Status update on the Golini case - what does it mean for the leveraged insurance arrangements with shareholder borrowing
The Golini case (Golini v. Her Majesty the Queen (2016) TCC 174, Miller J.) involved a complex, offshore, leveraged insurance arrangement that, in part, used a corporate-owned life insurance policy to secure a personal loan to the shareholder. The Tax Court found that the personal borrowing had an immediate shareholder benefit for the cumulative life insurance premiums already paid and paid in future (which equaled the amount of the loan to the shareholder) less the cumulative guarantee fees the shareholder had already paid and would pay in future to his corporation. (See also: As a Matter of Tax-Thin Edge of the Wedge.
The taxpayer appealed the case and it was settled before it was heard at the Federal Court of Appeal. The settlement is not a matter of public record.
The trial decision in this case stands
The Tax Court of Canada decision in the Golini case is still good law. Could the logic of this case be applied to other situations involving shareholder borrowing that may be less complex, aggressive or artificial than the Golini situation?
These were the Canada Revenue Agency’s (CRA) views before the Golini case where a shareholder uses a corporate asset as security for a personal loan:
Their general position was to assess a benefit where the shareholder does not deal at arm’s length with the corporation.
The taxable benefit may be measured as the difference in interest rates charged with and without the pledge of the corporate security, or as the amount that the borrower would have to pay to a third party to provide similar security for the loan.
If the shareholder can demonstrate that sufficient assets are available to repay the loan personally, and personal assets could have been used as security for borrowing at the same terms and interest rates received using the corporate security, it’s unlikely the CRA would assess a shareholder benefit.
If the lender would not have granted the loan without the corporation’s security, the shareholder would have to pay the cost of a third party providing a similar guarantee.
The Golini case raises several questions
Could a new value formula where shareholder benefit amounts equal the premiums paid by a corporation less any annual guarantee fee paid by the shareholder apply in other shareholder borrowing scenarios?
Unlike in the Golini case, the loan amount under many leveraged life insurance arrangements does not exceed the cash value of the life insurance policy and may require a margin – that is, the lender will lend against only a portion of the policy’s cash surrender value. A lender may also require the borrower to provide other personal collateral security in addition to the policy.
Also, unlike the Golini case, in many leveraged life insurance arrangements the loan is a full recourse loan where the shareholder is primarily liable for the debt. Should there be any recognition of a current benefit of the loan where this is the case?
It would be easy but perhaps simplistic to distinguish the Golini case because it was complex, aggressive and artificial. Is there something different about life insurance used as security that makes the CRA’s earlier views more difficult to apply in other shareholder borrowing scenarios now?
Generally, in conventional commercial lending, loan interest is not capitalized. Also, in general, loan principal is expected to be repaid over time.
The nature of life insurance allows for different expectations; for the repayment to be made at death and the loan amount to grow over time by the after-tax cost of interest.
Some life insurance products provide guaranteed cash values and death benefits where the premiums are paid as planned. Sometimes this product design makes it possible for a lender (where the borrower qualifies based on the lender’s credit criteria) to permit the loan amount to increase by new borrowings to pay interest on the amount borrowed. This is essentially capitalizing interest.
If the cash values are not guaranteed but the underlying investment returns are not volatile, the lender may have more confidence that the leverage margins established are sufficient. As a result, this can allow for the loan amount to increase with the underlying growth in cash values and death benefits.
In the context of shareholding borrowing, when these types of terms are offered what is this benefit worth? Would a typical guarantee fee fully reflect the value of this benefit?
This may be an area that the CRA may provide its views on in a future comment. Or, another case may end up in the courts to further the discussion. Until then, we are left with Golini.