By Kevin Rector, licensed Financial Services Professional, Calgary · Updated October 2026
The short version: Retained earnings left in a corporate savings or investment account are often taxed at high passive rates, then taxed again when they come out. Three strategies can put that money to work more tax-efficiently: corporate-owned permanent life insurance, critical illness insurance with return of premium, and an Individual Pension Plan (IPP). Which one fits depends on your age, health, how you pay yourself, and what you want the money to do.
Most of the incorporated business owners I meet have done exactly what their accountant asked. They pay themselves a sensible mix of salary and dividends. They leave the rest in the corporation at the small business rate. Over the years, retained earnings pile up.
That was good advice. The trouble is what comes next. When I ask what that money is doing, the answer is usually some version of "sitting there." A corporate savings account. A GIC. Maybe an investment account someone set up years ago.
Money parked like that costs more than people realize. Interest and investment income inside a corporation is taxed at high passive rates. Once passive income goes over $50,000 in a year, your small business deduction starts to shrink. And when the money finally comes out, through salary, dividends, a sale, or your estate, it gets taxed again on the way to you.
There are better ways to use corporate cash flow. Investing inside the corporation still has its place. The three strategies below work alongside it, and they are the ones I walk business owners through most often.
1. Corporate-owned permanent life insurance
This is the strategy I get the most questions about. It deals with the biggest tax bill most owners will ever face, and the one they think about least.
When you die, the Income Tax Act treats your shares as if you sold them that day at fair market value. If your corporation holds significant retained earnings and investments, your estate can owe a large amount of tax. It is due whether or not there is cash on hand to pay it. Families sometimes end up selling property or business assets they wanted to keep, just to cover the bill.
A permanent life insurance policy owned by the corporation changes that picture.
The corporation pays the premiums from retained earnings. Those dollars were taxed at the corporate rate, so they cost far less than paying the same premium out of your own pocket.
While the policy is in force, its cash value grows without annual tax. It also does not count as passive investment income, so it leaves your small business deduction alone.
At death, the corporation receives the benefit tax-free. Most of it is credited to the Capital Dividend Account, and from there it can be paid to your family as a tax-free capital dividend. The cash shows up at the same time as the tax bill.
The policy has value while you are alive too. Later on, the cash value can be used as collateral for a loan to help fund retirement, without giving up the policy.
2. Critical illness insurance with return of premium
One question I like to ask business owners: if you had a heart attack or a cancer diagnosis next month and could not work for a year, what would happen to the business?
Rent still comes due. Staff still need to be paid. The bank still wants its loan payments. Most owners have never planned for it.
Critical illness insurance pays a lump sum when you are diagnosed with a covered condition. You decide how to use it. Keep the business running, replace your income, pay for treatment, or simply give yourself time to recover.
The pushback I hear most is, "What if I never get sick? Then I paid all those premiums for nothing." A return of premium option answers that. If you go a set number of years, defined in the policy, without making a claim, the premiums can be paid back.
There are two common ways to set this up with your corporation:
The corporation owns the policy and pays the premiums. If you get sick, the benefit goes to the corporation to cover the cost of your absence. Any refund of premium also goes back to the corporation.
You and the corporation share ownership. The corporation pays for the critical illness coverage, and you personally pay for the return of premium portion. If you never claim, the refund comes to you. The cost split has to be fair and set out in a written agreement.
Working with your accountant is important to get this set up correctly, since the structure affects how the benefit and any refund are treated for tax.
3. An Individual Pension Plan (IPP)
A lot of the owners I work with max out their RRSP every year and still have profit left in the corporation. If you are over 40 and pay yourself a salary, an Individual Pension Plan is worth a look.
An IPP is a registered defined benefit pension plan that your corporation sets up for you. It is the same kind of pension large employers used to offer, built for one person.
What makes it useful:
Contributions, and the cost of running the plan, are generally deductible to the corporation. That lowers corporate taxable income today.
Contribution room is based on your age and salary. From your 40s on, it often exceeds what an RRSP allows, and the gap grows with age.
The corporation may be able to make a larger contribution for years you worked in the business before the plan existed.
Pension assets generally have strong creditor protection, which matters for professionals with liability exposure.
