Criss cross, promissory note or share redemption: which structure?

How it works

In the first, each shareholder holds coverage on the others and buys the shares personally. In the second, the purchase is promised and the money follows. In the third, the company itself buys back the departing shares. Different hands, different documents, different results.

The cost or the catch

four settled, then one question

What comes before any product

1. 01Accessible cash for something unexpected
2. 02High interest debt repaid before anything accumulates
3. 03Protection verified by a needs analysis, not an assumption
4. 04Capital, which has to exist before it can do anything
5. 05Then where it is held, and how many jobs each dollar does

Let me put it in plain terms. Every one of the three works on paper and fails in practice for the same reason: the paperwork stops matching the people. Coverage bought for one structure and left in place while the agreement is rewritten for another funds nothing the agreement now requires.

Step by step: what happens to the shares and the money in each structure

declared annually, never guaranteed

How a policy dividend is decided

1. 01A distribution from the insurer's participating account
2. 02Declared annually at the discretion of the board
3. 03Based on investment results, claims experience and expenses
4. 04It is not interest and it is not a return
5. 05It is never guaranteed, in any year of the contract

In a criss cross arrangement, each shareholder personally owns a contract insuring each of the other shareholders. On a death, the surviving shareholders receive the death benefit personally and use those funds to buy the deceased's shares directly from the estate at a price the shareholders agreement sets, which increases each surviving shareholder's own adjusted cost basis in the shares acquired, a detail that matters later if those shares are ever sold in turn. In a promissory note arrangement, the corporation, or sometimes the surviving shareholders themselves, commits in writing to purchase the shares over time, and the death benefit, wherever it happens to be held, funds the payments due under that note as they come due and not a single lump sum transaction at the moment of death itself. In a share redemption, the corporation itself is both the owner and beneficiary of the contract, receives the death benefit directly, and uses it to redeem the deceased's shares from the estate, a transaction that engages the corporate rules around deemed dividends and not the personal capital gains rules a criss cross arrangement engages instead.

Who signs what differs accordingly. A criss cross arrangement requires each shareholder to personally apply for coverage on every other shareholder, meaning as many contracts as there are pairs of shareholders once a group grows past two people. A share redemption requires only the corporation to own and pay for a single contract per life insured. A promissory note arrangement sits somewhere between the two depending on exactly how it is documented, and the shareholders agreement itself is what should specify, in writing, which of these paperwork patterns the group has actually chosen to follow.

What varies by number of shareholders, by tax treatment, and by year

The number of contracts needed under a criss cross arrangement grows quickly as shareholders are added. A group of two needs only one contract on each person, but a group of five needs a great many more, which is one practical reason larger shareholder groups often move toward a share redemption or a hybrid structure instead as the ownership group grows over time.

The tax treatment differs meaningfully between structures. A share redemption engages the corporation's own capital dividend account and can produce a deemed dividend to the estate on the portion of the redemption proceeds exceeding the shares' paid up capital, while a criss cross arrangement produces a capital gain or loss calculation for the surviving shareholders personally against their own newly increased adjusted cost basis, figures an accountant, not this page, works out for a specific group's actual numbers on the actual date involved.

What to ask, and of whom

underwriting is the part nobody controls

How long each stage takes

1. 01The discovery meetingThirty minutes. Online, with no products.
2. 02The suitability recordOne sitting. A licence requires it before advice.
3. 03The design meetingOne hour. More than one route, guarantees shown apart.
4. 04Underwriting2 to 6 weeks. Decided by the insurer, sometimes longer.
5. 05First conversation to a contract in force6 to 10 weeks. When nothing waits on a medical.

Ask a tax lawyer and a CPA together, working from the actual shareholders agreement and not a general description of the three structures, which one fits the group's specific number of shareholders, ownership percentages, and long term plans for the business, since the answer commonly changes as a company grows from two owners to several over the years.

Ask whoever administers the corporate minute book to confirm, in writing, which structure the current insurance coverage was actually purchased to support, and compare that confirmation against what the shareholders agreement currently says the group has adopted, since a mismatch discovered only after a death has already occurred is far harder to correct than one caught during a routine review conducted well beforehand.

Who this affects most, and who it does not

no legal limit, a practical one

How many contracts you may own

1. There is no legal limit on the number in Canada
2. Financial underwriting sets the practical limit
3. Total coverage in force is assessed against income
4. Insurers share this information with one another

This matters most to a growing company that adopted one structure early on with two founding shareholders and has since added partners without ever revisiting either the agreement or the underlying coverage, since that is exactly the pattern that produces coverage bought for one structure funding an agreement now written for another entirely. It also matters to any group where ownership percentages have shifted since the coverage was first purchased, since the amounts insured on each life should generally track each shareholder's own share value rather than staying fixed at whatever happened to be true years earlier.

It matters less to a stable two person partnership that reviews its agreement and coverage together on a regular schedule, and less to a sole shareholder corporation, where none of these three structures, built for multiple owners, actually applies in the same way at all.

What the agreement should also state about the money

Beyond naming which structure applies, the agreement should state the valuation method used to set the share price at death, since a criss cross or promissory note purchase price and a share redemption price are both meant to track the same underlying value, but only if the agreement's own valuation clause is actually followed and not left as boilerplate nobody consults when the moment finally arrives. Where the agreement is silent on valuation, or points to a method nobody has updated in years, the amount of insurance already in place can turn out to fund a price nobody actually intends to pay once the numbers are finally worked through together.

The agreement should also state what happens to any surplus if the death benefit exceeds the price actually payable for the shares, and what happens to any shortfall if it falls short instead, since neither outcome is automatic under any of the three structures and each produces a different result depending on which structure happens to be in place, a detail that belongs in the agreement itself rather than in an assumption everyone quietly shares until the moment it matters.

What this page will not tell you

This page does not recommend which of the three structures a specific group of shareholders should adopt, since that choice depends on the number of owners, their ownership percentages, the company's own tax position, and long term succession plans that only a tax lawyer and a CPA reviewing the actual numbers can properly weigh together against each other before anything is signed.

A Financial Security Advisor can confirm what the existing coverage was structured to do and flag where it no longer matches the current agreement, but does not draft the shareholders agreement or file the resulting tax elections, work that belongs entirely to the legal and accounting professionals engaged for that specific purpose, independent of how the advisor happens to be compensated for the contracts already in place today. Take from this only what applies to you.