What are the tax issues for the LivingCare benefit when the owner isn’t the insured person?

March 2020

The following discussion is predicated on the assumption that Lifecheque is accident and sickness insurance. The CRA has confirmed that it views critical illness insurance policies providing no Return of Premium benefits as accident or sickness insurance. It has not confirmed this view for policies containing Return of Premium on death benefits outside Quebec. It is Manulife’s view that Lifecheque with Return of Premium on Death and optional Return of Premium Riders should be viewed as accident and sickness insurance.

Lifecheque provides a LivingCare benefit. The LivingCare benefit provides a monthly care benefit if a client becomes functionally dependent and satisfies the waiting period. Functional dependence means they require substantial assistance with two or more of the Activities of Daily Living or substantial supervision is required because of cognitive impairment. The LivingCare benefit is available on issuance of Renewable, Level and Permanent Lifecheque coverages and is subject to underwriting approval.

The Lifecheque contract provides that the LivingCare benefit is payable to the insured person under the policy unless the owner specifies otherwise. In situations where the owner is different from the insured person, unexpected tax consequences can arise in certain circumstances. Planning can address this if thought is given to these possibilities up front.

Where a corporation purchases a Lifecheque policy for corporate protection (i.e., key person, business loan protection, buy-sell funding or to maintain premium payments to existing corporate insurance plans), the critical illness benefit is payable to the corporation. However, the contract provides that unless the corporation gives instructions otherwise, the LivingCare benefit would be paid to the insured person (key employee or shareholder). There is no specified premium for the LivingCare benefit. If left as is, an amount in respect of the LivingCare benefit may be required to be included annually in the income of the employee or shareholder as an employee or shareholder benefit. To avoid this issue, the corporation may direct payment of the LivingCare benefit to itself (or name itself as beneficiary, in provinces that permit a beneficiary designation under an accident or sickness policy – currently: Quebec, Manitoba, Alberta, B.C., Ontario and Saskatchewan) at the time of issuance of the policy.

This same issue arises where a corporation and an employee or shareholder enter into a split dollar arrangement under which the corporation pays for the risk portion of the policy. Again to avoid the potential for an income inclusion to the employee or shareholder for the LivingCare benefit, the corporation may name itself as beneficiary or direct payment to itself, as applicable.

Where a corporation intends to provide an employee benefit to one employee (not a group situation and not a shareholder situation) and a Lifecheque policy is purchased to provide this benefit, the following tax consequences arise:

• Where the employee owns the policy and the corporation pays the premium, the premium would be included in the employee’s income as an employee benefit and it would generally be deductible to the employer as a business expense. The LivingCare benefit, if any, received by the employee should be a non-taxable accident or sickness insurance benefit.
• Where the corporation pays the premium on a corporate owned policy and allows the policy to operate so that a LivingCare benefit payable under it would flow to the employee, (in addition to the employee being the payee, by either a beneficiary designation or direction to pay, as applicable, of the critical illness benefit), the premium would be included in the employee’s income as an employee benefit and generally deductible to the corporation as a business expense. Any LivingCare benefit (or critical illness benefit) received should not be included in the employee’s income.
• Where the corporation does not allow benefits to flow directly to the employee but rather, in the case of the LivingCare benefit, directs payment of the LivingCare benefit to itself (and does not name a beneficiary or direct payment of the critical illness benefit, as applicable, to the employee) the premium would not be included in the employee’s income or deductible to the corporation as a business expense. The corporation would generally deduct the LivingCare benefit (or critical illness benefit) paid to the employee funded by the non-taxable receipt of proceeds by the corporation under the policy. The LivingCare benefit (or critical illness benefit) would be included in the employee’s income as an employee benefit.

Where the corporation intends to provide employee benefits (not shareholder benefits) to a group of employees and Lifecheque policies are purchased as part of a group sickness or accident insurance plan the following tax consequences arise:

• Where the corporation pays the premiums on corporate owned policies and allows them to operate so that any LivingCare benefits payable under them would flow to the employees, (in addition to the employees being the payees, by either a beneficiary designation or direction to pay, as applicable, of the critical illness benefits), the premiums paid in respect of coverage after 2012 are included in the employee’s income under subsection 6(1)(e.1) and would generally be a deductible expense to the corporation. At the time any LivingCare (or critical illness benefit) is paid to employees, it would be non-taxable to the employees.

The tax consequences of receipt of the LivingCare benefit under a Lifecheque policy will depend upon the context in which it is being received. It is important to consider these contexts when determining if a beneficiary designation or direction to pay, as applicable, of the LivingCare benefit should be made or whether the contract should be allowed to operate to pay this benefit to the insured person under the policy.

The Tax, Retirement & Estate Planning Services at Manulife writes various publications on an ongoing basis. This team of accountants, lawyers and insurance professionals provides specialized information about legal issues, accounting and life insurance and their link to complex tax and estate planning solutions.

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