By Nicolas F. Baass LL.B., LL.M. (Tax)
On May 11, 2009 the Tax Court of Canada released Justice Lucie Lamarre’s judgement in Jacques Bilodeau v. The Queen. 1 As of the time of the writing of this blog the decision was only available in French. The case dealt with the deductibility of commissions received by a life insurance salesperson on the acquisition of a life insurance policy by that salesperson.
The facts of the case involved a commissioned life insurance salesperson who purchased life insurance policies for himself and his wife. The taxpayer made initial premium payments of $57,166 to acquire both policies. The taxpayer received commissions totalling $43,115 for selling the two policies. The taxpayer clearly acknowledged that he believed that the commissions received on the purchase of the life insurance would be non-taxable pursuant to long standing practice in the life insurance industry and the Canada Revenue Agency’s (“CRA”) administrative position on such a matter. The taxpayer further acknowledged that he would never have acquired the policies had he known that the commissions were taxable, as the commissions were largely used to offset the premiums paid for the policies.
The taxpayer initially reported income of $43,115 but claimed an offsetting deduction for the same amount. The CRA denied the taxpayer’s deduction of the $43,115, stating that the life insurance policies had been purchased for investment purposes and not protection and thus did not fall within the CRA’s administrative position. The taxpayer appealed to the Tax Court, arguing that the commissions were deductible under CRA’s administrative policy and, as a subsidiary argument if the commissions were not deductible, that the premium payments to acquire the policies were deductible.
In her analysis, Justice Lamarre recognizes that in the life insurance industry commissions received on the acquisition of life insurance policies by a life insurance salesperson are generally thought to be non-taxable. This policy arises from CRA Interpretation Bulletin IT-470R at paragraph 27 which states:
“Similarly, where a life insurance salesperson acquires a life insurance policy, a commission received by that salesperson on that policy is not taxable provided the salesperson owns that policy and is obligated to make the required premium payments thereon.”
In rejecting the taxpayer’s argument, the Court states that the commissions received are clearly taxable as business income pursuant to subsection 9(1) of the Act. The Court states that the taxpayer would never have received these commissions had he not been in the business of selling life insurance. The fact that the taxpayer acquired the life insurance policies for personal purposes does not change the fact that the commissions in question were earned while conducting professional activities as a salesperson.
With respect to the CRA’s administrative policy in IT-470R, the Court states that such an Interpretation Bulletin cannot take precedence over the Income Tax Act. Loosely translated, the Court states the following:
With respect to Interpretation Bulletin IT-470R, the Bulletin cannot be a substitute for the Income Tax Act. The Interpretation Bulletin is only the opinion of the CRA, and is not binding on the CRA, taxpayers, or courts.
Thus, in my opinion, to the extent that the CRA changes its administrative policy or considers that a particular case does not fulfill the conditions required by the generosity of the CRA, the taxpayer cannot apply to this Court to force the CRA to comply with the Interpretation Bulletin, especially if this Bulletin grants tax relief which is not in line with tax legislation. [Loosely Translated]
From the foregoing translated passage, it is clear that the CRA’s administrative policy cannot be enforced before the Tax Court. As such, the taxpayer’s reliance on the CRA’s Interpretation Bulletin offered no relief in the present case. The CRA is in no way bound by administrative relief which is not directly anchored in the Act.
The Court concedes that the CRA’s policy originates from the fact that when an employer grants a rebate to an employee on the employee’s purchase of merchandise, such a rebate will generally not be taxable. Likewise, when an insurance salesperson acquires life insurance the commissions received on this life insurance is akin to a rebate on this life insurance and is usually not taxable pursuant to this CRA administrative policy.2 The Court responds to this argument by reiterating that this administrative policy may have no basis in law.
It should be noted that there are a number of CRA documents which confirm that commission salespersons who receive a commission on the sale of a product for their personal use are not required to include the amount in income.3 However, the CRA has stated that administrative relief in this case will only apply when:4
a) The life insurance policy was acquired for personal purposes;
b) The vendor of the policy is the owner of the policy;
c) The vendor of the policy pays the insurance fees under the policy; and
d) The amount of the commission is not substantial.
The CRA also confirmed that each case will turn upon its own specific facts. In the case at hand, it appears that the taxpayer ran afoul CRA’s policy that the life insurance policy must be acquired for personal purposes. Indeed, the CRA was of the opinion that the taxpayer had acquired the life insurance for investment purposes. Ironically, the Court found that the taxpayer had in fact acquired the policies for personal purposes, but that the administrative relief usually granted by the CRA did not bind the Court to rule in favour of the taxpayer.
The taxpayer’s second argument was that amounts paid for the policies should be deductible as they were, at least in part, paid to receive commission income. The Tax Court rejects this argument, stating that the policies were acquired as life insurance protection for personal purposes. The Court found that the purpose of purchasing the policies was not to generate net income, but rather, was to substantially reduce the cost of acquiring life insurance by receiving commissions in the process.
This decision is important in that it confirms that CRA’s administrative policies are just that: administrative policies and the Courts are not bound by them. This decision is of further importance for insurance salespersons, as it casts doubt upon the life insurance industry’s long standing policy that commissions earned on the purchase of life insurance by a salesperson are not taxable. Given the fact that CRA has on a number of occasions reiterated its administrative policy, it is likely that such commissions will remain non-taxable as long as the life insurance policies are acquired for personal purposes.
3. See CRA Document No. 2003-0015615 – Self-employed commission income, June 18, 2003, CRA Document No. 9410837 – Life Insurance Commissions, September 6, 1994, CRA Document No. 2000-0017597F – Commission – police d’assurance-vie, July 31, 2000 and a number of other such documents.
4. CRA Document No. 2006-0197161C6 – Etendu de l’allégement – Bulletin IT-470R, October 6, 2006.