, policy loan excess, transfer at undervalue), income ≈ proceeds − ACB.
• Accrual calculations: a non-exempt policy can have annual inclusion of accumulating income (ITA 12.2 style accrual). Most purpose-built Canadian life policies are designed to remain exempt so that inside buildup is not taxed yearly.
• Exempt test concepts: compare the policy’s accumulating fund with the maximum tax actuarial reserve (MTAR) (and related exempt-test limits). Overfunding — especially dump-ins to UL — can cause failure.
• Corrective actions if the exempt test fails: stop or reduce deposits, increase the death benefit (more net amount at risk), withdraw or dump out excess, or accept non-exempt status and accrual tax. Insurers usually police this administratively. Confirm the restoration mechanics in the e-book; do not invent a single national day-count.

Grandfathering around 1 December 1982 and the 2017 exempt-test changes (curriculum language also points at 2015-era grandfathering) can make an old corporate policy irreplaceable. That inventory belongs with in-force tax position; here, know that replacing a grandfathered corporate contract can destroy an exempt-test or ACB advantage the CDA was counting on.

Using cash value personally: collateral loan at the prescribed rate

The official corporate item is using cash value personally from a corporately owned policy — collateral loan strategy at prescribed interest rate.

Do not surrender the corporate policy and bonus the CSV out (gain in the corporation if proceeds exceed ACB, plus a taxable benefit or dividend to the shareholder). Do not take an insurer policy loan that exceeds ACB if the goal is to avoid a disposition. Do not let the shareholder use corporate CSV interest-free.

The taught path: keep the corporate policy in force. Collateralize it. The shareholder borrows (from the corporation or from a bank with the corporate policy assigned or guaranteed) and pays interest at not less than the CRA prescribed rate for the period so a low-interest shareholder or employee loan benefit (ITA 80.4) is not imputed. CRA publishes that rate quarterly (the base prescribed rate has been 3% for published 2026 quarters through Q3 — confirm the quarter in force when you write the loan). Assignment to secure the loan is generally not a disposition. If the bank later seizes CSV, both corporate policy gain and a shareholder benefit can erupt — that is the risk to disclose, not a reason to skip the prescribed-rate interest.

Shared-ownership tax: each co-owner tracks their ACB for their interest. A transfer of one party’s interest is a disposition of that slice at fair market value. Sum-of-interests ACB can diverge from the insurer’s single ACB when one interest has gone nil. Document the split before the first dump-in.

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