Corporate surplus is taxed every year it is invested. Inside a policy, the growth is not.
If you have maxed your RRSP and still have corporate surplus you do not expect to need for many years, you know the problem: investment income inside the corporation is taxed each year, and passive income above $50,000 starts to reduce the federal small business deduction. An Insured Retirement Plan uses permanent life insurance to grow part of that capital without annual tax, then uses the policy as collateral for loans in retirement. It suits people who also need permanent life insurance, and it carries borrowing risk.
Three Phases, One Structure
The IRP works in stages. You build the asset, access the income, and settle at death. Each phase has a specific tax advantage.
Build the Asset
The corporation (or you personally) purchases a permanent life insurance policy with a significant cash value component. Premiums are paid over 10 to 20 years. The cash value grows inside the policy without annual tax as long as the policy stays within the exempt policy limits. Premiums are not tax deductible.
Access the Income
At retirement, instead of surrendering the policy (which can create a taxable gain), the cash value is used as collateral for bank loans. Borrowed money is not taxable income. If you own the policy and borrow personally, the loans do not appear on your tax return or affect OAS. If the corporation owns the policy, the corporation usually borrows, and moving that money to you is taxed as salary or dividends; borrowing personally against a corporate policy needs a corporate guarantee and a guarantee fee, which your accountant should review. Interest usually builds up on the loans until death.
Settle at Death
When the insured dies, the death benefit is paid tax-free to the policy's beneficiary and repays the outstanding loans, including accrued interest. For a personally owned policy, the rest goes to your named beneficiaries. For a corporate-owned policy, the proceeds go to the corporation, and the amount above the policy's adjusted cost basis is credited to the Capital Dividend Account, so that portion can be paid to shareholders as a tax-free capital dividend.
What This Actually Means for You
The mechanics are interesting. The outcomes are what matter.
Your cash value compounds without annual taxation
Investment income earned inside a corporation is taxed at about 46.7% in Alberta in 2026 (about 50.7% in BC), with part refunded when dividends are paid. Growth inside an exempt policy is not taxed each year. Over 20 to 30 years that difference can add up, after allowing for the insurance costs inside the policy.
Loan proceeds are not taxable income
When you borrow personally against a policy you own, the loan is not reported as income, so it does not push you into a higher bracket or trigger OAS recovery. With a corporate-owned policy, the money still has to get from the corporation to you, which is usually taxable, unless you borrow personally with a corporate guarantee. The loan and its interest are repaid from the death benefit.
Policy growth does not count as passive income
Passive investment income above $50,000 a year starts to reduce the federal small business deduction, which raises the tax on your active business income. Growth inside an exempt life insurance policy does not count toward that threshold.
The death benefit settles the loans
The death benefit repays the loans and the remainder goes to beneficiaries. For corporate-owned policies, the death benefit less the adjusted cost basis is credited to the Capital Dividend Account and can be paid to shareholders as a tax-free capital dividend; any other amount paid out is a taxable dividend.
You keep the life insurance coverage the entire time
Unlike strategies that require you to choose between coverage and income, the IRP keeps the permanent life insurance in force throughout. Your estate planning stays intact while you draw retirement income against the policy.
The Trade-offs
The IRP is a sophisticated strategy with real commitments. Here is what you need to weigh before proceeding.
This is a long-term commitment. The strategy typically requires 10 to 20 years of premium payments before it becomes effective. If you need the capital back in five years, this is not the right structure.
Bank lending terms can change. The lender can raise rates, ask for more collateral or stop lending, and continued access to loans at reasonable rates is not guaranteed over a 30-year horizon.
Policy dividends and other values that are not guaranteed can be lower than illustrated, which reduces how much can be borrowed.
Premiums are paid with after-tax dollars, and you need to qualify medically for the coverage.
If the policy is surrendered or lapses before death, the accumulated gains become taxable. The strategy only works as intended if the policy remains in force until death.
Insurance costs (mortality charges, policy fees) reduce the net cash value growth. The internal rate of return on the cash value will be lower than the gross investment return.
This requires coordination between your insurance professional, accountant, and banker. It is not a simple product purchase.
This strategy is not suitable for everyone. It works best for individuals or corporations with significant surplus capital, a long time horizon, and a genuine need for permanent life insurance coverage.
Common Questions
How much do I need to invest for an IRP to make sense?
There is no fixed minimum, but the strategy typically becomes practical with annual premiums of $25,000 or more, sustained over at least 10 to 15 years. The economics improve with larger premiums and longer accumulation periods. Your tax bracket, corporate surplus, and insurance needs will determine whether the numbers work.
What happens if interest rates rise significantly?
Higher interest rates increase the cost of the policy loans in retirement, which reduces the net income from the strategy. However, higher rates also typically increase the returns on the fixed-income component of the insurance cash value. The net effect depends on the specific policy structure. Stress-testing different rate scenarios is part of the planning process.
Is the IRP only for business owners?
No. While the IRP is commonly used in a corporate context (where the corporation owns the policy and benefits from the Capital Dividend Account), individuals with high personal income and surplus savings can also use the strategy. The tax advantages differ slightly depending on whether the policy is personally or corporately owned.
How does this compare to just investing in the corporation?
Investment income inside a corporation is taxed at about 46.7% in Alberta in 2026 (about 50.7% in BC), with part refunded when dividends are paid, and passive income above $50,000 starts to reduce the federal small business deduction. Growth inside an exempt policy is not taxed each year and does not count toward that threshold. The comparison only favours the policy if you also need the life insurance, because its costs reduce the growth.
Find out if the numbers work for you.
The IRP depends on your corporate surplus, your need for permanent insurance, your time horizon and your retirement income goals. A short call is enough to tell whether an insurer's illustration is worth looking at.
This information is general and does not constitute financial, tax, or legal advice. Insured Retirement Plans involve complex insurance, lending and tax considerations. Results are not guaranteed. This strategy is not suitable for everyone. Confirm any decision with your accountant and lawyer. Tax rules, interest rates and policy values change, and values that are not guaranteed can be lower than illustrated. Five Ridge Financial Ltd. is licensed to sell life insurance and segregated fund contracts in Alberta and British Columbia and is paid commissions by insurers on policies placed.