2022-0928841C6 2022 CALU Roundtable-Q6- Segregated Fund beneficiary Designation

Principal Issues: Does a shareholder or other benefit arise on making a revocable segregated fund beneficiary designation?

Position: Question of fact.

Reasons: Long-standing positions.

Author: Johnstone, Alexander
Section: 138(12)

CALU Roundtable – May 2022

Question 6 – Segregated Fund Beneficiary Designation

Background

For the purposes of the Income Tax Act (the “Act”), a segregated fund is defined to be a life insurance policy pursuant to the definition of that term in subsection 138(12) of the Act. The definition of life insurance policy in subsection 138(12) of the Act, which applies for the purposes of section 138 of the Act, is referenced in the definition of that term in subsection 248(1) of the Act which applies for the purposes of the entire Act. For the purposes of Part I of the Act, a segregated fund is also deemed to be a trust under paragraph 138.1(1)(a) of the Act. The policyholder of the segregated fund is treated as a beneficiary of the deemed trust and receives a T3 slip from the fund for income allocated from the segregated fund to the policyholder each year. These provisions bring the taxation of segregated funds in line with outcomes from investing in mutual funds.

Because a segregated fund is a life insurance policy, creditor protection for the value of the fund is available in common law jurisdictions pursuant to provincial Insurance Acts if the relationship between the beneficiary and annuitant/life insured falls within a prescribed class.

Question

Mr. A owns all the shares in Holdco. Holdco is a Canadian-controlled private corporation (CCPC) that owns a segregated fund insurance policy (the Policy) under which Mr. A is the life insured. In order to benefit from the provincial creditor protection rules described above, Holdco has named Mr. A’s spouse as a revocable beneficiary under the Policy.

As the policyholder under the Policy, Holdco receives the annual income and capital gains under the Policy. A T3 slip will be issued to Holdco by the insurance company and Holdco will report such income and capital gains on its T2 corporate income tax return. As well, if the policy is terminated before Mr. A’s death no benefits will be received by his spouse under the Policy. Can the CRA confirm that no immediate shareholder or other benefit arises from naming Mr. A’s spouse (or another related person) as beneficiary under the Policy?

CRA Response

We have previously opined that where a corporation is both the policyholder and the sole beneficiary of a life insurance policy on the life of a shareholder, and the corporation pays the premiums with respect to such policy, the payment of the premiums on such a policy would not ordinarily constitute a taxable benefit to the shareholder under subsection 15(1) of the Act.

However, it is also our long standing position that a shareholder benefit arises under subsection 15(1) of the Act when a corporation pays the life insurance premiums on a policy pursuant to which the shareholder or a person related to that shareholder is the beneficiary of the policy. The amount of the benefit to be included in computing the shareholder’s income in a given taxation year is usually equal to the amount of the insurance premiums paid by the corporation for that year.

In a recent decision (Harding v. The Queen, 2022 TCC 3) the Tax Court of Canada found that a benefit under subsection 15(1) of the Act was conferred when a corporation paid the premiums on corporate-owned life insurance policies insuring the life of the corporation’s sole shareholder and his spouse and all of which named the spouse or the shareholder’s stepchildren as beneficiaries.

Accordingly, given that a segregated fund policy is, by definition, a life insurance policy, we cannot confirm that no benefit arises in the described situation above where Holdco is the policyholder of the Policy and the shareholder’s spouse is named as the revocable beneficiary under the Policy. The question of whether a benefit under subsection 15(1) of the Act has been conferred is generally one of fact to be determined on a case-by-case basis.



Alex Johnstone
2022-092884
May 3, 2022





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