The Link Between - Protect your Financial Future

Corporate Owned Life Insurance - Watch Those Beneficiary Designations!

As a business owner, your corporation has a life insurance policy on your life - a key part of your estate and succession planning! However, to avoid unintended tax consequences, it’s critical that the beneficiary designations of your corporate owned life insurance policies be reviewed. Where your corporation is the owner and payor of the life insurance, your corporation (or a subsidiary of your corporation) needs to be the beneficiary of the life insurance - not members of your family or your estate. Why? Well, when corporate funds are used to pay for personal expenses of 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!

In fact, this is exactly what happened in the recent Harding v The Queen court case. 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 very good planning at all. As a result, 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 failed to see these reasons as valid arguments and assessed a taxable shareholder benefit for the life insurance premiums paid.

The lesson to be learned here? If you’re a business owner and your corporation owns a life insurance policy on your life, always ensure that the corporation (or subsidiary of your corporation) is designated as the beneficiary of that life insurance policy.

Contact us today to review your corporate owned life insurance and its’ beneficiary designations.