Insurance Expense
Business insurance premiums (liability, property, E&O) are deductible, but life insurance premiums on a key person are generally non-deductible even when the corporation is the beneficiary.
Federal · Updated September 23, 2026
Definition
Premiums protecting a business against operating risks, such as liability, property, errors and omissions or commercial vehicle risks, can be deductible to the extent of business use. Match prepaid coverage to its period. Personal coverage and corporate-owned life insurance require separate analysis. CRA insurance expenses
Life insurance and collateral
A corporation's key-person life-insurance premiums are generally not deductible merely because it is the beneficiary. Section 20(1)(e.2) provides a limited exception when a policy is required as collateral by a restricted financial institution and the borrowing interest meets the deductibility condition. The eligible amount is limited by premiums, net cost of pure insurance and the portion reasonably related to the outstanding debt. Voluntarily pledging a policy is not enough. Current section 20
A private corporation's qualifying life-insurance proceeds can add to its capital dividend account (CDA), generally after subtracting the applicable policy adjusted cost basis and subject to statutory adjustments. A valid capital-dividend election and sufficient CDA balance are required. Resident shareholders can receive qualifying capital dividends without ordinary dividend tax; non-resident payments can face withholding. CRA capital-dividend folio
Employee coverage
Employee group-life insurance, qualifying private health services plans and disability plans have different rules from corporate key-person coverage. Reasonable employee-benefit costs may be deductible compensation, with separate payroll treatment. Qualifying employer PHSP contributions are generally not federally taxable to employees; provincial treatment can differ. Disability income-plan payments and critical-illness lump sums cannot all be assigned the same tax treatment. Check the policy, contributions and beneficiary. CRA taxable-benefit guide
Example
A corporation pays $12,400 liability, $3,200 errors-and-omissions, $5,800 business vehicle and $900 cyber premiums, all for the current year and wholly for business. Those costs total $22,300. A separate $4,000 key-person life premium is added back if no exception applies.
If a qualifying private corporation later receives $2 million life-insurance proceeds and the relevant policy ACB is $60,000, the basic difference is $1,940,000. That illustrates the potential CDA addition before any other statutory adjustments; confirm the actual CDA and election before declaring a capital dividend.
Related concepts
Sources
- Income Tax Act s.18(1)(a)
- Income Tax Act s.18(1)(b)
- Income Tax Act s.89(1) (capital dividend account)
- Income Tax Act s.20(1)(e.2)
See also
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