Beneficiaries and Corporate owned Life Insurance
BENEFICIARIES AND CORPORATE OWNED LIFE INSURANCE
Adam Pukalo |
As a business owner, your corporation should have a life insurance policy on your life - a key part of your estate and succession planning! However, to avoid unintended tax consequences, it’s critical that the beneficiary designations of your corporate owned life insurance policies be reviewed. Where your corporation is the owner and payor of the life insurance, your corporation (or a subsidiary of your corporation) needs to be the beneficiary of the life insurance - and NOT members of your family or your estate.
Why? Well, when corporate funds are used to pay for personal expenses of shareholders and their family members, a taxable shareholder benefit will result, and the corporation does not get a deduction for the benefit. This results in double tax!
In fact, this is exactly what happened in the recent Tax Court of Canada, Harding v. The Queen, 2022 TCC 3, Justice St-Hilaire determined that a corporation had bestowed a benefit to its shareholder, Boyd Harding ("Harding"), for paid premiums in respect of certain life insurance policies that were owned by the corporation. The policies insured Harding's life and that of his spouse and for which, at times, the beneficiaries were his spouse and stepchildren. Harding did not repay the corporation for the insurance premiums it paid and, accordingly, was reassessed income tax in amounts over $140k for his 2013, 2014 and 2015 taxation years respectively.
Not very good planning at all. As a result, Mr. Harding tried to argue that he was not aware of who the beneficiaries were and did not mean to confer a benefit. Not surprisingly, the Canada Revenue Agency and the court failed to see these reasons as valid arguments and assessed a taxable shareholder benefit for the life insurance premiums paid.
The lesson to be learned here? If you are a business owner and your corporation owns a life insurance policy on your life, always ensure that the corporation (or subsidiary of your corporation) is designated as the beneficiary of that life insurance policy.
Disclaimers
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