Golini – Tax Court of Canada finds that a loan to a shareholder with recourse limited to an asset pledged by the corporation was a shareholder benefit (and an abuse of s. 84(1) when the loan was used to acquire high-PUC shares)

A simplified description of a “structured transaction” is that Opco used proceeds of a daylight loan to redeem shares of Holdco, which used those proceeds to purchase a life insurance policy (or, to be more precise, to purchase an annuity to fund the premiums on the acquired policy) from an accommodating offshore insurance company, with those funds making their way back, through a series of equally accommodating intermediaries, to the sole individual shareholder of Holdco (“Paul Sr.”) as a loan. This loan was guaranteed by Holdco, with the guarantee secured by Holdco’s life insurance policy. The loan terms limited the lender’s recourse thereunder to realization of such security.

In finding that most of the loan amount was a shareholder benefit, given that “Holdco has agreed to use insurance proceeds from a policy it owns to pay off its shareholder’s debt,” C. Miller J stated

The transactions were structured such that there would be no sensible reason for Paul Sr. to repay the loan. Everyone’s understanding was the annuity and insurance were the only manner in which the obligation of the… loan would be met… .

He did not consider it necessary, in order to reach the above conclusion, to consider that there had been an absolute assignment of the insurance policy by Holdco to the lender at the time of the loan – but considered that, in any event, the purported non-absolute assignment of the policy was a sham, which further buttressed his finding of a shareholder benefit. However, in referring to a clause in the purchased annuity contract which incorrectly indicated that there was a potential investment return on the annuity, he stated that

Although there has been a misrepresentation, my view is that to void the entire transaction as a sham transaction because of a misrepresentation that is not fundamental to the nature of the annuity extends the concept too broadly.

He also found that the 8% interest on the loan (which he appeared to consider to be in excess of a reasonable rate of 5.5%) was deductible in full, but that there was an offsetting shareholder benefit to the extent this interest was capitalized, so that Paul Sr. only received a net interest deduction for the portion of the interest (equivalent to about a 1.33% rate) paid by him in cash.

Paul Sr. used the loan proceeds to acquire shares of Opco with full paid-up capital, with Opco paying off the daylight loan. C Miller J found that if it had been necessary to rely on GAAR, he would have found “there is an abuse of the underlying policy of subsection 84(1).”

Neal Armstrong. Summaries of Golini v. The Queen, 2016 TCC 174 under s. 15(1), s.20(1)(c), s. 245(4), General Concepts – Sham.