Corporate Beneficiaries

The CRA's position on the structuring of corporate policies

by Kevin Wark and Glenn Stephens, October 2011

In our November/December 2010 article, "Pipeline Planning," we commented on a change in CRA administrative practice where a corporation (Opco) is the owner and premium payor for an insurance policy under which a corporate shareholder (Holdco) is beneficiary. The CRA indicated that it planned to assess Holdco for a shareholder benefit equal to the premiums paid by Opco. The announced change in the CRA's position did not, however, deal with the more common situation where Holdco is the owner of a policy under which Opco is beneficiary. This article will consider the CRA's position regarding the latter arrangements.

The Capital Dividend Account (CDA)

The amount of insurance proceeds paid to a private corporation, less the adjusted cost basis (ACB) of the policy, is credited to the corporation's CDA. However, the ACB is attributable only to the policy owner, which means that all proceeds paid to Opco as beneficiary are fully credited to its CDA irrespective of the policy's ACB.

In several technical interpretations, the CRA has stated that it might apply the general anti-avoidance rule (GAAR) where this structure is established primarily to maximize the CDA credit. A successful GAAR challenge could, for example, result in the ACB being attributed to Opco as if it were the policy owner.

We are not aware of any successful challenges by the CRA regarding these arrangements. In many cases, there are legitimate non-tax reasons, such as creditor protection, that provide a bona fide business purpose for arranging insurance in this manner.

In any event, attributing the policy's ACB to Opco would result in the same CDA credit that would have arisen had the policy owner and beneficiary been the same corporation. To this extent, therefore, the risk of structuring a policy with Holdco as owner and Opco as beneficiary seems minimal. However, recent comments made by the CRA have introduced other issues into the discussion.

CALU Roundtable Comments (2010)

Several questions regarding corporate beneficiary designations were posed to the CRA at the 2010 annual meeting of the Conference for Advanced Life Underwriting (CALU). Regarding circumstances where Holdco owns a policy and Opco is the beneficiary, the following statements made by the CRA are noteworthy:

  1. If Holdco pays the premiums under such a policy, it would not incur a taxable shareholder benefit. However, Opco could be subject to tax under subsection 246(1) of the Income Tax Act.
  2. Where Opco reimburses Holdco for the premiums, it is possible for the reimbursement to be taxable to Holdco under paragraph 12(1)(x) of the Act.


While the CRA is troubled by situations where one corporation is the owner of a life insurance policy and a related corporation is the beneficiary, the risk of structuring a policy in this manner seems minimal.

Over the past year, these comments have come to the attention of tax advisors, and have created some uncertainty regarding the structuring of corporate policies. We will discuss each of the above sections briefly:

  1. Opco could be considered to receive a taxable benefit under subsection 246(1) if a payment (i.e., the premium) is made by Holdco on its behalf and if the payment would have been taxable to Opco if received directly. It is not clear that Opco would be required to include such a hypothetical payment from Holdco in its income. In addition, subsection 246(1) does not apply where parties are dealing at arm's length, as is common where the insurance is used to fund a shareholders agreement.
  2. Paragraph 12(1)(x) could potentially apply if Opco was reimbursing Holdco for premiums that were being deducted by Holdco for tax purposes. In that case, the amount of the reimbursement could be taxable to Holdco. This could be the case, for example, where the policy is assigned to a financial institution as collateral for certain loans.

As a general comment, it is safe to say that neither of the above sections was designed specifically to deal with the structuring of life insurance in a corporate setting, and neither seems applicable in the majority of situations.

It's clear that the CRA is troubled by situations where one corporation is the owner and a related corporation is the beneficiary of a life insurance policy. It is also apparent that the CRA is relying on some "unusual" sections of the Act to challenge these structures. And while a GAAR challenge is possible, it will be difficult to sustain where other valid planning is involved.

It could also be argued that the CRA is overreacting to this issue. In most cases, the ACB of a permanent life insurance policy will ultimately reduce to zero, and will have almost always reached that point if the insured survives to life expectancy. The ACB of term insurance policies is typically low and will rarely be a material amount. For these reasons, there will often be no significant impact on the ultimate CDA credit from having a separate owner and beneficiary.


Kevin Wark, LLB, CLU, TEP, is the senior vice-president, business development, at PPI Financial. Glenn Stephens, LLB, is a planning services consultant with PPI Financial.

This article was published in the October 2011 issue of FORUM magazine. Posted with permission from the Financial Advisors Association of Canada (Advocis).

These resources are provided for reference only and do not necessarily represent the opinions of Guilfoyle Financial Inc. Please consult your own tax and legal advisors.