CORPORATE INSURANCE
BY GLENN STEPHENS
Harding Case T
he recent tax court decision in Harding v. The Queen does not break any new legal ground, but it does clearly illustrate the serious income tax consequences that can arise when the ownership and beneficiary designations in corporate life insurance policies are not carefully addressed. This case involved a successful business owner, Boyd Harding, who owned all the shares of a holding company (Holdco) that was the majority shareholder of a corporation (Opco) that carried on a logging business in eastern Canada. There were four insurance policies involved in this case: • A policy on the life of Mr. Harding’s wife, Deborah Harding, which she owned and under which she had named her four children (Mr. Harding’s stepchildren) as equal beneficiaries; • Another policy on Ms. Harding’s life under which Holdco was owner and 25% beneficiary, with her children named equal beneficiaries of the remaining proceeds; • Two policies on the life of Mr. Harding, both owned by Holdco and both naming Ms. Harding as beneficiary (subject to a 25% share payable to Holdco under one of the policies). Opco paid all of the insurance premiums under the above policies, which was approximately $476,000 over the years in question (2013, 2014, and 2015). The Canada Revenue Agency (CRA) took the position that all of these amounts should be included in Mr. Harding’s income as a taxable shareholder benefit. Mr. Harding responded to the CRA’s position by stating that he had never intended to confer a benefit, that he was unaware of the policies that insured his wife, and that family members were beneficiaries of those policies. He also stated that the beneficiary designations were made in error and were facilitated by one of the stepchildren, who was the insurance 32 FORUM MAY 2022
agent involved in the case and who had duped him into acquiring inappropriate policies. Mr. Harding also suggested that there was no actual benefit because the proceeds had yet to be paid. In the end, the court agreed with the CRA. It found no bookkeeping or administrative error in the beneficiary designations, and that even if Mr. Harding was unaware of some of the policies and how they were structured, he knew or ought to have known that Opco was paying the premiums, and that the policies had no legitimate business purpose. In any case, the Court found that a benefit can be conferred under the Income Tax Act even if the shareholder is unaware of it. The fact that no proceeds had been paid was found to be irrelevant, i.e., a taxable benefit arose because Mr. Harding’s wife and stepchildren would have received insurance proceeds on the insured’s death. The Court’s decision meant that all of the Opco-paid premiums were included in the taxpayer’s income as a shareholder benefit, a result that was all the more onerous because the amount of the benefit is not deductible to Opco. This essentially amounts to double taxation. Interestingly, the Court chose to apply the entire amount
of the shareholder benefit to Mr. Harding personally, even though Holdco was a beneficiary under two of the policies. Theoretically, a pro rata share of the taxable benefit could have been attributed to Holdco, although this issue does not appear to have been raised in the proceeding. Harding is not precedent-setting, and the decision is unsurprising and largely predictable. Having said that, it is useful as a means of illustrating “what not to do,” and clearly shows the negative tax results that can arise where corporations provide personal benefits to shareholders or their families. A key takeaway from this decision is to understand how the policies could have been structured in a way that allowed the policies to provide the intended benefits to family members without risking a taxable benefit to Mr. Harding. For example, it would have been open to the parties to have Holdco as the owner and beneficiary of all the policies in question. Although accounting and tax advice would have been needed, it is likely that Opco could have paid tax-free dividends to Holdco, out of which premium payments could have been made. Holdco would then have been paying premiums on policies it owned using its own funds. No shareholder benefit would have arisen. With appropriate planning and perhaps some share restructuring, proceeds received by Holdco, net of the adjusted cost basis of the policies, could have been distributed as tax-free capital dividends in a way that allowed the intended beneficiaries to ultimately receive the funds. There would have been some professional fees and other implementation costs, but these would have paled in comparison to the fees and tax costs actually incurred in this case. GLENN STEPHENS, LLB, TEP, FEA, is the vice-president, planning services at PPI Advisory and can be reached at gstephens@ppi.ca.
PHOTO: ISTOCKPHOTO
A ruling on beneficiaries and corporate life insurance policies
