With Michael Baker (CPA, CFP, TEP) & Martin Ochwat (COO, Dundas Wealth)
If you own a corporation in Canada and you've got money sitting inside it — retained earnings, investments, cash — the CRA is taxing that money in ways most business owners don't fully realize. Passive investment income inside your corp gets hit at the highest marginal rate. Cross $50,000 in passive income, and you start losing your small business deduction. Cross $150,000, and you lose it entirely.
In this episode of Keep What You Build, Martin Ochwat sits down with Michael Baker (CPA, CFP, TEP) — a 30-year accountant turned insurance advisor who specializes in corporate strategies for incorporated business owners — to break down corporate-owned life insurance from first principles: what it is, how the money actually flows, what happens through the Capital Dividend Account, and who it genuinely makes sense for.
Most incorporated business owners on taxable income of $500,000 or below pay corporate tax around 10%. As soon as passive income in the corporation crosses $50,000 a year, the small business deduction (SBD) starts grinding away — $5 of SBD lost for every $1 of passive income above the threshold. By $150,000 of passive income, the SBD is gone entirely.
"Most business owners on taxable income of $500,000 or below are going to be paying taxes at around 10%. As soon as they go above that threshold, each dollar generally moves up anywhere between 25 to 27%."
It's a double hit: you're paying the highest rate on the passive income itself, and you're also losing the preferential rate on your active business income. For business owners with serious retained earnings, the math gets ugly fast.
Michael walks through a recent client: an independent contractor consulting for financial institutions, with a holding company, surplus cash being moved up from the operating company, and a personal real estate portfolio — some of which sat inside the holding company too.
The passive income problem was already eating into the SBD. The real estate added more passive income. They'd looked at corporate-class mutual funds as a partial fix, but it didn't solve the core issue. Michael showed them how participating whole life insurance inside the corporation could redirect those dollars into a tax-sheltered environment — while solving for protection, cash management against the real estate portfolio, retirement income, and the estate at the same time.
The mechanics are simpler than the name suggests. Your corporation buys a permanent life insurance policy on you (or another key person). The corporation is the owner, pays the premiums with corporate dollars, and is the beneficiary of the death benefit.
"This is essentially having your corporation, your business, buy a life insurance policy on usually you as the business owner. So the corporation is the owner of the policy and it's also the beneficiary."
Inside the policy, the cash value grows on a tax-sheltered basis — not subject to the passive income rules that would normally apply to investments held inside the corp. That's the first lever.
The Capital Dividend Account (CDA) is a notional account inside every Canadian corporation, defined in section 89(1) of the Income Tax Act. It tracks amounts that can be distributed from the corporation to shareholders completely tax-free.
When a corporate-owned life insurance policy pays out a death benefit, the portion above the policy's adjusted cost basis flows into the CDA. From the CDA, those dollars can be paid to the family as a capital dividend — with no personal tax on receipt.
"Money comes in [to the corporation], a lot of it goes to the capital dividend account, and then it gets paid out to the beneficiaries without any tax."
Michael calls the dollars flowing through this structure "90-cent dollars" — because the corporation only paid the small-business 10% tax on the income used to fund the premium, and the entire structure delivers those dollars to the family without further tax. There aren't many vehicles in the Canadian tax code that do this.
Each year, the corporation writes a cheque from corporate cash into the life insurance contract. The premium is paid with corporate dollars at a lower tax rate than personal dollars.
The cash value inside the policy grows on a tax-deferred (and potentially tax-free) basis. It's tracked as an asset on the corporate balance sheet. The growth doesn't add to your passive income problem.
Participating whole life policies pay dividends. Eventually, those dividends are large enough to pay the policy premium themselves — the policy effectively funds itself. Stop funding too early and the policy can eat itself; this is science, not guesswork.
On death, the death benefit pays to the corporation tax-free. The portion above adjusted cost basis credits the CDA, and the corporation pays a capital dividend to the family — tax-free at both ends, if it's structured properly.
You don't have to wait until death to access the value. Once the policy has meaningful cash value, a third-party bank will lend against it — the policy itself gets pledged as collateral.
If the corporation owns the policy and you (personally) borrow against it, a guarantee fee should flow from you to the corporation to keep the structure clean with CRA. Take advances against the loan, use them for business purposes, and the interest may be deductible — while the underlying cash value continues to grow.
"It can be a very powerful cash management tool. If you're building huge real estate portfolios, they keep cash — vacancies, repairs. You can have that cash inside a whole life contract, get an overdraft from a bank collateralized against it, and still be earning an IRR of three to five percent over time."
Michael's caveat: any structure with leverage has interest rate risk, and the more complex the strategy, the more it needs to be properly documented. Sometimes the simplest solution is the best solution.
Hypothetical: a 45-year-old incorporated business owner with $1M sitting inside the corp, contributing roughly $30,000 a year into a participating whole life policy.
The design depends on goals: how much death benefit the family genuinely needs, how much premium the cash flow can handle, whether layered term coverage is needed during the high-earning years for additional income protection. Over 15–20 years, the cash value compounds quietly inside the policy. Once it hits offset, the cash value can grow $10,000–$20,000 a year on its own.
It's not a hero strategy. It's the kind of asset that does its job in the background while you focus on the business.
The single most important framing Michael gives:
"Life insurance shouldn't be looked at like an investment. It's not an investment, it's an asset. If it was an investment, it would be taxed."
Permanent life insurance behaves more like a supercharged fixed-income instrument than an equity replacement. Done well-balanced, a diversified investment portfolio may produce better long-run returns than a policy. The reason to own corporate-owned life insurance isn't to beat the stock market — it's the combination of tax-sheltered growth, the CDA mechanism on death, the optional leverage, and the protection layer.
Two more practical watch-outs: participating whole life and universal life are not the same thing — different risks, different mechanics. And any advisor pitching this should be willing to interview against another; if the math sounds too good to be true, get a second opinion before you sign.
This isn't for every incorporated business owner. Michael's view: term insurance comes first to protect income. Once you've grown past pure protection needs and you're accumulating real surplus inside the corp, that's when permanent corporate-owned life insurance starts earning its place.
Good fit: incorporated CCPC, $250K+ retained earnings, surplus cash beyond operating needs, 10+ year horizon, willing to coordinate with your accountant. Not a fit: short-term cash needs, no protection need at all, looking for a "tax trick."
Michael's a 30-year CPA. His honest take:
"Compliance-based activities have almost overtaken the advisory side on most accountants. There's so many rules, so many changes — even when they understand life insurance conceptually, it's just not the lane they live in day to day."
Most accountants Michael sits down with get it immediately when they see it laid out. The problem is human nature on the insurance side too — an advisor sees $1M sitting in a holding company and wants to fire all of it into a policy. That ignores what the money was earmarked for, and creates bad experiences. Build the plan first, find out what the client actually wants, then deploy.
If you've got meaningful retained earnings inside your corporation and you've never had this conversation, the first move is to have it — without committing to anything.
"It's not what we know that gets us in trouble. It's what we don't know that gets us in trouble."
You can book a free strategy call with Dundas Wealth, or reach Michael directly at bakerwealthca.com or on LinkedIn (Michael Baker CPA CFP TEP). Either way, the goal is the same: understand what's actually happening inside your corp, whether COLI fits, and what an honest implementation looks like.
Book a free strategy call with Dundas Wealth. We'll review your corporate structure, walk through whether corporate-owned life insurance fits your situation, and give you a straight answer — even if the answer is "not yet."
Book Your Free Strategy CallFree. No commitment. Bring your accountant if you'd like.