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Life Insurance and the Capital Dividend Account

Many business owners are unaware that corporate owned life insurance combined with the Capital Dividend Account (CDA) provides an opportunity to distribute corporate surplus on the death of a shareholder to the surviving shareholders or family members tax-free.

Income earned by a corporation and then distributed to a shareholder is subject to tax integration which results in the total tax paid between the two being approximately the same as if the shareholder earned the income directly. Integration also means that if a corporation is in receipt of funds which it received tax-free, then those funds should be tax free when distributed to the shareholder.

The Capital Dividend Account is a notional account which tracks these particular tax-free amounts accumulated by the corporation. It is not shown in accounting records or financial statements of the corporation.  If there is a balance in the CDA it may be shown in the notes section of the financial statements for information purposes only.

Generally, the tax-free amounts referred to, are the non-taxable portions of capital gains received by the corporation and the death benefit proceeds of life insurance policies where the corporation is the beneficiary. Read more



A New Way To Give

Using life insurance for charitable giving is not a new concept.

Specifically, through life insurance, you can make a larger gift than you might have thought possible while gaining significant tax advantages.

However, it is not unusual to overlook the fact that life coverage is not the only insurance vehicle you can use to donate to your favorite charity.

Have you considered critical illness insurance?

A Brief Overview

Similar to using a life insurance policy as a vehicle for charitable giving, with critical illness, the charity owns and is the beneficiary of the policy on you. You make a donation – for which you receive a tax credit – to the charity, which they use to pay the policy premium.

The added benefit of using a critical illness insurance vehicle is that there is a payout if you become ill. However, and while it is important to note that the policy will not pay a benefit should you pass away, the charity will still receive a payment in the form of a full refund of all premiums paid to that point in time.

Claiming Your Tax Savings

Once again, by making the charity the owner of an insurance policy you are still paying the premiums in the form of a regular donation, but you can claim these donations as an ongoing, annual tax credit.

One interesting point to note is that you can carry forward your income tax credits. In other words, you do not have to use your credits in the year in which you made the premium donation. While you are required to report these contributions on an annual basis to Revenue Canada, you do not need to claim them as credits for up to 5 years. As a result, you can use the credits when it is of the most benefit to you.

Choosing The Right Critical Illness Plan

Obviously, you want to choose the right critical illness plan to ensure that you and your charity realize the maximum return from your donation. This need for expert advice is where an experienced adviser will be most beneficial.

For example, people sometimes confuse critical illness with disability insurance. With the latter your ability to work triggers the payout, while with critical illness the insurance company pays a benefit based on a diagnosis of 24 conditions and survival of the individual for 30 days.

Having a firm understanding of how your charity receives a donation through any insurance vehicle will enable you to choose the right plan for your particular circumstances.

Don’t Forget Life Insurance

While this article has focused on using a critical illness insurance policy to make a charitable contribution to your charity of choice, let’s not forget about the benefits of using a life insurance policy to accomplish the same goal.

Like critical illness, you can realize significant tax benefits as a result of your generosity in the form of annual tax credits or use the full death benefit to reduce any taxes owing on your estate. The key is to seek the advice of an expert adviser to make sure that you structure the policy to deliver the greatest benefit to your charity and maximum tax savings for you personally.


If you have questions or require further information on how to use insurance to make a charitable donation, give me a call as I can provide you with direction from both an insurance and tax planning standpoint – Milan at 613-728-7030.


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