Citation: 2012 TCC 18
Date: 20120112
Docket: 2010-2986(IT)I
BETWEEN:
ANDRÉ BÉGIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
D’Auray J.
[1]
The issues in this
appeal are as follows:
- Whether the Minister was justified in
adding to the appellant’s income $33,883 in commission for the 2005 taxation
year and $28,400 in commission for the 2006 taxation year under subsection 9(1)
of the Income Tax Act (the Act);
- If I find that the commission was taxable
under subsection 9(1) of the Act, whether the Minister would be justified in
disallowing the deduction of the premiums related to these life insurance
policies under paragraph 18(1)(h) of the Act.
THE FACTS
[2]
The appellant admitted
the following facts at the hearing:
(a)
The appellant was a
life insurance broker.
(b)
During the years in
question, in addition to his regular activities with respect to life insurance,
the appellant set up a business activity enabling him to make profits by
purchasing individual life insurance policies for him, his spouse and his
father.
(c)
The appellant made a
profit from this activity because the commission he received relative to this
individual life insurance was greater than the premiums paid.
(d)
For the 2005 and 2006
taxation years, the appellant received commission in the amount of $33,883 and
$28,400 respectively for the individual life insurance policies.
(e)
For the 2005 and 2006
taxation years, the appellant paid premiums of $20,826 and $15,721 for
individual life insurance policies.
(f)
The appellant was the
beneficiary for his spouse’s and his father’s life insurance. His spouse was
the beneficiary for the appellant’s life insurance.
(g)
During their policy
period, the appellant, his spouse and his father benefited from the protection
provided in these policies.
(h)
When he signed the
contracts, the appellant knew that he was going to abandon the life insurance
policies shortly before the end of the minimum membership period, which was 24
months.
(i)
The brokerage that the
appellant dealt with paid individual life insurance premiums out of the
commission payments.
(j)
The appellant’s
objective was to earn income by using to his advantage the system some
insurance companies use to pay their salespersons.
[3]
When he prepared his
income tax returns, the appellant reported a gross commission income of $4,652 for
the 2005 taxation year and of $1,892 for the 2006 taxation year. The appellant
explained to the Canada Revenue Agency (CRA) when he filed his tax returns why,
in his opinion, he did not have to include in his income the amounts received
as commission for individual life insurance.
[4]
Les Assurances Luc
Deguire Inc., the payer, produced T4As indicating the amounts of $34,500 and
$28,400 for the 2005 and 2006 taxation years respectively. These amounts
included the amounts of commission that the appellant had received for the
individual life insurance policies that he had purchased on his life and those
of his spouse and his father.
[5]
At the hearing, the
appellant argued that the commission he received with respect to the individual
life insurance policies should not be included in computing his income for the
2005 and 2006 taxation years. Alternatively, he argued that, if the commission had
to be included as business income, the premiums should be deductible as
expenses incurred for the purpose of earning business income.
[6]
In support of his argument,
he referred to paragraph 27 of Interpretation Bulletin IT-470 R, which
reads as follows:
. . . 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.
[7]
This said, the CRA also
mentioned that paragraph 27 of the Bulletin applies only to cases where life
insurance was purchased for personal purposes and not as an investment or to
earn business income.
[8]
In this case, it was
admitted that the appellant had purchased individual life insurance policies
several times in order to increase his income. I cite paragraphs 2, 4 and
8 of the Notice of Appeal:
[Translation]
2. During the 2005 and 2006 taxation years, in addition
to his usual activities with respect to life insurance, the appellant set up a
business activity enabling him to make profits, namely, the difference between
the amount of premiums paid for a specific life insurance policy and the amount
of commission paid by the insurance company relative to that insurance policy.
. . .
4.
Thus, in tandem with his activities as a
life-insurance broker, the appellant set up various life insurance policies for
which he was paying premiums in order to obtain commission and then let the
policies expire without having to repay the commission received.
. . .
8. The appellant never intended to keep these life
insurance policies past the period required to acquire the commission he
received for the policies.
[9]
The appellant also
confirmed these allegations of fact in his testimony at the hearing.
ANALYSIS
[10]
First, I note that I am
not bound by the Interpretation Bulletin.
In addition, even if there was doubt as to the meaning of the Act, I am of the
view that the appellant cannot rely on the Bulletin in this appeal; the
appellant did not purchase life insurance policies for personal purposes but rather
to earn business income.
[11]
The appellant also
asked me not to take into account Bilodeau, a decision
rendered by my colleague, Justice Lamarre.
[12]
In that decision, Mr.
Bilodeau had purchased universal life insurance policies with guaranteed
insurance costs for himself and his spouse. As Justice Lamarre explained
in her decision,
[4]. . . the person who invests in such a policy invests a greater
amount in the beginning that is deposited into a fund where earnings grow
tax-free and are used to pay insurance costs over an average period of about 5
to 7 years, based on the rate of return in the fund.
Mr. Bilodeau alleged that he had purchased insurance
policies for personal purposes because there was no cash surrender value for
the first few years. Mr. Bilodeau argued that it was the non-taxability of
commission that enabled him to absorb the high cost of the insurance. Mr. Bilodeau
had paid premiums totalling $57,166.51 for the two policies and received
$43,115 in commission.
