A key employee is anyone whose special skills make a major contribution to the bottom line. Examples include the active business owner, employees who have strong relationships with valued customers, and any employee who has specialized knowledge who cannot be easily replaced.
Insurance cannot, of course, replace the abilities of the key person, but life insurance and critical illness insurance can provide the business with tax-free funds to:
- Keep the business running
- Offset expected reductions in sales revenue (after-tax)
- Find and train a new person to assume the deceased’s role
- Pay down business debt
The business can also use the proceeds to provide a $10,000 tax-free death benefit to the surviving spouse of the employee. 1
1 This opportunity is available in respect of a payment made on or after the death of an officer or employee in recognition of service. Interpretation Bulletin IT-508R (February 12, 1996) provides further details from the CRA on the taxation of amounts that qualify as a “death benefit” under subsection 248(1) of the Act.