(From the March 2024 Edition of eFORUM)

By Jamie Golombek & Debbie Pearl-Weinberg

Earlier this year, the Federal Court of Appeal (the “FCA”) handed down its judgment in Gestion M.- A. Roy Inc. v. Canada[1], which is one of only a handful of appellate court decisions involving the taxation of life insurance, and thus, worth a look.

The case involved a corporation (“Opco”) that was owned by a holding company (“Holdco”).  Opco paid the insurance premiums on various life insurance policies, but was not the owner of these policies, rather, it was the revocable beneficiary.  The actual owners of the various life insurance policies were Holdco and its sister corporation (“Sisterco”), which took out the policies on the life of their majority shareholder, Mr. Roy. Holdco and Sisterco had the ability to change the beneficiary of the policies, and also held all other contractual rights to the policies. Because of this structure, the Canada Revenue Agency assessed Holdco with a taxable shareholder benefit under subsection 15(1) of the Income Tax Act, and Sisterco with a taxable benefit under subsection 246(1).

At the lower court[2], Holdco and Sisterco (the “taxpayers”) argued that the purpose of the structure was to provide Opco with the ability to redeem shares from Mr. Roy’s estate upon his death. This would prevent his estate, a third party to the other shareholders, from gaining control of Opco. The taxpayers also indicated that they owned the policies so that they could change the beneficiary should there be a modification to the corporate structure, and to protect the accumulating value from creditors of Opco. Ultimately, because of an anticipated sale of some of the shares of Opco, it was decided that the policies were no longer needed. The policies were cancelled, and the funds received were paid to Opco. The taxpayers therefore argued that they received no economic benefit from the policies as they received no funds on cancellation of the policies, and any economic benefit from changing a beneficiary could only be quantified at that time.

The lower court rejected these arguments and found that under this arrangement, the payment of the insurance premiums by Opco resulted in Holdco receiving a shareholder benefit, while Sisterco received an advantage. The taxpayers appealed this decision to the FCA.

The FCA dismissed the appeal and upheld decision of the Tax Court. In reaching this conclusion, the FCA noted that as owners of the life insurance policies, “the choice to pay the surrender value to …[Opco] belonged to [the taxpayers].  They could just as well have kept these amounts for themselves.”  The FCA concluded, therefore, that “the taxpayers] received an advantage since for years they held policies…with all the related rights without having to pay premiums.”

While the taxpayer has until March 18, 2024 to seek leave to appeal the decision to the Supreme Court of Canada, unless leave is granted and the appeal is successful, the Gestion Roy FCA decision illustrates some of the tax risks in separating ownership and payment of premiums among different corporate entities. Professional tax advice is always advisable when structuring corporately owned permanent life insurance policies.

[1] 2024 CAF 16.

[2] Gestion M-A Roy Inc. v. The King

Refer to Kevin Wark’s May 2023 FORUM Magazine article on the Gestion Case here.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is managing director, tax and estate planning with CIBC Private Wealth Management in Toronto. He can be reached at jamie.golombek@cibc.com. Debbie Pearl-Weinberg, LLB, is executive director, tax and estate planning with CIBC Private Wealth Management in Toronto. She can be reached at debbie.pearl-weinberg@cibc.com.