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Shared ownership critical illness arrangements: What you need to know

Shared ownership (split dollar) arrangements let companies and key employees share critical illness insurance costs and benefits for potential tax advantages.

Updated

5 min. read

A shared ownership arrangement, also known as a split dollar agreement or a shared ownership agreement, is a longstanding strategy in the insurance industry. It is used when two parties—typically a company and an individual who is a key employee/shareholder—want to own distinct shares of a critical illness (CI) insurance policy, each paying a reasonable amount for the benefits they wish to receive. The two parties jointly own and pay for a critical illness insurance policy.

The corporation typically pays for the critical illness benefit portion of the policy.
The individual key employee/shareholder pays for the return of premium (ROP) rider, where that rider refunds premiums if no claim is made and the policy is surrendered or reaches maturity.

The shared ownership arrangement is a private agreement between these parties, not with the insurer.

Advantages

The arrangement can provide advantages to each party and is most commonly used in corporate settings and high-net-worth markets.

Benefits for the corporation:

Financial support: The CI benefit can provide tax-free funds to cover operational costs, hire replacements, or manage financial disruptions if the key individual becomes critically ill due to a covered illness.
Talent retention: Helps reinforce loyalty by implicitly designating key individuals (job security) and offering the ROP’s potential for tax-free funds (financial security — “golden handcuffs”).
Stability: Can help reassure customers and creditors that the business will have the strategic liquidity to continue as a viable entity and repay outstanding loans.

Benefits for the individual:

Financial incentive: Receives a return of premiums if no illness occurs. This can act as a savings vehicle or form of deferred compensation.
Job Security: Implicitly signals that the company regards the individual as a key person and a potentially long-term employee.
Potential tax advantage: depending on the particulars, the ROP may be paid to the individual on a partially or fully tax-free basis.

How shared ownership arrangements work

Shared ownership (split dollar) arrangements require careful planning and documentation. The contractual arrangement must clearly define ownership, premium responsibilities, benefit entitlements, etc.

Ownership structure: The company and the key individual/shareholder are each joint owners of the policy. The arrangement is formalized in a formal shared ownership critical illness agreement, which clearly sets out the rights and obligations of both parties, including the responsibilities for premium payments.
Premium payments: Each party pays a reasonable amount for their share of the policy, as specified in the shared ownership agreement and based on their respective rights in the critical illness policy
Benefits: The corporation usually gets the base critical illness coverage (insurance) in case the life insured gets ill. Depending on the applicable provincial law, these benefits will be paid according to either a beneficiary designation or a direction of payment. The agreement can also give relevant directions.

“Shared ownership (split dollar) arrangements require careful planning and documentation.”

Key steps to setting up a split dollar arrangement

Apply for a critical illness policy.
Establish joint ownership of the policy.
Designate beneficiaries or direction of payment as necessary.
Define the terms of the arrangement in a shared ownership critical illness agreement, ensuring alignment of the parties’ needs with the policy’s contract.

What advisors, companies, and key individuals need to know

Tax implications: It remains a question of fact (including application of the rules of the relevant provincial/territorial jurisdiction) to determine if a return of premiums received by the individual would be taxable.

The Canada Revenue Agency (CRA) is apparently of the opinion that this is a question of facts, and so taxable treatment can depend on factors that include (but are not limited to) whether or not the ROP benefit:

Is part of a genuine commercial transaction;
Constitutes an insurance benefit;
Was by virtue of employment or by virtue of shareholdings; and
Reflects premiums that correspond to the fair market value of the benefit.

Taxable benefit (employee/shareholder):

CRA has said that the premiums charged for the return of premium benefit by the insurance company may not necessarily be the fair market value.

Ensure the premium split aligns with CRA guidelines to avoid unintended tax consequences.
ROP Premiums paid by the individual are usually with after-tax dollars. Obtain a third-party actuarial valuation to quantify a reasonable amount for the ROP rider to be paid by the employee/shareholder. This amount is generally higher than the actual cost of the ROP rider.

Legal considerations:

Agreements must be clearly documented to define ownership, benefit entitlements, and termination conditions.
Legal review is essential to avoid disputes and ensure enforceability.

Policy design:

Choose appropriate policy types (e.g., term-20, level to 75) and riders.
Understand the cost structure and how ROP affects overall premiums.

Compliance and monitoring:

Regularly review the arrangement to ensure continued compliance with tax laws, corporate governance, and the arrangement’s contractual terms.
Be cautious of relying solely on product illustrations for premium splits.

Important note on shared ownership arrangements

A shared ownership critical illness agreement is a private arrangement between the company and the individual employee/shareholder. The insurance company is not a party to this agreement and does not administer or enforce its terms. Instead, the parties themselves are responsible for determining how premiums are split, how benefits are allocated, and for documenting these terms in a written agreement. As well, the parties are the ones responsible for making and tracking the premium payments.

Both parties should always seek independent legal and tax advice before entering into a shared ownership arrangement. Professional legal and tax advisors can help ensure the agreement is properly structured, compliant with tax laws, and aligned with each party’s interests. The insurer’s role is limited to issuing the policy and paying benefits as directed by the policy, beneficiary designation, or any redirection instructions provided by the owners.

This article is for information purposes only and is not intended to provide insurance, financial, legal, accounting or tax advice and should not be relied upon in that regard. Facts or information provided in this article are believed to be reliable and accurate, but we cannot guarantee that it is reliable and accurate at all times and for all scenarios.

Disclaimer

The information in this publication is intended as a summary of our products and/or services and may include projected values based on a set of assumptions. Actual results may not be guaranteed and may vary. Please consult the appropriate policy contract for details on the terms, conditions, benefits, guarantees, exclusions and limitations. The actual policy issued governs. Each policyholder’s financial circumstances are unique, and they must obtain and rely upon independent tax, accounting, legal and other advice concerning the structure of their insurance, as they deem appropriate for their particular circumstances. BMO Life Assurance Company does not provide any such advice to the policyholder or to the insurance advisor.

Insurer: BMO Life Assurance Company.

1082E (2025/11/24)

Learn more about critical illness insurance

Critical illness insurance provides you with a lump sum cash payment upon a medical diagnosis of covered conditions.

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