A small accounting firm owner, aged 45, is considering Disability Buy-Sell insurance. The firm has three partners, and the buy-sell agreement stipulates a payout period over five years if a partner becomes permanently disabled. What is a key challenge in structuring the disability buy-sell policy premiums and benefits to align with the agreement's multi-year payout without creating undue tax burdens or financial strain?

Question: A small accounting firm owner, aged 45, is considering Disability Buy-Sell insurance. The firm has three partners, and the buy-sell agreement stipulates a payout period over five years if a partner becomes permanently disabled. What is a key challenge in structuring the disability buy-sell policy premiums and benefits to align with the agreement's multi-year payout without creating undue tax burdens or financial strain?

Answer options:

• Ensuring the policy provides a lump sum benefit matching the agreement's total value, which may be impractical for multi-year payouts.
• Finding a policy that allows for premium deductions by the corporation and tax-free receipt of benefits by the disabled partner. ✅ Structuring the policy to provide installment payments over five years, with premiums that are not tax-deductible to the corporation, and benefits that are generally tax-free to the recipient.
• Managing the policy's cash value growth to cover the payout, as Disability Buy-Sell policies have significant investment components.

Correct answer: Structuring the policy to provide installment payments over five years, with premiums that are not tax-deductible to the corporation, and benefits that are generally tax-free to the recipient.

Explanation: Disability Buy-Sell premiums are typically not tax-deductible for the corporation under ITA s.18(1)(b), but the benefits, whether lump sum or installments, are generally received tax-free by the recipient when used to purchase the disabled owner's interest, making installment options key for matching agreement terms.