2024-1007091C6 2024 CALU RT-Q6- Shareholder benefits

Principal Issues: The question described three scenarios involving a shared ownership arrangement and premium payments in respect of a life insurance policy. The question is whether a taxable benefit has been conferred under each described scenario.

Position: General comments provided.

Reasons: Whether a taxable benefit has been conferred is a question of fact that can only be ascertained on a case-by-case basis on the particular facts and circumstances of each shared ownership arrangement. A review of a particular arrangement would normally be undertaken only in the course of a compliance review or advance ruling request.

Author: Johnstone, Alexander
Section: 15(1), 246(1)

CALU Roundtable – May 2024

Question 6 – Shareholder benefits – Corporate held life insurance

Background

The CRA has previously provided its views relating to various corporate-owned life insurance arrangements and various taxpayer benefit rules under the Income Tax Act (the “Act”). For example, in document 2010-0359421C6 dated May 4, 2010, the CRA has previously affirmed that there will be no subsection 15(1) shareholder benefit where a holding company (Holdco) is the policyholder and premium payor and where an operating company (Opco) is the beneficiary. However, in the same document, the CRA stated subsection 246(1) of the Act could apply. In 2007-0257251E5, dated November 19, 2009, the CRA also stated that the general anti-avoidance rule (GAAR) could apply. Additionally, in 2010-0359421C6, dated May 4, 2010, the CRA indicated that if Opco reimburses Holdco policyholder for the premiums, the reimbursement could be included in the income of Holdco under section 9 or paragraph 12(1)(x) of the Act.

The CRA was subsequently asked to consider the issue of various taxable benefit provisions where a life insurance policy is co-owned by two corporations under a shared ownership arrangement. The CRA provided the following comments in 2012-0435661C6, dated May 8, 2012:

…. the CRA has consistently expressed the view that where a life insurance policy is co-owned by a corporation and its shareholder (corporation or individual) pursuant to a split dollar arrangement or other shared ownership arrangement, there is a potential for the corporation to confer a benefit on that shareholder through the premium sharing arrangement. Where the premium paid by the shareholder is less than that which would be paid for comparable rights available in the market under a separate insurance policy, the corporation may be viewed as having conferred a benefit to the shareholder that could result in a shareholder’s benefit for the purpose of subsection 15(1) of the Act.

In this context, in order to determine the application of subsection 15(1), subsection 246(1), section 9 or paragraph 12(1)(x) of the Act, each arrangement must be considered based on its own facts, on a case-by-case basis. Consequently, it is impossible to elaborate on the potential application of those provisions. Such a review would normally be undertaken only in the context of an advance income tax ruling request or an audit.

In addition, under subparagraph (d)(iii) of the “capital dividend account” (CDA) definition in subsection 89(1) of the Act the CDA credit to a corporate beneficiary with respect to life insurance policy proceeds received in consequence of the death of a person after March 21, 2016 is reduced by the adjusted cost basis (ACB) of a policyholder’s interest in the policy. In other words, the CDA is reduced even if the corporation receiving the death benefit is not the policyholder.

The CRA was asked to reconsider its prior interpretations relating to taxable benefits arising from certain corporate-owned life insurance scenarios in light of this legislative change. The CRA indicated, in 2021-0882441E5, dated September, 28, 2022, that its views have not been altered by this legislative change, stating:

Given the broad scope of each of the provisions, we are unable to provide any further comments regarding the applicability of the provisions referred to in your question, to the limited Parentco/Subco situations described above. Accordingly, any determination of whether section 9, paragraph 12(1)(x), subsection 56(2) or 246(1) of the Act apply to a particular Parentco/Subco arrangement involving life insurance policies can only be ascertained, on a case-by-case basis, after a comprehensive review and analysis of the relevant facts and agreements amongst the parties (including any valuation considerations, as applicable).

Such a review would normally be undertaken only in the course of a compliance review of the particular arrangement or, where the arrangement involves proposed transactions that fall within the scope of Information Circular, IC 70-6R12, an advance income tax ruling request.

In addition, any determination of whether the aforementioned provisions apply to a particular Parentco/Subco life insurance arrangement is considered independently of any impact of the life insurance arrangement has on a corporation's CDA.

