Michael and Robert are equal partners in a small manufacturing business in British Columbia. They wish to set up a buy-sell agreement funded by life insurance to ensure that if one partner dies, the surviving partner can purchase the deceased's share from their estate. They each own a $500,000 life insurance policy on the other's life. If Michael dies, what is the most tax-efficient way for Robert to fund the purchase of Michael's shares using the insurance proceeds?

Question: Michael and Robert are equal partners in a small manufacturing business in British Columbia. They wish to set up a buy-sell agreement funded by life insurance to ensure that if one partner dies, the surviving partner can purchase the deceased's share from their estate. They each own a $500,000 life insurance policy on the other's life. If Michael dies, what is the most tax-efficient way for Robert to fund the purchase of Michael's shares using the insurance proceeds?

Answer options:

• The corporation owns and is the beneficiary of the policies, and pays a Capital Dividend Account (CDA) credit to Michael's estate. ✅ Robert owns the policy on Michael's life and is the beneficiary, using the tax-free proceeds to buy Michael's shares.
• Michael's estate owns the policy on Michael's life and is the beneficiary, using the proceeds to buy Robert's shares.
• They each own and are beneficiary of their own policy, and the proceeds are then lent to the surviving partner.

Correct answer: Robert owns the policy on Michael's life and is the beneficiary, using the tax-free proceeds to buy Michael's shares.

Explanation: In a cross-ownership (or 'criss-cross') structure, each partner owns a policy on the other's life and is the beneficiary. Robert receives the $500,000 tax-free and uses it to purchase Michael's shares from his estate, ensuring the buy-sell is funded efficiently.