An agreement sets the terms, but it doesn't supply the money. Without funding, survivors may have to use savings, borrow or pay over time.
Buy-Sell Insurance
Buy-Sell Insurance for Ontario Business Owners
Life insurance that gives surviving owners the money to buy a deceased partner's shares, and gives that partner's family a fair price. The agreement sets the deal. The insurance pays for it.
What It Is
What is buy-sell insurance?
Buy-sell insurance is life insurance that funds a shareholder or buy-sell agreement. When an owner dies, the death benefit pays for that owner's shares on terms all the owners agreed to in advance.
Without it, surviving owners may have to drain savings, borrow or pay the estate over time. The family, meanwhile, can be left holding shares in a business they don't run.
There's a tax reason too. At death, shares are generally treated as sold at fair market value, unless they pass to a spouse or common-law partner, so the estate can owe tax on an asset that's hard to turn into cash.
At a glance
- Two partsA legal agreement and the insurance that funds it
- A price set in advanceA fixed value or a valuation formula
- Cash when it's neededDeath benefits are generally tax-free
- Structure mattersIt changes who pays and how the gain is taxed
- Legal advice neededA lawyer drafts it, with your accountant's input
Structures Compared
Which buy-sell structure is right for your company?
There are three common structures and no single right answer. The choice changes who pays, who gets a higher cost base and how the deceased owner's gain is taxed.
| Criss-cross | Corporate-owned (redemption) | Promissory note | |
|---|---|---|---|
| Who owns, pays and receives | Each owner personally, on the other owners | The corporation | The corporation |
| How shares change hands | Survivors buy from the estate with the proceeds | The corporation redeems the shares from the estate | Survivors buy with a note, then repay it with capital dividends from the corporation |
| Premium dollars | Personal, after tax | Corporate, generally taxed at a lower rate | Corporate, generally taxed at a lower rate |
| Survivors' cost base | Increases | No increase | Increases |
| Capital gains exemption | Estate may be able to use it | Generally not used | Estate may be able to use it |
| Capital Dividend Account | Not involved | Can fund the redemption | Can fund the note |
| Creditor exposure | Proceeds stay outside the corporation | May be exposed to corporate creditors | May be exposed to corporate creditors |
| Main drawback | More owners mean more policies, and each owner must keep paying | Stop-loss rules can leave unexpected tax if not planned for | Depends on the corporation being able to pay the dividend |
Points to check
On a redemption, the estate generally relies on a capital loss carried back to the deceased's final return, within the estate's first three taxation years. Stop-loss rules can reduce that loss where capital dividends are paid. The redemption can also defer tax to the survivors, who keep a lower cost base.
Both corporate structures need the corporation to pass solvency tests before it pays a dividend or redeems shares. The CDA credit depends on the policy's adjusted cost base at death. Hybrid versions and holding company ownership also exist, and your wider tax planning may favour one.
The Agreement
Why does the shareholder agreement matter as much as the insurance?
The insurance only supplies the money. The agreement says who must buy, who must sell, at what price and when, so a lawyer should draft it with your accountant's input.
- Trigger eventsDeath, disability, retirement and disagreement
- Binding termsWhether a sale is mandatory or optional
- PriceA fixed value or formula, and how often it's updated
- Insurance linkWho owns each policy, who receives the proceeds and what happens to any shortfall
- ExitsWhat happens to the policies when an owner leaves
Each structure needs matching wording, and policies owned the wrong way can leave money in the wrong hands or add tax. Buy-sell funding is separate from key person insurance, which replaces what the business itself loses.
Common Failures
Why do buy-sell plans fail?
The weak points are usually ordinary ones that a regular review can find.
Outdated agreement
It still reflects former partners, an old share structure or tax rules that have since changed.
Stale valuation
A fixed price that's never updated can shortchange the family or overcharge the survivors.
Coverage falls behind
The business grows, the policy doesn't, and the survivors have to find the difference.
Policies lapse or expire
An owner stops paying a personal premium, or term coverage ends before the owners exit.
Policies don't match
The agreement describes one structure, while the policies are owned in a way that supports another.
No plan for living exits
If the agreement is silent on disability or retirement, owners have no funded way out.
Who It Fits
Who is buy-sell insurance for?
- Two or more ownersPartners, shareholders or a group practice
- Real value in the sharesToo much to buy out of pocket
- Insurable ownersCoverage depends on medical underwriting
- Owners who want certaintyA named buyer and a fair price for the family
What to Weigh First
When it may not fit
A sole owner
With no partners, corporate-owned life insurance and estate planning usually fit better.
Family succession
If children are taking over, the price and funding may need a different design.
Wide age or health gaps
Premiums can differ widely between owners, and an uninsurable owner needs another funding plan.
How We Work With Your Accountant
Your lawyer and accountant lead
We provide the insurance side and work alongside your advisors.
We review the plan
The current agreement, existing policies and each owner's share of the value.
Your advisors decide
They confirm the structure, the price and the wording.
We implement
We handle the insurer, underwriting and paperwork.
Common Questions
Questions owners ask about buy-sell insurance
It depends on the number of owners, their ages and who should get a higher cost base. Personal ownership keeps proceeds away from corporate creditors but uses personal after-tax dollars. Corporate ownership is simpler with several owners.
It usually starts with each owner's percentage multiplied by the fair market value of the business. Insurers will want support for that value, and the amount should be reviewed as the business grows.
Generally not, under an exempt life insurance policy. The tax questions sit with the shares: the deemed sale at death, the estate's position and the survivors' cost base, which all vary by structure.
Life insurance pays only at death, so the agreement needs a separate plan for these events. Critical illness coverage can help fund a buyout after a serious illness, and cash value in a permanent policy may help with a retirement buyout.
It can, but shares in a physician or dentist corporation are subject to College ownership rules, so the agreement has to reflect who may hold them. See our professional corporation planning page.
Related Guides
Strategies that often work together
Key Person Insurance
Coverage the business owns on someone it depends on, and how the amount is reasoned.
Read the guideCorporate-Owned Life Insurance
Permanent coverage owned by the corporation, with tax-sheltered growth and CDA planning.
Read the guideCapital Dividend Account (CDA)
How the CDA lets certain amounts leave a private corporation as tax-free capital dividends.
Read the guideThis information is general in nature and is not tax, legal, accounting, insurance or investment advice. It is based on current Canadian tax legislation, which can change. Any strategy should be designed and reviewed with your accountant and legal advisors based on your circumstances. Values above the policy guarantees, including dividends, are not guaranteed.
Buy-sell insurance in Burlington, Oakville, Milton, Mississauga and Hamilton
Book a Consultation
Would your buy-sell plan work if it were needed tomorrow?
Bring what you have, even if it's years old. A short call will show whether the funding still matches the agreement.
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