[13]
Mr. Bilodeau relied on
the same Interpretation Bulletin to argue that the commission he had earned
relative to the insurance for himself and his spouse was non-taxable. According
to the CRA, the purchases had been made for purposes of investment and
therefore the Interpretation Bulletin did not apply.
[14]
The judge found that
Mr. Bilodeau had earned commission as an insurance agent. Consequently, the
commission was taxable under subsection 9(1) of the Act. At paragraphs 14 and
19 of her decision, Justice Lamarre stated the following:
[14] In my view, the commission received in the amount of
$43,115 is taxable income within the meaning of subsection 9(1) of the ITA. It
is income that the Appellant earned from his business. Indeed, the Appellant
received that amount in carrying out his profession of life insurance broker.
Had he not been a broker, he would not have received that commission. . . .
. . .
[19] Accordingly, whether the policies were acquired by the
Appellant for personal reasons, or to obtain a tax-free return on his
investment, does not in any way change, in my view, the fact that the
commission he received in carrying out his profession is taxable.
[15]
The appellant does not
agree with Justice Lamarre’s finding. According to him, the commission is not
taxable because the policies were purchased for personal purposes. The
questions asked by the appellant are as follows:
- It is logical to tax commission on policies
for which premiums were paid?
- Does a taxpayer earn business income by speculating
on his or her own life?
[16]
It is difficult for me
to answer these questions, which, in my opinion, are questions concerning tax
policies. I must limit myself to the provisions of the Act. In this appeal, it
has been established in evidence that the appellant purchased individual life
insurance policies to earn income within the meaning of subsection 9(1) of
the Act. Accordingly, the appellant’s claims that the individual life insurance
policies were purchased for personal purposes cannot stand. In addition, as
indicated by my colleague Justice Lamarre, whether for personal or business
purposes, the commission was earned by the taxpayer while practising his
profession as insurance agent and is therefore taxable.
[17]
I therefore agree with
the respondent that the commission of $33,883 and $28,400 must be included in
computing the appellant’s income for the 2005 and 2006 taxation years.
[18]
Having concluded that
the commission was taxable, I will now turn to the second issue. Is the appellant,
in computing his income, entitled to deduct the premiums he had paid for the
purchase of the individual life insurance policies?
[19]
The appellant argues
that the premiums are expenses incurred in order to make a profit from a
business within the meaning of subsection 9(1) of the Act.
[20]
The respondent alleges
that the appellant is not entitled to deduct the amount of the premiums under
paragraph 18(1)(h) of the Act. She also argues that the fact that an
expense was found to be a personal expense does not affect the characterization
of the source of income to which the taxpayer attempts to allocate the expense.
The respondent based herself on Stewart,
in which Justices Iacobucci and Bastarache stated at paragraph 57:
. . . that the deductibility of expenses presupposes the existence
of a source of income, and thus should not be confused with the preliminary
source inquiry. If the deductibility of a particular expense is in question,
then it is not the existence of a source of income which ought to be questioned,
but the relationship between that expense and the source to which it is
purported to relate. The fact that an expense is found to be a personal or
living expense does not affect the characterization of the source of income to
which the taxpayer attempts to allocate the expense, it simply means that
the expense cannot be attributed to the source of income in question. . . .
[Emphasis added.]
[21]
The provisions of the
Act that are relevant to this appeal are subsection 9(1), paragraphs 18(1)(a)
and 18(1))(h) and the definition of personal or living expenses in
section 248:
9. (1) Subject to this Part, a
taxpayer’s income for a taxation year from a business or property is the
taxpayer’s profit from that business or property for the year.
General
limitations
18. (1) In computing the income of a
taxpayer from a business or property no deduction shall be made in respect of
General
limitation
(a) an outlay or expense except
to the extent that it was made or incurred by the taxpayer for the purpose of gaining
or producing income from the business or property;
. . .
Personal
or living expenses
(h) personal or living expenses
of the taxpayer, other than travel expenses incurred by the taxpayer while away
from home in the course of carrying on the taxpayer’s business;
The definition of
personal or living expenses is found in section 248 of the Act. I cite
only the relevant part of it:
“personal
or living expenses” includes
(a) . . .
(b) the expenses, premiums or
other costs of a policy of insurance, annuity contract or other like
contract if the proceeds of the policy or contract are payable to or for the
benefit of the taxpayer or a person connected with the taxpayer by blood
relationship, marriage or common-law partnership or adoption, and
(c) . . .
[Emphasis added.]
[22]
Although the insurance
premiums were paid by the appellant to earn business income, they cannot be
deducted in computing the appellant’s business income. The evidence showed that
the premiums relate to insurance policies the proceeds of which, while they
were in effect, were payable to the appellant or his spouse. The premiums are
therefore personal or living expenses that are not deductible under
paragraph 18(1)(h) of the Act.
[23]
Therefore, the
appellant cannot deduct the premiums in the amount of $20,826 and $15,721 relative
to the individual life insurance policies he purchased for the 2005 and 2006
taxation years respectively.
[24]
Accordingly, the
appeals from the reassessments made under the Act for the 2005 and 2006
taxation years are dismissed.
Signed at Ottawa, Canada, this 12th day of January 2012.
“Johanne D’Auray”
on this 28th day
of February 2012
Margarita
Gorbounova, Translator
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