Recent Case Law

In Harding v. The Queen, (endnote 1) the Tax Court of Canada (TCC) included corporate-paid premiums in a shareholder’s income where the beneficiaries were the shareholder’s spouse and stepchildren, and the life of the insured was the shareholder. Also, Gestion M.-A. Roy Inc. v. The King, (endnote 2) the TCC found that there was a taxable benefit to two Holdcos when an operating company (Opco) paid insurance premiums for various insurance policies owned by the Holdcos under which Opco was the beneficiary. The TCC concluded that a subsection 15(1) shareholder benefit applied to Gestion M.-A Roy Inc. (Holdco1) and a subsection 246(1) benefit applied to 4452712 Canada inc. (Holdco2). The TCC decision in Gestion Roy has been affirmed on appeal by the Federal Court of Appeal. (endnote 3)

CALU Commentary

There are a number of bona fide business reasons for structuring life insurance on a shareholder of a corporation where a holding company (Holdco) holds an ownership interest in a policy with the subsidiary corporation (Opco) receiving some or all of the death benefit arising on the death of a shareholder. For example, owning a life insurance policy in a Holdco could offer some creditor protection to the life insurance policy, avoid the potential of a taxable transfer of the policy to the holding company on the sale of Opco, and ensure the death benefit is payable to the corporation which requires the coverage with accompanying CDA credit.

Fact Situation - Shared ownership arrangement with Holdco and Opco

Holdco recently acquired a 10-year term life insurance policy with a face amount of $1 million and a guaranteed annual premium of $1,000 until renewal in 10 years. Opco requires a term insurance policy of $500,000 for buy-sell funding purposes. Holdco and Opco agree to enter into a shared ownership arrangement under which Holdco and Opco each pay 50% of the annual premium ($500). Each is designated as the beneficiary for 50% of the death benefit ($500,000).

Questions

1) Can the CRA confirm there is no taxable benefit to Holdco or Opco from this arrangement?

2) Assume that after five years, Opco no longer requires the term insurance coverage and stops paying its portion of the premiums. If Opco was the sole owner of a term life insurance policy and stopped paying premiums, the policy would lapse and Opco would receive no amount under the policy. If Holdco continues to pay the entire premium under the policy and becomes the sole beneficiary of the death benefit, is there a taxable benefit conferred on Opco?

3) Can the CRA confirm that there is no taxable benefit to Holdco where Holdco owns the term life insurance policy, Opco is entitled to 50% of the death benefit as a beneficiary, and Holdco and Opco each pay 50% of the annual premium (the equivalent to the fair market value of their respective interests)?

CRA Response

The questions request confirmation of the income tax result of a particular arrangement. Given the broad variations in insurance policies and products, the CRA has not adopted any general positions with respect to split dollar arrangements or other shared ownership arrangements. The terms and conditions of these arrangements are so flexible that they can only be commented on by reviewing a specific life insurance contract and all the other related agreements which may form part of the particular split dollar arrangement.

We have consistently expressed the view that where a life insurance policy is co-owned by a corporation and its shareholder (corporation or individual) pursuant to a split dollar arrangement or other shared ownership arrangement, there is a potential for a taxable benefit to be conferred with respect to the arrangement, notwithstanding that there may be bona fide business reasons for the particular arrangement.

Consequently, we remain of the view that any determination of whether section 9, paragraph 12(1)(x), or subsections 15(1), 56(2) or 246(1) of the Act apply to a particular shared-ownership arrangement involving life insurance policies and their respective premium payments can only be ascertained, on a case-by-case basis, after a comprehensive review and analysis of the relevant facts and agreements amongst the parties (including any valuation considerations, as applicable). Such a review would normally be undertaken only in the course of a compliance review of the particular arrangement or, where the arrangement involves proposed transactions that fall within the scope of Information Circular, IC 70-6R12, an advance income tax ruling request.

Alex Johnstone
2024-100709
May 7, 2024

ENDNOTES

1 2022 TCC 3.

2 2022 CCI 144.Herein Gestion Roy.

3 2024 CAF 16 (January 18, 2024).

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