Show Caution with Insurance Policy Beneficiaries


(From the April 2022 Edition of eFORUM)

By Jamie Golombek and Debbie Pearl-Weinberg


It’s common for a private corporation to purchase a life insurance policy on the life of a key person to the business. The corporation pays the premiums, generally at a lower after-tax cost than if the premiums were paid personally. And, in most cases, the corporation would be named as the beneficiary of the policy and, upon the death of the key person, would receive the tax-free death benefit. The death benefit could then be flowed out to the shareholder(s) as a tax-free capital dividend.[1]

But what if the corporation was not designated as the beneficiary of the policy? What if, instead, the insurance policy was set up with the insured’s relatives, and not the corporation, as the beneficiary of the policy? That’s what happened in a recent tax case that came before the Tax Court of Canada (Harding v. The Queen, 2022 TCC 3.)

Mr. Harding was a shareholder and sole director of an operating company (“Opco”) where the majority shareholder was a holding company (“Holdco”) wholly owned by Mr. Harding. He was also the sole director of Holdco. Opco purchased a few different life insurance policies, some on Mr. Harding’s life, and others on the life of his spouse. Opco paid all of the premiums on the policies. Although the designated beneficiaries of the policies did change over time, they included the spouse of Mr. Harding and her children (i.e., Mr. Harding’s stepchildren.) Opco was never reimbursed for paying these premiums even though it was not the beneficiary of the policies and thus would not stand to benefit in the event of a claim.

Under the Income Tax Act, when a corporation confers a benefit on a shareholder, or on an individual who does not deal at arm’s length with a shareholder, then the value of that benefit must be included in the shareholder’s income for tax purposes.[2] The Canada Revenue Agency (CRA) reassessed Mr. Harding and included in his income the amounts paid for life insurance premiums by Opco on his life and his wife’s life on the basis that a benefit was conferred on him. Mr. Harding appealed these income inclusions to the Tax Court.

Mr. Harding did not dispute that he was not dealing at arm’s length with his wife, stepchildren, or Opco. He also admitted that there was no legitimate business purpose for Opco taking out the life insurance policies. As such, the Tax Court reviewed whether a benefit had been conferred on Mr. Harding by Opco when it paid premiums on life insurance policies where his wife and stepchildren would be the designated beneficiaries of the life insurance policies.

Mr. Harding argued that no benefit was conferred on him because there was no intention on the part of Opco to do so, and intention was necessary for this type of income inclusion to apply. He claimed that he didn’t realize that Opco had been paying premiums on an insurance policy on the life of his wife, nor did he know that his wife or stepchildren were beneficiaries of any of the life insurance policies taken out by Opco. He asserted that one of his stepchildren, who was an insurance broker responsible for his insurance portfolio, “duped” him by selling Opco inappropriate insurance policies and having the beneficiaries of the policies changed to be her and her siblings, rather than the corporation. He did, however, admit to signing all the relevant forms.

Perhaps not surprisingly, Mr. Harding was not successful in Tax Court. The court held that, in the circumstances, Mr. Harding ought to have known not only that the insurance policies existed, but also that his wife and stepchildren were named as beneficiaries. This was sufficient for the judge to conclude that a benefit had been conferred on him for tax purposes even if Mr. Harding was correct in his assertion that there was no intent on the part of Opco to confer the benefit.

The case serves as an important reminder that clients need to obtain independent tax advice when purchasing a corporate-owned insurance policy, especially in situations where the designated beneficiary of the policy is not the corporation paying the associated insurance premiums.



[1] A capital dividend may be paid when there is a positive balance in the capital dividend account. The amount of the death benefit received that exceeds the adjusted cost base of the life insurance policy is added to the capital dividend account.

[2] See subsection 15(1) of the Income Tax Act, Canada.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is managing director, tax and estate planning with CIBC Private Wealth in Toronto. He can be reached at Debbie Pearl-Weinberg, LLB, is executive director, tax and estate planning with CIBC Private Wealth in Toronto. She can be reached at