Insurance Commissions

FORUM Magazine


Recent case reignites the tax debate

The taxation of commissions on the sale of advisors’ own policies has always been a hot topic. There still appears to be some confusion among advisors about whether such commissions are indeed taxable. A recent tax case (Bégin v The Queen, 2012 TCC 18), discussed below, reignites the debate on this issue.

CRA’s position

The source of the confusion can likely be traced to the Canada Revenue Agency’s longstanding published administrative position, as articulated in its Interpretation Bulletin IT-470R. This bulletin states that “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.”

Some advisors have taken this general statement to mean that any commissions earned on the sale of personal insurance products should be tax-exempt, notwithstanding the fact that since the publication of IT-470R, the CRA has modified its administrative position through various technical interpretations and other public statements. The modification, which applies to both self-employed salespersons as well as those who are employed by a life insurance company, states that commissions received would only be tax-exempt “where the particular salesperson has purchased the particular life insurance policy for personal use rather than investment or business purposes.”

This position is based on the analogy that commission income is akin to an employee product discount, in which the amount of the commission received by the advisor is netted against the premium payable.

Older tax cases

CRA’s position on this issue was the subject of two tax cases in 2009 dealing with advisors’ commissions (see FORUM, March 2010, “Taxing Decisions”). The first case, Bilodeau v. the Queen (2009 TCC 315), involved Jacques Bilodeau, a life insurance broker who took out two $1 million Transamerica Life universal life insurance policies on both his own and his wife’s life. When Bilodeau filed his 2003 tax return, he deducted the $43,000 of commissions he received on the sale of the two life insurance policies as an expense.

The CRA denied Bilodeau’s deduction on the basis that the life insurance policies “were not purchased with a view to obtaining personal protection but for investment purposes.” The judge concluded that the $43,000 of commissions received was taxable income. As the Judge wrote, “Had he not been a broker, he would not have received that commission … That the two policies were acquired by him for personal purposes … does not change the fact that he earned the commission in issue as part of his professional activities as a broker. It is precisely because he was a professional broker that he was entitled to that commission.”

A similar conclusion was reached a few months later in Li v. The Queen (2009 TCC 530) in which insurance advisor Linzi Li was denied a $7,000 commission income deduction offset against the commission earned on a life insurance policy on her own life as “there are no provisions in [the Act] that allow such a deduction.”

2010 CALU CRA Roundtable

At the May 2010 Conference for Advanced Life Underwriting (CALU) roundtable, the CRA was asked to provide further guidance about the situations or fact patterns where it may apply the Bilodeau decision, rather than follow its administrative position.

Citing prior published technical interpretations, the CRA stated that “the administrative position described in paragraph 27 of IT-470R would not apply where the amount of commission income was significant.” In addition, the CRA stated that its administrative position “is not intended to apply where the insurance was obtained for investment or business purposes.”

This position was most recently tested in the Bégin case, which was released in January 2012.

Bégin v The Queen

In the most recent case, the issue was whether André Bégin, a life insurance broker, should pay tax on life insurance commissions on the sale of policies on his own life, the life of his spouse and the life of his father. Bégin also claimed the premiums paid as deductible expenses as he had to pay the premiums on each policy in order to obtain the commissions. He would then let the policies expire without having to repay the commission received.

He was able to profit from this activity because the commission he received was greater than the premiums paid. For the 2005 and 2006 taxation years, he received commission in the amounts of $33,883 and $28,400, respectively, and paid total premiums of $20,826 and $15,721.

Bégin testified that when he signed the contracts, he knew that he was going to “abandon the life insurance policies shortly before the end of the minimum membership period, which was 24 months.” According to court documents, “his objective was to earn income by using to his advantage the system some insurance companies use to pay their salespersons.”

Not surprisingly, the judge concluded that the commission was earned by Bégin “while practising his profession as insurance agent and is therefore taxable.” The judge also denied his deductions for the premiums, finding that the premiums were “personal or living expenses” that are specifically not deductible under the Income Tax Act.