Corporate-owned life insurance (COLI) is a vital component in advanced planning conversations for business owners and family enterprises. From funding shareholder agreements to supporting estate liquidity and enabling a tax-efficient transfer of wealth, the strategic use cases are well established.
Yet despite its potential, many advisors encounter resistance from accountants when recommending COLI. This is not simply a matter of differing opinions — it is a question of perspective.
Advisors often focus on long-term outcomes and strategic integration. Accountants prioritize precision, compliance and risk mitigation. Understanding that difference is critical for advisors who want to move these strategies forward.
COLI’s complexity creates discomfort. It introduces multiple layers of tax and accounting considerations: adjusted cost basis (ACB), capital dividend accounts (CDA), passive income rules, policy ownership and intercompany structuring.
These variables interact and evolve over time, making outcomes harder to predict. Accountants, responsible for confirming tax accuracy, are naturally cautious when results rely on long-term assumptions.
There are eight common concerns.
1. It’s not a traditional tax strategy
Premiums are generally not deductible and the tax-free death benefit is typically realized only in the distant future. This makes the strategy less straightforward from a tax-planning perspective.
In limited cases, a prorated deduction for the net cost of pure insurance (NCPI), or a portion of the premium, may be available when a policy is assigned to a restricted financial institution and the policy is required as collateral for the loan.
Note that NCPI is not the actual cost of insurance. It is a Canada Revenue Agency-prescribed mortality cost used to calculate the policy’s ACB.
2. ACB, CDA and OMG
The Income Tax Act introduced the concept of the CDA in subsection 89 (1). It is not always equal to the full death benefit. It must be reduced by the policy’s ACB.
The ACB of a life insurance policy is different from the ACB of an investment. Since a life insurance ACB changes over time, final outcomes cannot be known with certainty.
Accountants have seen errors in practice, which leads to a more conservative stance. Unplanned deposits may disrupt the pattern of the projected ACB grind, or documentation, and any unknowns can create more uncertainty.
3. Passive income risks
Accessing policy values via cash withdrawal or policy loans may generate passive income and reduce access to the small business deduction or even the lifetime capital gains exemption limits.
These downstream impacts may only emerge years later, increasing concern about hidden risks. If a policy needs to be surrendered, or ownership transferred, that sudden taxable disposition can throw off planning.
In the case of an immediate financing arrangement, reinvesting the proceeds can end up creating more passive income.
4. Reporting complexity
Corporate policies must be reflected on financial statements, creating additional reporting obligations and potential disconnects between tax and accounting treatment.
Planning or backdating policies so that the anniversary lines up with the corporate year-end can be an efficient way to get correct policy values for corporate financial statements.
If structured correctly, life insurance can also help reduce the eventual deemed disposition on the death of a shareholder by griding the cash values down over time.
5. Structural errors
Common implementation mistakes — such as incorrect ownership or premium funding — can result in shareholder benefits or unexpected tax consequences.
Accountants often evaluate the strategy based on these observed failures. Organization charts are key to identifying the ideal ownership, payor and beneficiary of the policy. Determine how corporate-owned, trust-owned and personally-owned life insurance policies can help achieve different things for your client.
6. Limited flexibility
COLI is not easily adjusted. Ownership transfers can trigger tax including policy disposition and shareholder benefits issues.
Incorrectly accessing funds, or incorrect payor or beneficiary designation, may create unintended consequences.
7. Creditor exposure
Depending on structure, policies may be exposed to creditors or business risk, requiring careful planning. COLI is not a creditor-protected asset, so getting the ownership right matters.
8. Coordination risk
Successful implementation requires alignment between advisors, accountants and legal professionals.
Lack of coordination is a major source of failure. If an accountant needs to rely on you for your ongoing support, and they don’t feel comfortable with you, they might not want to open themselves up to that risk.
Uncertainty and poor execution
Accountants are not opposed to COLI — they are opposed to uncertainty and poor execution. Their concerns are valid and centre on precision, documentation and predictability.
So, how can advisors bridge the gap?
Lead with precision. Provide ACB and CDA projections. If required, structure a process in which you provide regular in-force updates for your corporate-owned policies.
Next, address risks upfront. Acknowledge where things can go wrong. Shying away from risk is not a strategy. There is good and bad risk, so the key is being able to explain how you can address risks that may or may not come up.
Finally, align with all relevant parties early in the planning process. Involve accountants before implementation. Getting their buy-in is important as you don’t want to go down a long planning process, only to have the deal killed when you are about to deliver the contract after months of underwriting.
Advisor takeaways
- Accountants resist uncertainty, not insurance. Get them comfortable with what it can do and be honest about its limitations.
- Model scenarios. ACB and CDA are critical and must be illustrated, along with scenarios if funding is not available. Can you illustrate a switch from a guaranteed 10-pay to 20-pay or 100? Can you show what a reduced paid-up option would look like? How does the product behave in adverse interest rate environments?
- Secure the sale. Your client’s health can change without warning. If you are not sure where to hold the policy, recommend a single or joint last to die term policy to secure the insurability. Then you can figure out the ultimate amount of insurance your client needs, and which entity should own it.
- Explain passive income impacts. The 2018 federal budget introduced new passive income rules for Canadian-controlled private corporations. Which province your client is in and how the corporation is structured matters here. Also, are there policy provisions that allow for tax-free access to the cash surrender value?
- Coordination across advisors is essential. Like a good marriage, communication is key.
- Transparency reduces resistance. Be honest when COLI doesn’t make sense. It’s not worth the consequences a few years later when plans deviate.
- Position COLI as a precision planning tool. Do not sell it as a tax shortcut.
COLI is a powerful tool when implemented correctly. The advisor’s role is not to sell the product, but to demonstrate control, clarity and discipline in execution.
Pierre Ghorbanian, MBA, CFP, TEP is vice-president, advanced markets at BMO Life Assurance Company.