Disability and office overhead expense insurance: be sure to choose the right fiscal structure

This article was generously provided by Luc Brunelle, D.E.S.S. Fisc. Pl. Fin. and senior advisor in Business Development, Financial Horizons Group, Quebec Region.

 

Last May, a ruling was made in the case of the Crown v Chantal Béliveau in the Tax Court of Canada and therefore constitutes a legal precedent. That is why, in this article for financial security advisors, I want to clarify and emphasize the right tax structure while underwriting disability and office overhead expense insurance for clients, i.e. premiums that are deductible from business income and benefits that are added to business income.

 

Let’s examine the judgement rendered May 29, 2018 in the case of Crown v Chantal Béliveau in the Tax Court of Canada:

Ms. Béliveau is a dental surgeon and signed three disability insurance contracts with an insurance company over the years: two were office overhead contracts, and the other was an individual disability insurance plan for professionals.

The first office overhead expense contract cost her $85.22 per month, and the monthly benefits amounted to $5,500. The second office overhead expenses contract was for premiums of $407.75 per month for monthly benefits of $15,000, and the individual disability insurance plan had premiums of $883.45 per month for monthly benefits of $8,000.

Ms. Béliveau purchased all this insurance on a personal basis and paid all the premiums herself. She therefore didn’t request any tax deductions for these premiums (including the two office overhead expenses contracts) at the recommendation of her advisor, who had told her that thus no benefits would be taxable in the event of a disability.

Revenue Canada thought otherwise. In 2009, they assessed Ms. Béliveau for $88,150; in 2010, for $249,417; and in 2011, for $114,116. These assessments correspond to the sums she received by virtue of her office overhead expenses contracts, even if she had never deducted the premiums from her business taxes.

 

Here is the judge’s ruling:

The fact that the premiums paid by the appellant to purchase and maintain these two office overhead expenses policies during the years in which she was not disabled were not deducted, and the fact that the premiums were paid from the personal bank account she held with her spouse, cannot change the nature of the benefits received, nor their taxability. The correlation between the deduction of premiums and the taxation of benefits is not an absolute principle, even though in the present case, the premiums were deductible in the appellant’s business income calculations but were not deducted. Moreover, it must also be emphasized here that the appellant benefited from the exoneration clauses for the premiums provided for her disability insurance policies for the three years in contention and therefore did not pay the premiums during this period (the premiums paid in 2009 were reimbursed to her).

For all these reasons, the appellant’s appeal is rejected.

 

Imagine the state in which Ms. Béliveau now finds herself: although she never deducted premiums from her business taxes, she must be taxed on those sums which she received through her office overhead expenses contracts, i.e. on $450,683 ($88,150 for 2009, $249,417 for 2010, and $114,116 for 2011). If we calculate a tax rate of approximately 50%, this represents half of these sums which she must now render to the government, plus penalties and interest if necessary.

This ruling, this situation and the jurisprudence may seem unjust, but it is up to us now to learn our lesson to avoid their repetition at all costs. Advisors must ensure they offer the right tax structure while underwriting disability and office overhead expense insurance for their clients. The tax system is clear and precise: premiums must be deducted from business income, and benefits must be added to business income, regardless of weather the business is incorporated.

Insurers’ taxation tables for disability insurance plans are one reference to consult on this subject. That said, insurers always note that they only provide general guidelines and that legal or tax advice must come from the client’s own tax specialist or accountant. As a precaution, we thus recommend that you advise along these same lines.

Do you need greater expertise, support or advice for one of your more complicated files? You are welcome to contact the Business Development Consultant at your local branch of Financial Horizons Group.