Corporate structure
There are four ways out of your corporation. Which one were you shown?
The cash has to leave by one of those doors, and the spread between the widest and the narrowest is the whole of it.
Business owners
If your co-owner dies tonight, who owns their half tomorrow?
The shares do not evaporate. They go somewhere, and if nothing was written down they go to an estate.
Two of you started it. It works. Ten years in there is staff, a lease, equipment, a client list, and a real number attached to the whole thing.
There is probably an agreement. There is far less often a funded one. Most owners have read the first half of the document they signed and never the second.
So on the worst morning in the business's life, the surviving owner wakes up with a new partner. Or with a lawyer acting for one.
What it comes to
$10,269
The annual difference in earnings required to send the same $10,000 premium
Paid personally at BC's top personal rate you have to earn $21,505 to be left with $10,000. Paid by a corporation taxed at the small business rate, $11,236. Same coverage, same cheque, arriving at the same office.
How many of the five questions can you answer?
We put these in front of every co-owner we meet, and it is rare that anyone has answers to more than two. How does the business carry on without you. Somebody opens the doors tomorrow, and it is worth knowing who that is.
Do you leave your shares to a spouse who has no idea what is involved in running the place? Or to children who might not be ready, or willing, or interested? And if the survivors are supposed to buy you out, where does the money come from on the day. Not in principle. On the day.
Then the fifth. If none of that is written anywhere, who decides? That last one is the real question, because somebody will decide. It just will not be either of you.
The two questions most co-owners can answer are usually the two that do not cost anything to answer. The three that cost money are the three nobody has been through.
An agreement says who buys. What produces the money?
Plenty of owners do have a shareholders agreement. Good. Most of them have never checked the second half.
A legal document does not buy anyone out. It says who buys, at what price, on what terms. It does not produce the money.
There are five ways to fund the deal. Start saving for it today. Borrow from a lender. Use current earnings. Sell assets. Or insure it. Look at the first four honestly and every one of them needs the business to be having a good year on the worst day of its life.
The founder has just died, the bank is nervous, and the clients are asking questions. That is the moment you are asking the company to produce several hundred thousand dollars in cash.
Whose after-tax money is paying for it?
Life insurance premiums generally are not deductible. So the money paying them is after-tax money either way, and the question becomes whose after-tax money.
Say the premium is $10,000 a year, which is not a large policy for two owners with a real business between them. Paid personally, at BC's top personal rate, you have to earn $21,505 to be left with that $10,000. Paid by a corporation taxed at the small business rate, you have to earn $11,236.
A difference of $10,269 in what you had to earn to send it, every single year, for identical coverage. That is not a product recommendation and it is not automatic either. Corporate ownership brings its own complications, the premiums differ between shareholders by age and health, and creditor protection works differently. But it is arithmetic, and it is usually the deciding factor once somebody actually shows it to you.
about $205,000
Of earnings across twenty years, decided by which pocket writes the cheque
BC 2026 combined rates: small business corporate 11%, top personal 53.50%. Re-verify yearly, since brackets index, and substitute each shareholder's actual marginal rate rather than the top one.
Which of the three structures did your lawyer actually draft?
Criss-cross. Each shareholder personally owns a policy on every other shareholder, and on a death the survivors take the proceeds and buy the shares straight from the estate. Simple with two owners. With four it needs twelve policies, and it keeps getting worse.
Promissory note. The company owns the policies. The death benefit credits the capital dividend account, the survivors buy with a note, and repay it with a capital dividend received without tax in their hands. One policy per owner, more moving parts, and a better tax result in a lot of cases.
Corporate redemption. The company owns the policies and redeems the deceased's shares directly from the proceeds. No notes to write or chase. Simplest of the three, and it lives or dies on the paid-up capital and on how the dividend is treated.
Which one fits depends on how many owners there are, their ages, their health, and what the shares are actually worth. It is genuinely a case-by-case answer, and anyone who tells you otherwise is selling a template.
The arithmetic
| Paid from | Income required to send $10,000 |
|---|---|
| Personally, at the top combined rate of 53.50% | $21,505 |
| The corporation, at the small business rate of 11% | $11,236 |
| The difference, every year | $10,269 |
| Across twenty years of the same policy | a little over $205,000 |
| Premiums are generally not deductible in either case, so this is a question of whose after-tax dollars pay them rather than whether anything is deductible. Substitute each shareholder's actual marginal rate rather than the top one. Corporate ownership carries its own complications and creditor protection works differently. | |
This week
None of them needs us, and none of them needs an appointment.
What to pull out of the drawer this week
When this is not your problem
Plenty of agreements are fine. If there are two of you, the valuation clause was revisited in the last few years, and there is a funding line somebody can actually point at, then this page is describing a problem you have already solved and the right thing to do is nothing. It is also worth saying plainly that insurance is one of the five funding routes and not automatically the right one. A business with real liquidity and a patient estate can fund a buyout out of earnings, and some do. The reason the fifth route usually wins is timing rather than cleverness. It is the only one of the five that arrives on the day.
Is this one actually happening on your file?
Fifteen minutes on the phone is usually enough to tell. You describe the structure, we ask questions, and nothing is presented at you. There is nothing to send in advance and nothing arrives afterwards unless you ask for it.
Check whether the agreement is fundedFifteen minutes, and bring the document. Every shareholder should have their own independent legal counsel.
Read next
Protection
You insured the house and the car. What about the likely one?
Most people carry cover against the things least likely to happen to them, and nothing against the thing most likely to.
The article
Do you want your partner’s spouse as your new business partner?
Five questions every co-owner has to answer, and what happens to your shares if nobody ever did.
Sources and cautions
Please read this part. General information, not legal or tax advice. Every shareholder should have independent legal counsel, and the agreement should be drafted by a lawyer experienced in shareholder and insurance-funded agreements. The premium leverage figures use BC 2026 combined rates, small business corporate 11% and top personal 53.50%. Re-verify yearly, since brackets index, and substitute each shareholder's actual marginal rate rather than the top one. Capital dividend account treatment assumes a nil adjusted cost basis on the policy; confirm the real adjusted cost basis, because it changes both the capital dividend account credit and the taxable portion of any dividend. Confirm current creditor-protection rules for corporately-owned versus personally-owned policies before treating that as a deciding factor. Prabhjit Virk is not a Canadian CPA. Life insurance licences are held in British Columbia, Alberta and Ontario; Quebec is pending. Provincial rates and rules quoted here are British Columbia figures unless stated. Alberta and Ontario differ.