Corporations paying insurance premiums may trigger unforeseen income tax for their shareholder(s)
A shareholder benefit occurs when a corporation provides something of value to its shareholders. While most shareholders know that they must report dividends and wages as income, many do not appreciate that they must also report less-obvious transfers of wealth from their corporation.
Subsection 15(1) of the Income Tax Act (Canada) provides the general rule that the amount or value of any benefit conferred by a corporation on a shareholder of that corporation is to be included in the income of that shareholder. The purpose of this provision is to prevent benefits from flowing to shareholders without the appropriate payment of income tax being paid.
In a recent decision of the Tax Court of Canada, Harding v. The Queen, 2022 TCC 3, Justice St-Hilaire determined that a corporation had conferred a benefit to its shareholder, Boyd Harding ("Harding"), for paid premiums in respect of certain life insurance policies that were owned by the corporation. The policies insured Harding's life and that of his spouse and for which, at times, the beneficiaries were his spouse and stepchildren. Harding did not repay the corporation for the insurance premiums it paid and, accordingly, was reassessed income tax in the amounts of $152,116.41, $228,925.09 and $140,973.01 for his 2013, 2014 and 2015 taxation years respectively. Justice St-Hilaire confirmed said reassessments and denied Harding's appeal.
This case is an important reminder to business owners that they should be cautious when their corporation pays insurance premiums. The beneficiary cannot be a shareholder or a family member or the premium paid will be considered a benefit to the shareholder and income tax will be owing. The corporation needs to be the beneficiary of any life insurance policies it owns. If you are a business owner whose business is paying insurance premiums, it would be prudent to review your policies and named beneficiaries.
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