Suppose Bob and Dave each own half of a company worth several million dollars. Dave dies. Without funding, Bob is now in business with Dave's spouse, or he is borrowing against the company to buy her out, or the company is sold under pressure. None of those is the plan either partner wanted.
How the strategy works
A buy-sell agreement sets the obligation and the price. Life insurance on each shareholder supplies the cash at the exact moment the obligation lands. There are three common ways to hold the coverage. In a criss-cross arrangement, each shareholder owns a policy on the other and uses the proceeds to buy the shares personally. In a corporate share redemption, the company owns the policies, receives the benefit tax-free, and redeems the deceased's shares. In the promissory note method, the company owns the policies and lends or pays the proceeds to the survivor to complete the purchase.
The corporate routes matter for tax. A death benefit received by the company creates a credit to the Capital Dividend Account equal to the benefit minus the policy's adjusted cost basis, and that credit can move to the estate as a tax-free capital dividend. The redemption route also interacts with the stop-loss rules on the deceased's shares, which is why we work through the structure with your lawyer and accountant before any policy is placed. Two more details that get missed: the agreement needs a valuation method the survivors will actually honour, and the coverage needs reviewing every few years as the company grows.
This is likely relevant if
- Your company has two or more shareholders who are not each other's heirs.
- A shareholders' agreement exists or is being drafted, and the buy-sell clause has no funding behind it.
- The company is worth more than any one partner could pay from personal savings.
- You want the surviving family made whole in cash, not left holding shares they cannot sell.
The ownership mechanics sit on our page about corporate-owned life insurance in Canada. If one partner is also the person the business cannot run without, see key person insurance. If the agreement also triggers on disability, the funding side is covered on disability insurance for business owners, and our process shows how an engagement runs.
Talk to us before the agreement is signed
Doug Leyland and Jordan Matters are Chartered Professional Accountants, CPA, CA, and Private Client Estate and Succession Advisors. We read the draft agreement with your lawyer, model each funding structure in plain numbers, and place the coverage that matches the obligation. If you are working with an estate or corporate lawyer, we report back to them throughout.
Prefer to go deeper first? Request the full guide and we will send you our detailed briefing on funding a buy-sell agreement.
Common questions
What is buy-sell agreement life insurance?
It is life insurance placed on each shareholder of a private company so that when one dies, the proceeds fund the purchase of that shareholder's shares under the terms of the shareholders' agreement. The survivors keep control and the estate receives cash at the agreed price.
Who should own the policy, the shareholders or the company?
It depends on the number of shareholders, the tax position of each, and how the agreement is written. With two partners a criss-cross arrangement can be simplest. With several partners, or where the company will fund the premiums, corporate ownership is usually cleaner and allows the Capital Dividend Account to carry most of the proceeds out tax-free.
Are buy-sell insurance premiums tax deductible in Canada?
Generally no. Premiums on a policy that funds a buy-sell obligation are not deductible whether the company or the individual pays them. The advantage comes at the other end, where the death benefit is received tax-free.
How much coverage does a buy-sell agreement need?
Enough to buy the shares at the value the agreement produces, plus room for growth between reviews. Many agreements set a formula or call for a periodic valuation. The coverage should be reviewed against that number every two to three years and after any major change in the business.
What happens if the agreement triggers on disability instead of death?
Life insurance pays only at death. If the agreement requires a buyout after a long-term disability, that obligation needs its own funding, usually a disability buy-out policy. We check both triggers when we review the agreement.
