How Dentists Can Unlock Tax-Free Dollars Using Permanent Life Insurance
Dr. Miguel DeSouza (not his real name) had spent over two decades building his dental practice in Ontario. Known for his calm demeanor and meticulous attention to detail, he not only earned the loyalty of his patients but also grew a successful business that provided well for his family. At age 50, with his kids nearing university age and an eventual retirement in mind, he was proud of what he had accomplished.
But something about his financial plan was keeping him up at night.
"What happens when I'm gone?" he asked during a meeting with his investment planning advisor from CDSPI Advisory Services Inc. "There's this seven-figure tax bill hanging over my estate. I don’t want my family to have to sell off investments or scramble for liquidity."
His concern is one that many incorporated dentists share. The moment you pass away, the Canada Revenue Agency treats your shares as if you'd sold them. That can mean hundreds of thousands of dollars in tax! Plus, if those funds aren't readily available, your family may be forced to sell assets at the wrong time.
In this case there was a solution already within reach: Dr. DeSouza's holding company. With strong cash flows and a growing investment account, it was an ideal vehicle to implement a tax-efficient strategy using a Capital Dividend Account (CDA) and CDSPI Term 100 permanent life insurance.
What is a Capital Dividend Account?
A CDA is a special notional account inside your corporation that tracks tax-free amounts that can be paid out to shareholders. It isn't shown on your balance sheet, but it plays a crucial role in estate and tax planning.
Your CDA grows when your corporation realizes capital gains on investments (50% of the gain is added), or when it receives the death benefit from a permanent life insurance policy. When the time comes, your company can declare a capital dividend equal to the CDA balance. This dividend can then be paid completely tax-free to shareholders or your estate. As Shane Dewling, an Investment Planning Advisor at CDSPI Advisory Services Inc. puts it to clients: "The CDA is the bridge between your corporation and your family. It lets you move money out without triggering a personal tax hit."
A Real-Life Example: Dr. DeSouza's Strategy
Working closely with his advisor, at age 50, Dr. DeSouza put in place a term 100 non-participating permanent life insurance policy inside his holding company. The plan was simple: ensure $1-million of tax-free liquidity would be available to his estate at death. In the example below, the assumption is Dr, DeSouza passes away at age 85.
Here’s how it worked:
- Life Insurance Benefit: $1,000,000
- Annual Premium: $13,5001 (paid by the corporation)
- Total Cost to Age 85: $472,500 (30 years of premiums)
- Owner and Beneficiary: Dr. DeSouza's holdco
Upon death at age 85, the policy would:
- Pay $1,000,000 death benefit to the holdco
- Generate a CDA credit of $934,948
- Result in a relatively small taxable dividend distribution ($31,056 in tax)
- Deliver $968,944 in net tax-free funds to the estate for $472,500 in corporately-paid premiums—in this case that’s the equivalent of a 49% return on capital for a risk-free investment!
According to Shane Dewling, "with this strategy, nearly the entire death benefit passed to the estate with minimal tax. It gave Dr. DeSouza peace of mind that his family wouldn't face financial disruption."
The Bigger Picture: How Dentists Use CDAs
Dr. DeSouza's situation is far from unique. Many dentists accumulate wealth in holding companies resulting from practice profits and prudent investing. But few realize how much of that value could be trapped behind tax if they don’t plan ahead.
Jordan Weinberg, Partner and Business Advisor with MNP’s Professionals Services group, explained it clearly during a recent session of the “Navigating Death and Taxes” panel, hosted by CDSPI at dental conferences across Canada in 2025: "A CDA isn’t automatic. You have to realize gains, and elect them correctly, so they end up in the account."
Your advisor can help you make the most of this account by:
- Helping you trigger capital gains when appropriate
- Coordinating with your accountant to file a T2054 CDA election
- Integrating permanent life insurance into your corporate structure to create CDA value at death
Permanent life insurance, such as a Term 100 policy, can play a unique role in estate and tax planning. Unlike regular term life insurance, which can expire without ever paying a benefit, Term 100 is a permanent policy that is guaranteed to pay a benefit when you pass away - as long as premiums are paid.
When a Term 100 policy is held inside a corporation – like a holding company – the death benefit can be paid to the company. That amount can flow into the CDA, allowing the company to pay tax-free money to its shareholders, often your family or the estate. As Renata Whiteman, a Senior Insurance Advisor at CDSPI Advisory Services Inc. explains: "Holding a Term 100 policy in a holding company is key. It allows the proceeds to flow into the CDA, creating a tax-efficient way to provide cash to your heirs or cover estate taxes."
Common Pitfalls to Avoid
Dentists often make the mistake of assuming corporate money will automatically reach their families tax-free. But without proper planning, that assumption can lead to:
- Missed CDA elections (no Form T2054 = no tax-free dividend)
- Expired or inappropriate insurance (term policies don't create CDA credit)
- Capital losses that offset and reduce the CDA balance
As Raphael Tachie, a Partner at the law firm Dentons noted during the same panel discussion: "Don't treat the CDA as a side benefit. It’s a core estate-planning tool that works together with freezes, trusts, and rollover strategies."
What About "Pipeline Planning"?
For dentists whose CDA balance is not large enough to cover estate taxes, pipeline planning may offer a tax-efficient alternative. This after death strategy treats the sale of corporate shares as a capital gain rather than a dividend by carefully structuring a series of transactions after death. The goal is to reduce tax from the dividend rate (up to ~47%) down to the capital gains rate (~28%).
“Pipeline planning is an election on death,” Jordan Weinberg noted at the panel. “It doesn’t rely on having a CDA or life insurance, but it needs legal and accounting coordination to get right.” It works by transferring the deceased’s shares to the estate at fair market value. The estate then sells those shares to a new corporation owned by the same beneficiaries. The new corporation repays the estate (over time) with tax-deferred corporate funds.
This strategy may be an option if:
- You didn’t build up a CDA balance or insure for liquidity.
- You want to avoid the double-tax trap on death (once at the personal level and again when money leaves the corporation).
- You’re willing to phase the payout to the estate over 3–5 years.
Pipeline planning can be effective if structured properly but be prepared for a longer payout timeline and the need for legal and tax advisor support. Before undertaking this type of strategy, always consult your advisors.
Planning with the Right Team
No matter what type of exit strategy you pursue, talking things through with your financial advisor is a prudent first step. “For dentists it’s a change of mindset,” says Shane Dewling. "It’s no longer just about growing assets. It’s about planning how that money ultimately leaves the corporation." Your financial advisor will work closely with your tax and legal professionals to:
- Coordinate CDA elections
- Time capital gains to build CDA balance
- Implement permanent insurance solutions in your corporation
Don’t leave exit planning until the last minute. If you're an incorporated dentist with corporate investments or surplus cash, now is the time to ask:
- Do I have a strategy to get those dollars out tax-free?
- Am I using permanent insurance to fund future estate costs?
- Have I maximized my CDA’s potential?
Speak with a financial advisor from CDSPI advisory Services Inc. for help evaluating your options and building a tax-smart exit plan that protects your wealth and your family. Remember, the earlier you plan, the more flexibility and value you can retain.
1Based on a quote for $1,000,000 of CDSPI Term 100 Life Insurance with waiver of premium option for a 50-year-old male non-smoker as at June 5, 2025.
This article is for general informational purposes only and is not intended to provide tax, legal, or financial advice. While we strive to provide accurate and current information, we make no guarantees regarding its completeness or applicability. Please consult with qualified tax, legal and financial professionals to discuss your specific needs.