Corporate Tax Landmines In Canada with Henry Wong
What You Will Learn
Corporations don’t retire, but corporate owners do, and the strategy used to convert a corporate life insurance policy into retirement income can either be done correctly or it can trigger a catastrophic tax event that CRA discovers at the worst possible moment. This session with Jason Lowe, Richard Canfield, and CPA Henry Wong walks through the two routes available inside a Corporate Insured Retirement Program, why the shareholder borrowing route is a tax land mine, and what a landmark 2016 court case reveals about what happens when it goes wrong.
Key Moments in This Session
- Corporate borrowing versus shareholder borrowing: how a Corporate Insured Retirement Program works at a high level, why the corporation owning the policy and borrowing against it through a commercial bank is the preferred and well-understood route, and why the shareholder borrowing route, where the loan goes directly to the individual using the corporation’s policy cash values as collateral, is where the land mine lives.
- The shareholder benefit rule under subsection 15(1): how any benefit a shareholder receives from their corporation that is not at arm’s length can be included in their personal income as a taxable benefit, why paying a guarantee fee to mitigate the collateral benefit does not automatically solve the problem, and why CRA does not tell you what a reasonable guarantee fee actually is.
- The Galini case, July 2016: how a business owner used a holding company, an offshore annuity, and a chain of lending arrangements to access $6 million personally using corporate policy cash values as collateral, paid a $40,000 annual guarantee fee, and was still assessed by the Minister of National Revenue with the full $6.3 million included as a personal taxable benefit under subsection 15(1), resulting in a multi-million dollar tax bill.
- What happens at death when the shareholder borrowing route is used: how at death the insurance company writes one check to the bank and one to the corporation, meaning the entire outstanding loan balance is added to the shareholder’s terminal tax return as income unless the corporation has a pre-arranged agreement with the lender to accept the death benefit proceeds and release the collateral assignment before issuing the check.
- Why this land mine is still being sold today: how illustration software used by advisors includes a shareholder borrowing option that produces attractive retirement income projections without showing the net after-tax result, why insurance professionals are generally not tax professionals, and why getting the right team including chartered accounting, trust and estate planning, and insurance expertise working together before implementing any corporate retirement strategy is the only way to avoid it.