In Golini v. The Queen, 2016 TCC 174, a Canadian private company group (the Canco Group), together with certain insurance and financial entities largely based in the Caribbean (the Financing Group), engaged in a “structured” loan arrangement involving a principal shareholder (the Shareholder) that may be abbreviated as follows:
- an entity in the Canco Group borrowed $6 million from the Financing Group (the First Loan),
- an entity the Canco Group acquired a life insurance policy from the Financing Group effectively for $6 million (the policy was to pay a death benefit in respect of the Shareholder of $6 million, to be increased annually),
- an entity in the Financing Group (the Lender) lent $6 million to the Shareholder at interest (the Second Loan),
- the Shareholder used the proceeds from the Second Loan to subscribe for preferred shares of an entity in the Canco Group (the Preferred Shares) having a paid-up capital of $6 million,
- proceeds received by the Canco Group in respect of the Preferred Shares were used by the Canco Group to repay the First Loan,
- the Second Loan was secured by a guarantee from an entity in the Canco Group (the Guarantee),
- the Guarantee was secured by the life insurance policy owned by the Canco Group (the Collateral), and
- the Lender’s recourse on the Second Loan was limited to the Collateral (see paragraph 64).
On these facts, the Tax Court of Canada (TCC) found that in “reality” the Shareholder “would not have to repay” the Second Loan (see paragraph 96). Accordingly, even taking all the documents at their face value, the Shareholder received a taxable shareholder benefit under s. 15(1) equal to $5.4 million – being the amount of the Second Loan ($6 million) less the total fees to be paid by the Shareholder for the Guarantee ($40,000 x 15 years = $600,000) (see paragraphs 104 and 105). The TCC similarly found a taxable benefit under s. 15(1) equal to the capitalized interest on the Second Loan, which benefit effectively wiped out the corresponding interest deduction the Shareholder had claimed on the Second Loan under s. 20(1)(c) (see paragraph 129). In the alternative, the TCC held that the general anti- avoidance rule in s. 245 applied to these transactions, resulting in a deemed dividend to the Shareholder under s. 84(1) equal to the $6 million paid-up capital of the Preferred Shares (see paragraph 139).