Corporate Owned Life Insurance and Beneficiary Designations

Many of your business-owner clients have corporate owned life insurance – an excellent and tax efficient way for your client to achieve their estate and succession planning goals. However, to avoid unintended tax consequences, it is critical that the beneficiary designations of the corporate owned policies be reviewed. Where the corporation is the owner and payor of the life insurance, the corporation (or a subsidiary of the corporation) needs to be the beneficiary of the life insurance – not the shareholder’s estate or members of the shareholder’s family! Why? Well, when corporate funds are used to provide personal benefits to shareholders and their family members, a taxable shareholder benefit will result, and the corporation does not get a deduction for the benefit. This results in double tax for your client!

This is exactly what happened during a recent Tax Court case, Harding v The Queen. A shareholder benefit was assessed since the company owned life insurance policies on Mr. Harding (the sole shareholder) but the beneficiaries of those policies were Mr. Harding’s spouse and children. Not good planning. Mr. Harding tried to argue that he was not aware of who the beneficiaries were and did not mean to confer a benefit. Not surprisingly, the Canada Revenue Agency and the court did not see these reasons as valid arguments and assessed a shareholder benefit for the life insurance premiums paid.

The Harding case is a good reminder of what not to do when there is corporate owned life insurance, as well as the importance of reviewing the beneficiary designations on corporate owned life insurance with your clients. For more information on this case and how to effectively structure corporate owned life insurance, read Glenn Stephens’, PPI’s VP of Planning Services, article for Forum magazine Harding Case – A ruling on beneficiaries and corporate life insurance policies, located on PPI’s Professional Resource Centre (Advisor login required).

And if you have questions regarding estate and tax planning, please contact your local PPI office.

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Corporate Owned Life Insurance - Watch Those Beneficiary Designations!