Key person insurance: what a BC business needs

If the person who brings in most of your revenue died next month, how many payroll runs could the company cover before things got ugly?

That is the question key person insurance is built to answer. It is not the same question a buy-sell agreement answers, and mixing the two up is a common and expensive mistake for owners in Burnaby and across Metro Vancouver. One protects operations. The other protects ownership. Plenty of businesses need both, some need neither, and the published rules matter a lot more than the sales pitch.

Key person insurance covers the operating hole

The structure is simple. The company owns the policy, the company pays the premiums, and the company is the beneficiary. If the insured person dies, the money lands in the corporation rather than with the family. It is there to buy time: replace lost gross profit, fund recruiting and training, keep the lender calm, and hold onto customers who were really buying a relationship with one human being.

Replacing that human being is rarely fast. In the Canadian Survey on Business Conditions for the third quarter of 2026, collected from July 2 to August 6, 2026, Statistics Canada reported that recruiting skilled employees was the second most commonly expected obstacle, anticipated by 25.2% of businesses and by 38.2% in manufacturing (Statistics Canada). If hiring is already the hard part in an ordinary quarter, it does not suddenly get easier in the weeks after a death.

The key person is not always the founder. Sometimes it is the estimator who prices every job, the one certified tradesperson the contracts are written around, or the salesperson holding three quarters of the customer relationships.

Buy-sell insurance covers the ownership hole

Now imagine the person who died owned 40% of the shares. Operations might survive. The share register is the problem.

The Canada Revenue Agency explains that "when a person dies, they are considered to have sold all their property just prior to death, even though there is no actual disposition or sale," and the capital gain is the fair market value on the date of death minus the adjusted cost base (CRA). Shares issued years ago for a nominal amount, now worth real money, can produce a sizeable gain on the final return. CRA also notes that property transferred to a surviving spouse or common-law partner resident in Canada may not create a gain on that final return, provided it becomes locked in for that spouse no later than 36 months after the date of death. So the tax timing depends heavily on who inherits.

Either way, the surviving shareholders can wake up in business with someone's grieving spouse, and the estate can be holding shares it has no way to sell. A funded buy-sell agreement handles both halves. The estate gets cash, the survivors get the shares, and nobody negotiates a price while planning a funeral.

The tax rules that catch owners off guard

Premiums usually are not deductible. CRA's guidance for line 8690 is blunt: "In most cases, you cannot deduct your life insurance premiums" (CRA). Owners often assume that because the corporation writes the cheque, it lands like rent or utilities. It generally does not.

The collateral exception is narrower than people expect. If a policy is assigned as security for a business loan, a limited deduction may be available under paragraph 20(1)(e.2). Interpretation Bulletin IT-309R2, issued February 28, 1995 and now archived, sets three conditions: an interest in the policy is assigned to a restricted financial institution, the interest on the borrowing is deductible, and that institution requires the assignment as collateral. Even then the deduction is capped at the lesser of the premiums payable for the year and the net cost of pure insurance, and only the portion reasonably related to the amount owing (CRA, IT-309R2).

The death benefit side is where the planning value lives. IT-430R3 (Consolidated) states that "the net proceeds of a life insurance policy (essentially the proceeds minus the adjusted cost basis of the policy), if received by a private corporation, are added to its capital dividend account" (CRA, IT-430R3). Income Tax Folio S3-F2-C1, Capital Dividends, effective January 13, 2025, describes this as Component 4 of the capital dividend account at paragraph 1.59 (CRA). That is the mechanism that lets insurance money move out to shareholders as a tax free capital dividend.

The capital dividend account is not self serve. The corporation has to elect, using Form T2054, and the same folio sets the due date at the earlier of the day the dividend becomes payable or the first day any part of it is paid (¶1.19). Elect for more than the account holds and the folio points to Part III tax under subsection 184(2) equal to 60% of the portion of the dividend that does not qualify (¶1.87). This is accountant territory, not something to eyeball.

One thing that is genuinely different in BC

British Columbia does not treat unanimous shareholder agreements the way the federal statute and several other provinces do. Under the Business Corporations Act [SBC 2002] Chapter 57, section 137(1), "the articles of a company may transfer, in whole or in part, the powers of the directors to manage or supervise the management of the business and affairs of the company to one or more other persons," and section 137(2) moves the matching rights, powers, duties and liabilities across with them (BC Laws).

The practical point for a Coquitlam or New Westminster company is that some restrictions you might expect to tuck into a side agreement may need to sit in the articles to have full effect. A BC corporate lawyer should draft the buy-sell terms. Insurance funds the deal, it does not create it.

What to bring to the first conversation

• An honest list of who the business would struggle to replace, and why
• A valuation method you could defend, plus who updates it and how often
• The current share register, including who holds which class
• Bank covenants, personal guarantees, and leases tied to one specific person
• What each owner's family would actually need, and over what period
• Your accountant's read on the policy's adjusted cost basis and your capital dividend account balance

What this doesn't tell you

A lot here depends on your situation, and the sources either disagree or stay quiet on the details.

The capital dividend account credit is net proceeds, not the face amount. Because the adjusted cost basis of a permanent policy shifts over the years, the amount that can flow out tax free is not always the full death benefit. Your insurer and your accountant have to run those numbers.

IT-309R2 and IT-430R3 are both marked archived on canada.ca. They set out CRA's stated positions as of their dates, and tax law moves, so confirm current treatment before you act on either.

There is also no single correct ownership structure. Corporate owned policies, criss-cross arrangements between shareholders, and hybrid designs each trade off differently on cost, capital dividend account access, creditor exposure, and what happens if a shareholder leaves while very much alive. The CRA material sets out rules, it does not rank structures, and anyone who tells you one option is simply the best is skipping the part where your circumstances matter.

Finally, valuation is judgment, not arithmetic. A formula that felt fair in 2020 can be badly wrong today, which is why a review date belongs in the agreement itself.

This article summarises published rules and research for general information, is current as of the date shown above, and is not personalized financial, tax or legal advice.

Sources

• Canada Revenue Agency. *Line 8690 – Insurance*. canada.ca
• Canada Revenue Agency. *Income Tax Folio S3-F2-C1, Capital Dividends*, effective January 13, 2025. canada.ca
• Canada Revenue Agency. *IT-309R2, Premiums on Life Insurance Used as Collateral*, February 28, 1995 (archived). canada.ca
• Canada Revenue Agency. *IT-430R3 (Consolidated), Life Insurance Proceeds Received by a Private Corporation or a Partnership as a Consequence of Death*, 1997, consolidated to 2002 (archived). canada.ca
• Canada Revenue Agency. *Taxable capital gains on property, investments and belongings* (deemed disposition at death). canada.ca
• Province of British Columbia. *Business Corporations Act* [SBC 2002] Chapter 57, section 137. BC Laws. bclaws.gov.bc.ca
• Statistics Canada. *Canadian Survey on Business Conditions, third quarter of 2026*. The Daily, August 31, 2026. statcan.gc.ca
• Insurance Council of British Columbia. *Insurance Licensee Directory*. insurancecouncilofbc.com

If you own part of a business in Burnaby, Vancouver, or anywhere in the Lower Mainland and you are not sure whether your agreement is actually funded, book a free no pressure call with Milo. He is an independent broker who compares Canada's top insurers, works in English and Tagalog, and is happy to sit down with your accountant and lawyer rather than around them. You can confirm his licence yourself in the Insurance Council of BC directory before you share a single number.