A software startup relies heavily on its lead developer, Alice, whose unique skills are critical to the company's core product. The company wants to purchase Key Person Life Insurance on Alice. What is the primary financial rationale for the startup to purchase this insurance, and what tax implications should they be aware of regarding the premiums?

Question: A software startup relies heavily on its lead developer, Alice, whose unique skills are critical to the company's core product. The company wants to purchase Key Person Life Insurance on Alice. What is the primary financial rationale for the startup to purchase this insurance, and what tax implications should they be aware of regarding the premiums?

Answer options:

• To provide a tax-deductible means of compensation for Alice; the premiums are non-deductible for the company. ✅ To protect against financial losses due to Alice's death and ensure business continuity; the premiums are not tax-deductible for the company.
• To offer Alice a tax-free investment vehicle; the premiums are considered taxable benefits to Alice.
• To fund a future retirement plan for Alice; the premiums are partially deductible as an employee benefit.

Correct answer: To protect against financial losses due to Alice's death and ensure business continuity; the premiums are not tax-deductible for the company.

Explanation: Key Person Life Insurance protects the company from financial losses if a crucial employee dies, providing funds for recruitment or business recovery. According to ITA s.18(1)(b), premiums paid by a corporation on a policy where the corporation is the beneficiary are not tax-deductible.