Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Following the Golini case, can the CRA provide an update on tax concerns regarding any insurance products or strategies that are subject to specific audit programs?
Position: Comments provided below.
CALU Roundtable - May 2018
Question 7 - Golini v. The Queen (endnote 1)
The Tax Court of Canada decision in Golini v. The Queen involved the review of a complex planning arrangement where funds were borrowed by a Canadian private corporation (Opco) to redeem preference shares held by a holding company (Holdco). Holdco used those funds to purchase a life insurance policy and annuity contract offered by two non-resident insurance companies which did not appear to reflect commercial insurance rates. Those policies were then used to guarantee a $6 million loan from a third party to the shareholder of Holdco (Mr. Golini). Mr. Golini invested those funds in Opco, which in turn used those funds to pay the original loan. The tax benefits of this arrangement included an annual interest expense deduction to Mr. Golini as well the acquisition of high ACB/PUC shares in Opco.
The CRA challenged the tax benefits on the basis that the transactions were a sham, the loan resulted in a shareholder benefit, or the General Anti-Avoidance Rule applied to include the loan in Mr. Golini’s income as a taxable dividend. While the Tax Court of Canada did not find on the basis of sham, the Court did find several elements of the transactions to be a sham. The Court went on to conclude that these sham elements supported a finding that the taxpayer received a shareholder benefit, or in the alternative, that the GAAR would apply to the transactions. CALU understands that the CRA has concerns with these types of arrangements and has strongly advised members to not engage in this type of planning on behalf of their clients.
Is the CRA aware of any new leverage structures similar to those undertaken by Mr. Golini? If yes, could the CRA share details on those arrangements and the specific tax concerns so our members can properly advise their clients? Could the CRA advise if there are any insurance products or strategies (other than “Golini” type strategies) that are subject to specific audit programs or are under consideration by the GAAR Committee?
The CRA continues to be concerned with planning arrangements similar to those undertaken in the Golini case. In that regard, it is important to note that the Golini appeal to the Federal Court of Appeal has been withdrawn, thus, leaving the decision of the Tax Court of Canada unchanged.
The CRA continues to identify leveraged structures where products that form part of the arrangement are heavily interdependent and would not have otherwise been issued in the absence of the others (i.e. insurance coverage and annuity contract). The CRA is concerned with arrangements that seem to circumvent the 2013 amendments to the “LIA Policy” definition, which was intended to eliminate the tax benefits associated with leveraged insured annuity arrangements.
The new arrangements identified thus far entail manipulating the terms of the products (including pricing) that form part of the arrangement, including the issuance of products that would not have otherwise been issued on a stand-alone basis. An example of this might be the issuance of life insurance policies on the lives of high risk individuals or persons not connected to the underlying business or in any way connected to (or necessary for) the underlying borrowing to enhance tax deductible premiums paid in circumstances where the life insurance policies are intricately tied to refundable annuity contracts, or schemes seeking to exploit the preferential treatment in respect of the capital dividend account (CDA) of private corporations receiving life insurance proceeds.
The CRA has consistently expressed the view, that the general anti-avoidance rule found in section 245 of the Act could apply to these arrangements. The CRA’s concerns with newly identified arrangements will also be brought to the attention of the Department of Finance, Canada so that they can evaluate whether further legislative action is warranted.
The Act was also amended in 2013 to deny multiple and unintended tax benefits related to 10/8 arrangements to improve the integrity and fairness of the tax system.
As part of its mandate to administer the Act and to deter non-compliance, the CRA is continuing its review of alternative products offered to policy holders, by certain insurance companies, as a replacement for 10/8 structures. The CRA has some concerns with the restrictions attached to the replacement investment accounts when such accounts are not used to obtain a collateral loan. However, the CRA review is still ongoing.
Also, as part of the Government of Canada’s agenda to improve the integrity and fairness of the tax system, the CRA will continue to take action to detect and to address domestic and cross-border tax planning schemes with life insurance products which seek to achieve preferential tax benefits contrary to the underlying tax policy. For greater certainty, in case of doubt, the CRA recommends that an advance tax ruling should be requested before new products or arrangements are offered to clients.
Response prepared by
Industry Specialist Services – Insurance
International, Large Business and Investigations Branch
May 8, 2018
1 2013 TCC 174.
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