Funding the Buy-Sell with Corporate Dollars

On Suzanne's death the corporation receives $1,000,000. That creates a capital dividend account credit equal to the death benefit minus the policy's adjusted cost basis (adjusted for any earlier dispositions or CDA additions). With an ACB of roughly $4,000, the credit is close to $996,000. Paid out as a capital dividend - with the required election filed - that money reaches Tom tax-free, where an ordinary dividend would be taxed.

The credit does not fund the purchase by itself. The corporation still has to pay fair market value for Suzanne's shares, which triggers a deemed disposition on her final return. With $95,000 of retained earnings and no sinking fund, the only source of funds is the death benefit. That makes the structure workable - but only if the buy-sell agreement exists before the death, fixes a valuation formula, obliges the estate to sell and Tom to buy, and directs the corporation to pay the premium every year. Without the agreement, the corporation holds a $1,000,000 windfall and no obligation to buy anything.

Both routes have consequences that must be put to the client in writing.

Transferring: a change of ownership is a disposition at fair market value. A term policy has no cash value, but its fair market value is not automatically zero, so the agent must confirm the valuation with the insurer and the client's accountant - if proceeds exceed the adjusted cost basis, Suzanne has a taxable policy gain. She also loses control of the contract and the right to name a personal beneficiary, and the proceeds become a corporate asset exposed to the corporation's creditors.

A new policy: Suzanne's diabetes will be underwritten now, and an A1C of 8.1% will likely mean a rating or a diabetes exclusion - she should apply and find out before surrendering or transferring anything. Her existing term still has four years to run and remains valid regardless of her health changes, because it was underwritten when she was healthy.

The likely answer is a new corporate policy for the buy-sell plus keeping the personal policy with a named beneficiary for family needs - but the ACB, the FMV and any rollover relief must be confirmed by a tax advisor, not assumed by the agent.

Creditors: a corporate-owned policy is a corporate asset. If the corporation is sued or fails, the policy and any death benefit it has already received can be reached by business creditors. Contrast that with a personally owned policy naming a spouse, child, parent or grandchild as beneficiary, which in most provinces is protected from the beneficiary's creditors and passes outside the estate. The trade-off is real: corporate ownership buys tax-efficient funding through the CDA and cheap corporate dollars, but it buys less creditor protection. A collateral assignment or a split structure may address part of it - that is a decision for the client's lawyer and accountant.

Suzanne leaving: without triggers, the corporation keeps paying premiums on a former shareholder with no mechanism to buy her out. The agreement needs defined events - departure, disability, retirement, deadlock, divorce - with a valuation formula and funding for each. Tom's wife's instinct is sound: the policy is not a plan. It only becomes one when the agreement, the beneficiary designation and the premium obligation all line up, and the agent should say so rather than sell the policy alone.