Shareholders of private corporations may require life insurance for a variety of personal and/or business reasons, such as creating liquidity to pay estate liabilities, funding a buy-sell agreement or covering the repayment of a business loan. The issue that often arises is whether to own that insurance personally or have it owned by the corporation. Since the payment of insurance premiums is generally a non-deductible expense, it often makes sense for the corporation to be the owner and payor of the premiums. If there is a need for any part of the death benefit to be available to the shareholder’s estate, there is a mechanism that permits the corporation to pay insurance proceeds to the shareholder’s estate as a tax-free capital dividend.

It is however very important to ensure that the shareholder’s estate or a family member are not designated as a beneficiary under a corporate-owned life insurance policy. The Canada Revenue Agency (CRA) has indicated in several technical interpretations that this will result in the assessment of a shareholder benefit equal to the premiums paid by the corporation, and court decisions have supported this position.

The recent Tax Court decision in Harding v. The Queen (2022 TCC 3) is another reminder of the pitfalls of designating family members as beneficiaries of a corporate-owned policy. The taxpayer, Mr. Harding, in the relevant taxation years was a shareholder and sole director of an operating company (Opco) and was also the sole shareholder of a holding company (Holdco) that was the majority shareholder in Opco. Opco was the owner and paid significant premiums on several life insurance policies insuring the lives of the Mr. Harding or his spouse. The beneficiaries of those policies in the relevant taxation years included Mr. Harding’s spouse and his stepchildren.

The CRA assessed Mr. Harding for a shareholders benefit in the amount of almost $475,000 over three taxation years in respect of the premium payments. He tried to argue that he had been duped by one of his stepchildren, who was also an insurance agent, into changing the beneficiaries under those policies from the corporation to his wife and stepchildren. However, the court did not accept that this was a mere “bookkeeping error”. The court also indicated that even through no death benefits were paid under the policies to the family beneficiaries, “the fact that the Appellant’s spouse or stepchildren would have received payments on the insureds’ death while they were the designated beneficiaries results in a benefit to him under subsection 15(1) of the Act.” As a result, the Court upheld the assessment of the shareholder’s benefit.

The end result was a significant tax bill to Mr. Harding, with the added complication that Opco could not claim any deduction against its income for the taxable benefits received by the taxpayer. This case illustrates the importance of ensuring that the beneficiary of a corporate-owned insurance policy is properly set up and maintained in favour of the corporation (or a subsidiary corporation) to avoid the application of the shareholder benefit rules.