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Corporate-Owned Life Insurance and Your LCGE: The QSBC Test
By Parvesh Benning, Licensed Life Insurance Broker working with nearly 20 Canadian insurers
The lifetime capital gains exemption may not be fully used when a significant portion of the company’s assets are passive investments rather than active business assets, and a corporate policy’s cash value counts on the passive side.
Unless money is being generated inside the corporation, I won’t tell you to own a policy corporately. Why would you create a tax situation you don’t need? When the money is there, owners ask a sharper question: will a corporate policy cost them the capital gains exemption when they sell? It can. Whether it does depends on which company owns the policy and what that company’s balance sheet looks like at the sale and through the two years before it.
Updated September 20, 2026
Corporate-Owned Life Insurance and Your LCGE: The QSBC Test
By Parvesh Benning, Licensed Life Insurance Broker working with nearly 20 Canadian insurers
The lifetime capital gains exemption may not be fully used when a significant portion of the company’s assets are passive investments rather than active business assets, and a corporate policy’s cash value counts on the passive side.
Unless money is being generated inside the corporation, I won’t tell you to own a policy corporately. Why would you create a tax situation you don’t need? When the money is there, owners ask a sharper question: will a corporate policy cost them the capital gains exemption when they sell? It can. Whether it does depends on which company owns the policy and what that company’s balance sheet looks like at the sale and through the two years before it.
Updated September 20, 2026
Corporate dollars pay for the policy, and the cash value can grow tax sheltered. That’s the reason a policy ends up inside a company. It’s also the number that matters if you ever sell the shares.
The lifetime capital gains exemption (LCGE) lets a Canadian resident shelter the gain on selling shares of a qualified small business corporation (QSBC), up to a lifetime limit. The shares only qualify if the company passes a set of asset tests. For those tests, a policy on a shareholder’s life is valued at its cash surrender value, and the CRA doesn’t treat it as an asset used in the business. The estimator below shows where a company sits on the sale-date test today. The rest of this page covers where the policy should sit, what moving it costs, and when to start checking.
Where does the company sit against the 90% line today?
Enter current values for the company whose shares would be sold. The estimate shows what share of its assets is used in the business, with and without company-owned life insurance counted.
Equipment, inventory, receivables, the working capital the business needs, business premises and goodwill.
Surplus cash, GICs, investment accounts and any other asset your accountant treats as not used in the business.
From the latest policy statement. Use the cash surrender value, not the death benefit, and add every policy the company owns.
The cash surrender value rule applies when the life insured owns shares of this company or a connected company.
Business share, policy counted
0%
Needs 90% or more at the sale
Business share, cash value left out
0%
The policy effect on its own
Reduction needed to reach 90%
$0
In assets not used in the business
Policy share of non-business assets
0%
Cash surrender value as a share of the passive side
What this estimate does not check
- The 24-month test. More than 50% of the company’s assets must have been used in the business throughout the 24 months before a sale. This estimate looks at one day only.
- Connected and holding company rules. Shares and debt of connected companies follow separate rules that are not modelled here.
- Who has owned the shares. They generally must not have been owned by anyone other than you or a person related to you in the 24 months before the sale.
- Whether each asset counts as used in the business. That classification is your accountant’s call.
- The dollar limit of the exemption, which the CRA publishes on its capital gains deduction page.
Planning a sale in the next few years?
Where the policy sits is easier to set up early than to fix later. We work alongside your accountant on the insurance side.
Book a free 15-minute consultationor call 1-877-654-6119
This estimate is for illustrative purposes only and does not constitute tax, legal or accounting advice. It is not a determination that any share qualifies for the lifetime capital gains exemption. Your accountant or tax lawyer confirms the tests. Calculator provided by Protect Your Wealth, a licensed insurance brokerage offering life insurance and segregated fund solutions.
Can Corporate-Owned Life Insurance Cost You the Lifetime Capital Gains Exemption?
A corporate policy is quite attractive, to be clear, but it’s not something that will magically fix all tax concerns. The lifetime capital gains exemption is where that shows. The policy can cost you the exemption on a sale when it’s owned by the company whose shares you sell, or by a connected company in that structure, and its cash surrender value, which the CRA doesn’t treat as an asset used in the business, stops the shares passing the QSBC asset tests.
The policy only puts the exemption at risk when all four of these are true
All four true: the cash value can be what stops the shares qualifying. That gets worked out with your accountant years before a sale, not the month of it.
What the worry looks like. An owner asked us to set up a corporately owned whole life policy, then paused it about a month later. They’d read that it could lower the value of the business and their ability to claim the exemption on a sale. Fair question. My answer went to where the policy could sit, and whether term, which has no cash value, could carry the coverage until the tax side was settled.