In retirement, pension income can generally be split with your spouse.
It does come with strings attached. You need to be drawing T4 salary, not just dividends. Your future RRSP room shrinks. There is an actuary involved, regular valuations, and ongoing fees. If the plan's investments fall short, the corporation may have to top it up. It works best for owners who plan to stay incorporated for the long haul.
When an IPP looks like a fit, I bring in your accountant and an actuarial firm to run the numbers before anything is set up.
Which one fits you?
Most of the owners I work with end up using more than one of these. They solve different problems.
Corporate-owned life insurance
Solves: tax at death and moving wealth to family
Tax advantage: tax-sheltered growth, tax-free death benefit, tax-free payout through the CDA
Pays off: at death, or in retirement through a policy loan
Fits: surplus retained earnings and a focus on legacy
Trade-off: a long-term commitment
Critical illness with return of premium
Solves: income and business risk if you get sick
Tax advantage: tax-free benefit on a claim, with the potential to get premiums back
Pays off: on diagnosis, or after a set number of years with no claim
Fits: owners the business depends on
Trade-off: the structure should be reviewed with your accountant
Individual Pension Plan
Solves: retirement savings beyond RRSP limits
Tax advantage: deductible contributions and tax-deferred growth
Pays off: in retirement, as a pension
Fits: age 40 and up, drawing T4 salary
Trade-off: administration costs and funding obligations
The right mix depends on your age, your health, how you pay yourself, how much is in the corporation, and what you want to happen to it. Sorting that out is what the first conversation is for.
If you are in your late 50s or 60s, these strategies can still make sense, depending on your health and goals. They simply have more time to work the earlier they start.
Frequently asked questions
Can I take money out of my corporation tax-free?
Generally, no. Salary and dividends are taxed on your personal return. One exception is the Capital Dividend Account: amounts credited to it, including most of a life insurance death benefit paid to the corporation, can be paid to shareholders as tax-free capital dividends.
What is the Capital Dividend Account (CDA)?
The CDA is a notional tax account that tracks certain tax-free amounts a Canadian private corporation receives. When a corporation receives a life insurance death benefit, the amount above the policy's adjusted cost base is generally added to the CDA and can then be paid out tax-free.
What happens to my corporation's retained earnings when I die?
The Income Tax Act treats your shares as if you sold them at fair market value on the day you die. If the corporation holds significant retained earnings or investments, that can create a large tax bill for your estate, due whether or not there is cash available to pay it.
Is corporate-owned life insurance a tax loophole?
No. It relies on long-standing provisions of Canadian tax law, including the Capital Dividend Account, and has been used by incorporated business owners for decades. It needs to be structured properly and reviewed with your accountant.
Can I get my critical illness insurance premiums back?
With a return of premium option, premiums can be refunded if you go a set number of years, defined in the policy, without making a claim. How the policy is owned affects how the benefit and refund are treated for tax, so review the setup with your accountant.
Who is an Individual Pension Plan best for?
An IPP generally suits incorporated owners over 40 who draw T4 salary from their corporation, have maxed out their RRSP, and plan to stay incorporated for many years. It involves an actuary and ongoing administration costs.
How much in retained earnings do I need for these strategies?
As a general guide, these strategies start to make sense at around $100,000 in retained earnings and become more compelling at $250,000 or more. Every situation is different.
About Kevin
I am a licensed Financial Services Professional and Senior Partner at Eau Claire Partners in Calgary. I work with established families and business owners to build wealth and risk strategies that protect their family's lifestyle and prepare for retirement. Much of that work is with incorporated professionals who have money building inside their corporation and want a clear plan for it.
Your next step
If you have $100,000 or more in retained earnings and no clear plan for it, let's talk. Book a 20-minute call with me and we will look at which of these strategies, if any, makes sense for your corporation. You will leave knowing which strategy, if any, fits and what the next step would be.
Kevin Rector is a Financial Services Professional with Eau Claire Partners. Licensing varies by province. This article is for informational purposes only and does not constitute financial, tax, or legal advice. Tax treatment depends on individual circumstances and current legislation, which can change. Results vary. Consult your accountant and a qualified professional before acting on any strategy described here.
