Written on behalf of Feigenbaum Consulting
For people who own their own business, no matter large or small, it can be easy to forget or not think about some of the tax implications that may be involved in seemingly small matters. This might be especially true when an independently owned business works with family members. Regardless of whether you are the sole owner of a business that brings in $25,000 per year, or one that does over $10 million in revenue, it’s important to remember that complying with tax rules is critical to avoiding unpleasant experiences with tax authorities such as the Canada Revenue Service. This was the case in a recent decision from the Tax Court of Canada.
Life Insurance is purchased for the business owner and his family
The taxpayer is a successful business owner from New Brunswick. He is the sole shareholder and owner of a business that brings in $18 million every year, including about $1m in profit. Unbeknownst to him, the business had paid insurance premiums on life insurance policies for the taxpayer and his wife, listing his wife and stepchildren as beneficiaries. This led to a reassessment from the CRA, in which it was determined that he had not paid taxes on those benefits, which should have been considered income for tax purposes.
The taxpayer claimed he was not aware that the insurance policies were in place, nor that the premiums for the policies were being paid for by the business. The CRA’s position was that his knowledge of how premiums were paid was irrelevant because he benefited from the practice by not paying tax on the premiums.
Taxpayer says he didn’t know about the benefits; CRA says he ought to have known
The taxpayer said that his stepdaughter (“NH”), who is a licensed insurance broker, had been put in charge of his own personal insurance. He told the court he took a hands-off approach to his life insurance and wasn’t aware of the specifics around his policy or that one was put in place for his wife. He also told the court he didn’t know his stepchildren had been named as beneficiaries of the policy. His argument was anchored in the business’ lack of knowledge about conferring the benefit to the taxpayer. After all, he is the sole shareholder of the business and was not aware he was giving himself the benefit.
The taxpayer said that while the payment of insurance policies constitutes a “benefit” under the Income Tax Act, it’s necessary that there be an intent by the business to confer the benefit. The taxpayer cited a 1998 federal court decision, which stated,
“I think a benefit may be conferred within the meaning of subsection 15(1) without any intent or actual knowledge on the part of the shareholder or the corporation if the circumstances are such that the shareholder or corporation ought to have known that a benefit was conferred and did nothing to reverse the benefit if it was not intended.”
Of course, we know that every word in a decision or a law deserves to be considered and included in our understanding of what the law is. As such, it is important to realize that the decision shared by the taxpayer said the corporation knew or “ought” to have known of the benefit. As we will see, the CRA took the position that even if the taxpayer in his capacity as the owner of the business did not know, he ought to have known.
Should the taxpayer have known he was providing himself a benefit?
The CRA relied on the Act, which states,
“If, at any time, a benefit is conferred by a corporation on a shareholder of the corporation, …, then the amount or value of the benefit is to be included in computing the income of the shareholder…”
The court agreed with the taxpayer that a benefit may be conferred without intent or actual knowledge by the shareholder, but also stated it is up to the court to determine if the shareholder ought to have known. This is opposed to simply taking the taxpayer’s word for it that he did not know.
The court considered the taxpayer’s argument that he did not know the policies were in place, and that he felt “duped” by his stepdaughter, who he said named her and her siblings as beneficiaries of the policy without his knowledge. It also considered the taxpayer’s statement that the premiums were not significant expenses as compared to the rest of the costs associated with the business.
However, the court found that as the sole shareholder, he had signed the financial statements for the business for each of the tax years in question and that he had reviewed the financial statements of the business with his accountant. The expenses were not as insignificant as claimed, with annual costs of $149,760, $315,376, and $150,420 for each of the years in question. The court found them to have been some of the highest expenses incurred by the business in each year, so while they may only make up a small percentage of the total expenses, the numbers themselves are significant. The court also noted that the taxpayer had signed beneficiary designation forms for the insurance, and while he may not have been paying attention to what he was signing, he certainly should have. Finally, the court gave little weight to the taxpayer’s argument that he didn’t actually benefit from the policies since he and his wife did not die. The court ruled that the payment of the premiums themselves constitutes a benefit as opposed to the payout of the premiums.
Let the tax team at Feigenbaum Law help you avoid tax pitfalls
The case discussed is a great example of how easy it is to run afoul of tax law when operating a business, especially when a great deal of trust is in place among those making decisions related to the business. That’s why it’s important to experienced tax lawyers such as the tax team led by Mark Feigenbaum at Feigenbaum Law. We work closely with clients in Canada and the United States to assist with personal tax planning and compliance and corporate tax planning and compliance to make sure they have a sound strategy in place. We are ready to represent our clients in litigation should it be necessary. Please reach us online or by phone at 1-877-275-4792 to see how we can help you today.