If any one of the four is false, the policy isn’t what stands between you and the exemption. Other passive assets can still be, so the whole balance sheet matters more than any single line on it.
The QSBC Asset Tests: 90% at Sale and More Than 50% for 24 Months
Shares qualify for the exemption only if they pass three tests, two about the company’s assets and one about who has owned the shares. A corporate policy’s cash surrender value counts in both asset tests: one measured on the day of the sale, the other across the 24 months before it.
Three tests, one 24-month window
Who owned the shares
No one other than you or a related person, for the full 24 months
Cash value doesn’t matter here
More than 50% in the active business
Every day of the 24 months, while a Canadian-controlled private corporation
Cash value counts here
90% in the active business
On the day of the sale only. The Act says all or substantially all, which the CRA reads as 90%
Cash value counts here
24 months beforeSale
The 50% test covers the whole 24 months. Moving assets out of the company the month before a sale can bring the sale-day number above 90% and still leave the earlier months below 50%.
Holding structures. When the company owns shares of connected companies, those companies’ assets are looked at too, and the thresholds apply in a modified way. That is the accountant’s calculation, and the estimator on this page doesn’t model it. The full definition is in section 110.6 of the Income Tax Act.
How the CRA Values a Corporate-Owned Policy: Cash Surrender Value, Not the Death Benefit
Premiums on a corporate policy almost always aren’t a tax deduction; the policy is an asset on the corporate balance sheet. For the QSBC test, the CRA values that asset at its cash surrender value, not the death benefit and not the premiums paid, as long as the life insured owns shares of the company or a connected one.
One policy, three numbers. The test counts one.
From a corporate illustration I ran for a client, at year 20: $50,000 a year for 20 years at an assumed 6%. Illustrative only, not guaranteed, not current rates.
$1.0M
Counted
$1.8M
$5.0M
Premiums paid
Cash value
Death benefit ($5M face)
That counted number usually climbs every year the policy is funded. A policy that barely registered in the test when it was bought can weigh on it ten years later, so how fast the cash value builds matters when a sale is possible.
Which value the test uses depends on whose life is insured, and when
Before a death, when the life insured owns shares of the company or a connected one
→
Cash surrender value
Before a death, when the life insured is not a shareholder, such as a key employee
→
Ordinary valuation, which can be higher
After a death, when the proceeds are used within 24 months to buy back the insured’s shares
→
No more than the pre-death cash surrender value
If the policy is on someone who isn’t a shareholder, have the accountant value it before assuming the cash surrender value applies.
Operating Company, Holding Company or Sister Company: Where the Policy Should Sit
Some scenarios I’ve seen are where a business was sold with the insurance policy as an asset of the main business, and the issue becomes significant. Where the policy should sit depends on what you’d sell and how the companies are connected. The corporation whose shares are sold is tested, and connected-corporation rules can bring other companies in the structure into the calculation. A separately owned sister company outside the sale generally isn’t part of that test.
What you sell is what gets tested
A common structure: you own a holding company, it owns the operating company, and a separate company sits beside them.
You, the shareholder
Holding company
Countedif you sell the holding company’s shares. Kept away from the operating company’s buyer.
Operating company
CountedIt sits on the business’s own books, and it can go with the business in an asset sale.
Sister company
OutsideOutside the sale structure, so its policy generally isn’t tested. Funding it takes more planning with your accountant.
Term, owned by any of them. Having a term policy has no cash value, so when the life insured is a shareholder, there’s generally nothing from the policy to count. A policy on a non-shareholder can be valued differently. Term can be converted later without a new medical, within the contract’s limits, and once converted, the permanent policy’s cash value counts like any other.
In most straightforward setups, the corp is the owner of the policy, the corp is the beneficiary of the policy, the corp is the payer of the policy. That keeps the death benefit landing in the company that paid for the coverage, which is where the capital dividend account planning starts. Other arrangements, such as a different company in the group as beneficiary, are used, but they need tax advice first because a shareholder or corporate benefit can arise.
It’s easier to choose which company owns the policy before the application goes in than to move it later, so talk to a broker directly first.
Transferring Business-Owned Life Insurance Between Companies and What It Costs in Tax
What I’ve seen before is a corporately owned policy transferred personally or vice versa, and it creates a tax issue no one was aware of, because there’s a value and a deemed disposition in those cases. The same applies between related companies. The move is treated as a sale, and the company giving up the policy can owe tax on a policy gain even when no money changes hands.
