Business owners are always looking for ways to protect their companies while also planning for personal financial growth. One strategy that offers both corporate protection and personal benefit is the CI Split Dollar arrangement, also known as Shared Ownership Critical Illness Insurance.

This strategy allows for a personal tax-free refund of corporate and personal premiums while safeguarding the business against the financial impact of a critical illness affecting a key individual.

What is CI Split Dollar Insurance

It’s a shared ownership structure involving a Critical Illness (CI) insurance policy, typically between a corporation and a shareholder or key employee.

• The corporation pays for the base CI coverage.
• The individual pays for the Return of Premium (ROP) rider.

If a critical illness occurs, the corporation receives a tax-free lump sum. If no illness occurs and the policy is cancelled or expires, the individual can potentially receive a tax-free refund of premiums paid.

To ensure CRA compliance, the arrangement must include:

• A formal Shared Ownership Agreement
• Actuarial certification of the premium split

Strategic Benefits of CI Split Dollar Insurance for Business Owners

CI Split Dollar is effective for:

• Owner-managers and incorporated professionals
• Corporations with strong cash flow and long-term planning goals
• Individuals seeking tax-efficient long term alternatives to salary, dividends, and bonuses

When properly structured, it allows corporate and individual premiums to be refunded to an individual without being subject to taxation.

Tax Treatment and CRA Considerations for CI Split Dollar Insurance

CI payouts to the corporation are not taxable and do not credit the Capital Dividend Account (CDA). ROP refunds to the shareholder are not considered taxable benefits, provided the premium split is actuarially justified and properly documented.

The CRA does not explicitly address CI Split Dollar arrangements in the Income Tax Act. This means proper documentation is essential to avoid reclassification of the refund as a taxable benefit.

To ensure compliance, a formal Shared Ownership Agreement should be drafted, actuarial certification obtained, and the structure reviewed by both tax and legal advisors.

Risks to Consider for CI Split Dollar Insurance

• Improper premium allocation may result in taxable shareholder benefits.
• Policy transfers during business restructuring or sale can trigger tax consequences.
• CRA interpretation may evolve, or change completely, requiring ongoing review and compliance.

This strategy should be implemented with professional guidance to avoid unintended tax exposure.

Accounting and Advisory Support for Canadian Business Owners

At KWB, we help business owners make informed, strategic decisions that align with their financial goals.  Book an introductory meeting here to learn more about becoming a KWB client today.

This blog article was prepared in collaboration with Infinity Financial Solutions.