There are many reasons in the corporate context to have one company (a holding company or a sister company) own the life insurance policy on a shareholder and have the operating company as the beneficiary. One very important reason is that the separation allows for the operating company to fund the buy out of the shareholder’s estate on the death of the shareholder pursuant to a shareholder agreement.
Other reasons include: protecting the policy cash surrender value (CSV) from the operating company’s creditors; maintaining the qualification of the operating company for the qualified small business corporation exemption (since the CSV is not an asset used in active business and could put the company offside); and if the operating company is sold, having another company own the policy avoids onerous tax consequences that could result from the transfer of the policy to the shareholder.
The question that arises is which company should pay the premium, the operating company since they are the beneficiary or the holding company since they are the owner and entitled to the rights to the policy on surrender. This issue was the subject of a recent Federal Court of Appeal tax case, Gestion Roy v The King (2024 FCA 16). The Federal Court of Canada confirmed the Tax Court of Canada’s decision and assessed a benefit to the holding company and a sister company respectively, as Opco had paid for the premiums on the policies of which it was the beneficiary. While the insurance industry may not agree with this decision, it is the law. In many cases, instead of the operating company paying the premium (like in the Roy case), the operating company could pay a tax-free (if certain requirements are met*) inter-corporate dividend to the holding company, which would then enable the holding company to pay the premium. While the facts in this arrangement aren’t the same as in Roy, the CRA has stated in past Technical Interpretations that it could still possibly assess a benefit. We believe the CRA view can be countered with a number of technical arguments.
To review the CRA’s past positions on the payment of insurance premiums when there is a separation of ownership from beneficiary and review a summary of the Roy case, please read the Tax Bulletin, Corporate Life Insurance Premiums – How to Avoid Taxable Benefits. And for more information on the tax consequences of transferring a policy see the Tax Bulletin, Transferring Life Insurance – What You Need to Know or visit the Professional Resource Centre.
Contact your local PPI Collaboration Centre if you have clients that could be affected by the Roy decision.
*The holding company must own more than 10% of the operating company and there must be sufficient safe income (tax paid retained earnings) on the shares