In Gestion M.-A. Roy Inc. c Canada (2024 FCA 16), the Federal Court of Appeal agreed with the Tax Court that the corporate holders of two life insurance policies received taxable benefits where the premiums of both policies were paid by a third corporation within the group.
The case involved an operating company (the “Opco”) that paid premiums for life insurance policies held by two holding companies (the “Holdcos”). One of the Holdcos was a shareholder of Opco and the other one was not. Opco was the revocable beneficiary of both policies, which were put in place to ensure Opco would have sufficient funds to redeem the Holdcos’ shares in the event of the ultimate shareholder’s death.
The Court found that the particular structure gave rise to a taxable benefit under subsection 15(1) of the Income Tax Act (Canada) for the Holdco that was a shareholder and under subsection 246(1) for the Holdco that was not a shareholder.
Subsection 15(1) is a well-known provision that taxes cash or non-cash benefits conferred by a corporation on a shareholder, thus limiting the shareholder’s ability to obtain benefits tax-free that otherwise would have been paid out in a taxable manner (e.g. as dividends). Subsection 246(1) is a more general provision that applies where a benefit is conferred on a taxpayer by another person and the benefit is not otherwise included in the taxpayer’s income. The Federal Court of Appeal agreed with the Tax Court’s conclusion that the analysis to be conducted under both subsections is substantially the same.
This case emphasizes the care that must be taken when devising life-insurance structures, especially where the policy is held by one entity with another entity paying the premiums, regardless of whether a direct shareholder relationship exists.