The usual workaround, a buyout funded from the company itself, drains working capital at the moment the business has just lost its founder. And before any of that, the CRA deems your shares sold at death, so a large tax bill lands ahead of any value reaching your children.
How the strategy works
You leave the business to the child who runs it, and you insure your life for an amount close to each other child's fair share. At death the successor inherits the company outright, and the other children receive the insurance proceeds tax-free. Nobody sells, nobody buys anyone out, and every child ends up with comparable value. For owners with real corporate surplus, the policy can often be owned by the corporation and funded with lightly taxed corporate dollars, with the proceeds flowing out tax-free through the Capital Dividend Account. We cover that structure on corporate-owned life insurance for Canadian business owners.
This is likely relevant if
- Your incorporated business is worth more than the rest of your assets combined.
- Some of your children work in the business and others do not.
- You want the successor to own the company outright, without sibling co-owners.
- You want the other children treated fairly without a forced sale or buyout.
Fair and equal can line up. That is the work.
Doug Leyland and Jordan Matters are Chartered Professional Accountants, CPA, CA, and Private Client Estate and Succession Advisors. We work alongside your accountant and your succession lawyer to value the business, project the tax at death, and size the policy that keeps your family whole. See our process for how an engagement runs.
Prefer to go deeper first? Request the full guide and we will send you our detailed briefing on this strategy.
Common questions
What is estate equalization with life insurance?
It uses a life insurance policy to create cash so one heir can inherit an illiquid asset, like the family business, while your other heirs receive equivalent value in tax-free proceeds. Nobody has to sell the business or split it among children who do not work there.
How do I leave my business to one child and treat the others fairly?
You leave the company to the child who runs it and insure your life for an amount close to each other child's fair share. The proceeds pass to the other children tax-free, giving each child comparable value without a forced sale or buyout.
Should the equalization policy be owned by me or by my company?
It depends on whether your company holds real surplus. For most owners with retained earnings, corporate ownership funds the same coverage for much less, with the proceeds moving out tax-free through the Capital Dividend Account.
How does the Capital Dividend Account help fund the payout?
When a corporate-owned policy pays out, the death benefit minus the policy's adjusted cost basis credits the Capital Dividend Account, and the company can then pay a capital dividend your family receives tax-free. That tax-free dividend funds the equalizing payment to your non-active children.
What happens to the company shares for tax purposes when I die?
The CRA treats you as having sold your shares at fair market value, and the growth is taxed as a capital gain on your final return. That bill lands before any value reaches your children, which is why the estate needs cash for both the tax and the equalizing payment.
