Canada: Tax Assistance

Introduction: Shareholder Benefits

Under subsection 15(1) of the Canadian Income Tax Act, a distribution of property by a corporation to a shareholder or a contemplated shareholder is a taxable benefit that must be included in the shareholder's income unless the distribution is exempted by the subsection. These shareholder benefits are not taxed as dividends. Consequently, if the shareholder is an individual, the dividend tax credit is not available, and the corporation is not permitted to make a corresponding deduction for the conferred benefit. This provision captures situations where a shareholder receives distributions from a corporation other than through the conventional dividend route and its purpose is to prevent shareholders from using corporate property for personal use without the appropriate payment of tax. Many cases have come before the courts as to the scope of a shareholder benefit and whether a benefit has been conferred. On January 11, 2022, the Tax Court of Canada released a decision, Boyd B. Harding v The Queen, 2022 TCC 3, on whether premiums paid in relation to insurance policies by a corporation to its shareholder was considered a shareholder benefit.

Facts of Boyd B. Harding v The Queen, 2022 TCC 3

Mr. Boyd B. Harding is a successful businessman who is the sole shareholder and director of a holding company. This holding company is a majority shareholder of a corporation named Boyd B. Harding Ltd. (BBH Ltd.), which carries on a logging business that has annual income of around $18 million.

For the 2013, 2014, and 2015 taxation years, BBH Ltd. paid the premiums for the insurance policies that insured the lives of Mr. Boyd and his wife. The beneficiaries of the insurance policies, were, at times, his wife, and stepchildren for the relevant years in question. Mr. Boyd was reassessed by the Canada Revenue Agency (CRA) for the three years on the grounds that the premium paid by the corporation should have been included in Mr. Boyd's income as shareholder benefits.

Issue before the Tax Court and the Position of the Parties with Respect to Shareholder Benefits

The primary issue before the Tax Court was whether the payment of the insurance premiums by BBH Ltd. conferred a shareholder benefit upon Mr. Boyd within the meaning of subsection 15(1) of the Income Tax Act. Evidently, Mr. Boyd was of the view that BBH Ltd. did not confer a shareholder benefit on him because his stepdaughter managed his insurance portfolio. Because his stepdaughter managed his portfolio, he was unaware that there was a policy insuring his and his wife's lives, and that his wife and stepchildren were the beneficiaries of the policies. The CRA, on the other hand, held that Mr. Boyd knew or ought to have known about the insurance policies, including who would receive the payment if the insured passed away. Further, just because Mr. Boyd did not know about the details surrounding the beneficiaries of the insurance policies, his lack of knowledge does not preclude a finding that there was a shareholder benefit.

Tax Court finds that a shareholder benefit was conferred

Justice St-Hilaire, writing for the Tax Court, first examined whether a benefit was conferred. A benefit is conferred upon a shareholder if the corporation engages in transactions that are not genuine business transactions, but ones engaged for personal purposes. Here, the fact that the beneficiaries of the insurance policies were his spouse and stepchildren do not support the finding that the insurance policy payments were genuine business transactions.

Next, because Mr. Boyd acknowledged that the premium payments made by BBH Ltd. were a benefit, but that BBH Ltd. did not have an intention to confer a benefit on him, Justice St-Hilaire turned to the case relied upon by Mr. Boyd: Canada v Chopp, [1998] 1 CTC 407 (FCA). Justice St-Hilaire then adopted the approach set out by Justice Morgan in the trial decision of Canada v Chopp, which was also approved by the Federal Court of Appeal. In the trial decision, Justice Morgan explained that a shareholder benefit may be found even if the shareholder did not have actual knowledge or intent to receive the benefit. The fact that the shareholder ought to have known that a benefit was conferred is sufficient to substantiate a finding of a shareholder benefit. After examining the documentary and oral evidence, Justice St-Hilaire concluded that Mr. Boyd ought to have known that BBH Ltd. had purchased insurance policies that insured the lives of himself and his wife, and from which his wife and stepchildren stood to benefit if the insureds passed away. Mr. Boyd had reviewed the financial statements of BBH Ltd. with his accountant for the years in question, which showed that the amounts of the insurance premiums expenses were significant. Justice St-Hilaire further reasoned that just because payments were not made under any of the policies since the insureds remained alive, the fact that Mr. Boyd's spouse and stepchildren were the designated beneficiaries means they would have received the payments in the event of the insureds' death. Consequently, Mr. Boyd was conferred a benefit within the meaning of subsection 15(1) of the Income Tax Act.