At GBA LLP, we work closely with business owners and incorporated professionals to help them navigate the complexities of financial planning and tax-efficient strategies. One financial tool that offers significant advantages is Corporate-Owned Life Insurance (COLI). To provide expert insight on this topic, we sat down with Blair Patton, CEO of Benchmark Insurance Ltd., to discuss why business owners should consider this strategy.
Blair: Absolutely. Corporate-Owned Life Insurance (COLI) is a permanent life insurance policy owned by a corporation rather than an individual. Unlike traditional life insurance, which is typically purchased for personal protection, COLI is primarily used as a tax-efficient financial planning tool. It provides tax-free investment growth within the policy. The business owner can have access to these funds in a tax-advantaged manner. It facilitates tax-free wealth transfer to beneficiaries through the Capital Dividend Account (CDA). For business owners with retained earnings, it can be a highly effective strategy for minimizing tax exposure and maximizing financial flexibility.
Blair: Business owners often assume that retaining earnings within the corporation and investing them is the best approach. While it may defer personal taxes initially, it comes with potential drawbacks. Investment income inside a corporation is subject to high corporate tax rates. When funds are eventually withdrawn, they can result in personal dividend taxes, which could result in a significant personal tax burden. Also, passive income earned within the corporation can reduce access to the Small Business Deduction (SBD), increasing overall tax liability.
Blair: COLI offers several advantages. The cash value within the policy grows tax-free, meaning it is not subject to corporate investment tax. Business owners can also access these funds in a tax-efficient manner, such as by borrowing against the policy rather than withdrawing from taxable corporate investments. Upon the policyholder’s death, the proceeds are paid to the corporation and can be distributed tax-free to shareholders through the Capital Dividend Account (CDA). This helps ensure a seamless and efficient wealth transfer.
Blair: Certainly. The four main advantages of COLI are:
Blair: It’s understandable. Many business owners are familiar with traditional investments like stocks, bonds, and real estate but are less aware of how life insurance can be a financial planning tool. The key advantage of COLI is that it provides stability, tax efficiency, and long-term value in a way that many traditional investments cannot. Also, because the premiums are paid with corporate after-tax dollars, which are taxed at a lower rate than personal income, this strategy may offer significant tax savings over time. The key is working with a knowledgeable Insurance agent and a knowledgeable Accountant. Together, we can help business owners determine if this approach aligns with their overall financial goals.
Blair: COLI is best suited for incorporated business owners and professionals who have accumulated excess retained earnings in their corporation. It is particularly beneficial for those looking to grow wealth tax-efficiently, access funds in a flexible manner, and ensure a smooth, tax-free wealth transfer to beneficiaries. If a business owner has more than they need for daily operations and wants to maximize financial efficiency, COLI is a strategy worth considering.
Blair: My biggest piece of advice is to have an open mind. In some cases, as soon as the business owner hears the word “Life Insurance” they stop listening. Earlier, you used the correct term, a planning tool. That’s all this is. Another tool in the toolbox to help you fix a problem. To carry that analogy forward, if you’re not great with tools bring in someone with the experience who is. An experienced Insurance agent. An experienced Accountant. Both will ensure that the policy is structured correctly to align with your long-term business and personal financial goals.
Corporate-Owned Life Insurance is more than just an insurance policy—it is a strategic planning tool that helps business owners minimize tax burdens, maximize retained earnings, and ensure a smooth wealth transition. By leveraging this strategy, business owners can make their money work smarter while securing their financial legacy.
For those interested in learning more about how Corporate-Owned Life Insurance could fit into their financial plan, we encourage you to reach out to Benchmark Insurance Ltd. for expert guidance.
Disclaimer: The insights shared in this blog reflect the experience, knowledge, and opinions of Blair Patton regarding Corporate-Owned Life Insurance (COLI). This content is for general informational and educational purposes only and should not be considered financial, tax, or legal advice. Every business owner’s situation is unique, and financial strategies should be tailored to individual circumstances. We strongly recommend consulting with your Life Insurance Advisor and your Accountant to determine whether COLI aligns with your specific financial goals and tax planning needs.
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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.
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