The move is priced at the greatest of three numbers
Cash surrender value Greatest
$420,000
Paid for the policy
$0
Adjusted cost basis (the policy’s tax cost)
$300,000
$420,000 deemed proceeds minus $300,000 adjusted cost basis equals a $120,000 policy gain, taxed as income to the company giving up the policy.
Example figures only. The receiving company takes the policy at a $420,000 cost. Based on subsection 148(7) of the Income Tax Act.
I have seen too many instances where the strategy makes sense and there was a pause; in between, life happens and the client no longer medically qualifies. That’s the case for moving a policy rather than replacing it. A term policy with no cash surrender value, moved without payment, produces no policy gain, because its deemed proceeds equal its own adjusted cost basis.
Move the existing policy
Keeps the health rating it was issued with. Costs a possible policy gain, priced as above.
or
Replace it with a new policy in the right company
Needs new underwriting at today’s age and health. Costs a surrender of the old policy, which can create its own policy gain.
Timing matters here as well. A move made just before a sale can help the sale-day 90% test and still leave the policy counted through the 24 months before it. How policy gains are taxed on surrenders and withdrawals is covered separately.
When to Check Whether Your Shares Still Qualify for the LCGE
I’ve seen it many, many times: the owner calls once the buyer is already at the table, and the workarounds are really tough to execute that late. Check whether your shares still qualify years before a sale, and again every year after a corporate policy starts building cash value. The QSBC tests look back 24 months, so a fix needs time behind it before the sale, not just on the day of it.
The earlier the check, the more options are still open
1. When you buy
Decide which company owns the policy, or whether term fits better for now.
2. Every year
Compare the numbers
Set the cash value against the company’s total assets at each review.
3. 24+ months out
Run both tests
Have the accountant check the 90% and 50% tests. Changes made now have time to clear the 24-month window.
4. Offer in hand
Options narrow
A change can still help the sale-day test, but the 24 months behind you are already counted, and moving a policy can be taxable.
I’m not here to be the accountant. I have a lot of these ideas and sometimes I get squashed by the accountant saying you get double taxed here, and that’s the right order: the accountant or tax lawyer decides the structure, and the broker sizes and places the insurance to fit it. An annual policy review is where the cash value gets set against the rest of the balance sheet before it becomes a problem.
Corporate Life Insurance and the LCGE: Questions Owners Ask
Does a term life policy affect the QSBC test?
Generally not. When the life insured owns shares, the policy is counted at its cash surrender value, and having a term policy has no cash value, so there’s nothing to count. A policy on someone who isn’t a shareholder may be valued differently. If it’s later converted to permanent coverage, the new policy’s cash value counts like any other.
How long do I need to own the shares before selling?
24 months, not one year, which is a mix-up I’ve had to correct. During those 24 months the shares generally can’t have been owned by anyone other than you or a related person, and the asset test has to hold the whole time. Your accountant confirms the dates against the share records.
Does borrowing against the policy lower the value that counts?
No. For this rule the cash surrender value is measured without regard to policy loans, so a loan against the policy doesn’t shrink the number the test counts. If the borrowed money then sits in the company as cash, it can add to the passive side as well.
Is this the same as the passive income rules for the small business deduction?
No. The small business deduction rule looks at the company’s investment income from the prior year. The QSBC tests look at what the company’s assets are worth, on the sale day and across the 24 months before it. A company can pass one and fail the other.
Should an owner planning to sell soon buy permanent insurance in the company?
Not always. If the business is likely to sell within the next several years, term coverage can meet the need without adding cash value to the company. One founder I worked with chose a 10-year term over a 20-year one because he expected the company to sell inside that window. Where the need is permanent, the owner and placement get decided first.
What to Do Before You Sell a Business That Owns Life Insurance
Sometimes you complicate your life so much that you have to ask what you’re complicating it for. The next step is usually simple: get the accountant and the broker looking at the same balance sheet, well before a buyer does.
- Ask your accountant to run both QSBC tests on the company you’d sell, with the policy’s cash surrender value included.
- Bring your latest policy statements to the broker, including the cash surrender value and the adjusted cost basis, which the insurer can provide. An annual review keeps those numbers current.
- Confirm the structure: usually the same company is the owner, the beneficiary and the payer of the policy. If any of those differ, your accountant should have signed off on why.
- Price any move before making it, because transferring a policy between companies can create a taxable policy gain.
If a sale is on the horizon, even a distant one, get in touch or call 1-877-654-6119. We’ll look at where the policy sits, what it’s worth for the test, and what your accountant needs from the insurer.
Protect Your Wealth is an independent brokerage offering life insurance and segregated fund solutions, licensed in Ontario, British Columbia, Alberta, Manitoba, Saskatchewan, New Brunswick and Nova Scotia. This page is general information, not tax, legal or accounting advice.
