This post was written prior to our January 2017 merger, under our previous firm name, MacPherson Leslie & Tyerman LLP.
The recent decision of Golini v. R., 2016 TCC 174, serves as a good reminder that, despite the often close relationship between a private corporation and its principal shareholders, care must be taken in retirement and transition planning to ensure that the corporation does not impoverish itself for the benefit of its principal shareholder, such that a taxable benefit to the shareholder could arise.
In Golini, a successful family business completed a series of transactions to address certain retirement and estate planning objectives in a tax efficient manner. As part of the series of transactions, the retiring shareholder received a $6,000,000 loan, the proceeds of which he used to purchase $6,000,000 worth of preferred shares in the operating company. In connection with that loan, a holding company within the corporate group guaranteed the loan, using its interest in a life insurance policy on the shareholder’s life as security.
Various tax benefits arose to the retiring shareholder and his group of companies as a result of the series of transactions. The Minister of National Revenue challenged the tax consequences of the series on a number of grounds, including the fact that the corporate guarantee was a shareholder benefit conferred on the principal shareholder.
The Court held that the guarantee of the loan of its principal shareholder by the holding company conferred a benefit to the shareholder under subsection 15(1) of the Income Tax Act (Canada). The Court was persuaded by the fact that, in all practicality, the only way the loan was going to be repaid was by the life insurance proceeds payable to the holding company that guaranteed the loan. Even though the shareholder could technically repay the loan at any time prior to his death, the Court indicated that he would have to act irrationally in order to do so, considering the repayment obligation would be satisfied on his death.
This resulted in the shareholder having to include $5,400,000 in his income for that year, valued as the cost of the insurance policy premiums, less the guarantee fee he agreed to pay the holding company as consideration for providing the guarantee.
This case serves as another example of the unintended consequences that can arise if private corporation estate and retirement planning structures are not properly implemented.