2022-0928871C6 2022 CALU Roundtable-Q8-Employee benefits and Life Insurance

Principal Issues: Does the transfer of a life insurance policy from a corporation to an individual result in an employee/shareholder benefit?

Position: Either of subsections 6(1) or 15(1) of the Act may apply to include in the income of the individual, as the case may be, the amount by which the fair market value of the policy exceeds any actual consideration paid by the individual for the policy.

Reasons: Longstanding positions.

Author: Johnstone, Alexander
Section: 148(7)

CALU Roundtable – May 2022

Question 8 – Employee Benefits and Life Insurance

Background

The CRA has previously considered the situation where a corporation owns a policy on the life of a shareholder, with the shareholder’s estate, spouse or a related party designated as beneficiary under the policy. The CRA expressed the view in document 2004-0081901I7 that the premiums paid by the corporation would be considered a shareholder benefit under subsection 15(1) of the Income Tax Act (the “Act”) (this position has been confirmed in Reakes Enterprises Ltd. v. The Queen [2006], CTC 2206 (TCC)). Similarly, pursuant to document 2009-0312171E5, if an employer pays the premiums under a policy owned by an employee, such premiums will be considered an employee benefit under paragraph 6(1)(a) of the Act.

Question

Assume that an employer (Opco) acquires a term life insurance policy on the life of a key employee who is not a shareholder and deals at arm’s length with the employer. The employee’s estate, spouse or a related person is designated as beneficiary of the policy. Each year Opco includes the amount of the premium in the income of the key employee as a taxable benefit and deducts this amount from its taxable income. The term policy has no cash surrender value. Upon its renewal, the policy is transferred to the employee for no consideration under subsection 148(7) of the Act. Following the transfer, the key employee now assumes the obligation to pay the annual premiums under the term policy.

Can the CRA confirm that, since the key employee has effectively been paying the premium under the policy in the form of a taxable benefit, that no employee benefit will arise on the transfer of the policy to the key employee for no consideration?

Can the CRA comment on whether its response would be different if the key employee was also a shareholder of Opco?

CRA Response

At the 2019 CLHIA Roundtable (CRA document 2019-0799051C6), we addressed a similar situation with the exception that the life insurance policy transferred to the employee in that document was a permanent policy and refer you to the comments in that document. In circumstances in which the person to which the interest in the policy was transferred to is an individual who is an employee or shareholder of the corporation which effected the transfer, either of subsections 6(1) or 15(1) of the Act may apply to include in the income of the individual the amount by which the fair market value of the policy exceeds any actual consideration paid by the individual for the policy.

If the person on whom the benefit has been conferred is both a shareholder and an employee of the corporation, a determination will have to be made, taking into consideration all the relevant facts and circumstances of the particular case, as to whether the benefit was conferred by the corporation on the person as a shareholder or as an employee.



Alex Johnstone
2022-092887
May 3, 2022

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