Insurance Expense

Definition

Insurance expense is the premium paid for policies that protect the business against operating risks. Most commercial insurance is deductible under the general income-earning purpose test. Life insurance is a notable exception: premiums are generally not deductible, although the death benefit, net of the policy's adjusted cost basis, flows into the Capital Dividend Account and can be distributed to shareholders tax-free.

Key rules

• Deductible business insurance: commercial general liability, errors and omissions, directors and officers, commercial property, business interruption, commercial auto, cyber, product liability, and fidelity bonds. Premiums are deductible in the period they relate to (prepaids must be matched, see ).
• Life insurance premiums (s.18(1)(a) limitation): premiums on life insurance are generally not incurred for the purpose of gaining income, so they fail the s.18(1)(a) test and are non-deductible. This applies whether the corporation or the owner is the beneficiary.
• Exception (s.20(1)(e.2)): when a life insurance policy is assigned as collateral for a business loan from a restricted financial institution that requires the assignment as a condition of the loan, the lesser of the premium and the net cost of pure insurance attributable to the collateralized portion can be deducted.
• Capital Dividend Account (CDA): the death benefit received by a private corporation, less the policy's adjusted cost basis at death, is credited to the CDA under s.89(1). See . A capital dividend election (Form T2054) lets the corporation pay that amount to shareholders tax-free.
• Health and dental: premiums paid by the corporation under a Private Health Services Plan (PHSP) are deductible to the corporation and not a taxable benefit to covered employees, subject to CRA's PHSP tests.
• Critical illness and disability: deductibility depends on who pays, who owns, and who receives the benefit; employer-paid disability benefits make the resulting payout taxable to the employee.

Example

Riverstone Builders Inc. pays 2026 insurance premiums of $12,400 commercial general liability, $3,200 E&O, $5,800 commercial auto, $900 cyber, and $4,000 on a $2 million key person life insurance policy on the owner.

The CGL, E&O, commercial auto, and cyber premiums (totalling $22,300) are fully deductible. The $4,000 life insurance premium is non-deductible and added back on Schedule 1. If the owner later dies and the corporation receives a $2 million death benefit with an ACB of $60,000 at the time of death, $1,940,000 is credited to the CDA and can be declared as a tax-free capital dividend.

Common mistakes

• Deducting life insurance premiums because the corporation is the beneficiary. That does not make the premium deductible.
• Forgetting to add back non-deductible life insurance on Schedule 1.
• Treating a multi-year prepaid premium as fully deductible in the year paid. The matching principle requires accrual over the policy term.
• Missing the CDA credit on receipt of a death benefit. The election is critical.
• Overlooking the limited s.20(1)(e.2) deduction available when a bank requires life insurance as loan collateral.

Related concepts