Scotti v. Agence du revenu du Québec, 2019 QCCQ 7579, effectively overruled in part by Verrier v. ARQ, 2024 QCCA 298

An insurance broker (Mr. Chabot) agreed with the taxpayer (Mr. Scotti), as an inducement for Mr. Scotti to acquire a universal whole life policy from Standard Life with an insured sum of $5 million and providing for initial monthly premiums of $1,490.87) to pay him $6,000 per month for 24 months (for a total of $144,000). It was agreed that Mr. Scotti would keep the policy in force during this period and that, thereafter, he could terminate it or renew it for a lesser insured sum. This was subsequently determined to be part of a scheme of Mr. Chabot to cheat insurers, resulting in his pocketing commissions from them in excess of the amounts he agreed to pay to his clients. Here, the payments ceased in June 2009 after Mr. Scotti had received a total of $90,000 and when the scheme of Mr. Chabot (who had his brokerage licence taken away) was exposed.

The principal issue in determining whether the $90,000 paid by Mr. Chabot was includible in Mr. Scotti’s income under the Quebec equivalent of s. 12(1)(x) was whether it was received “in the course of earning income from a business or property.” In finding that this test was satisfied, Croteau, J.C.Q. stated (at paras. 31-32, 44, TaxInterpretations translation):

Mr. Scotti's Policy had an investment savings component that allowed him to pay a monthly premium in excess of the cost of insurance and accumulate the excess in an accumulating fund. The accumulated amounts were then invested by Standard Life in the investment funds chosen by Mr. Scotti.

Thus, of the $6,000 that Standard Life withdrew from the bank account to which Mr. Scotti deposited Mr. Chabot's cheques, only $1,490.87 was used to pay the monthly premium and insurance fees. The surplus, of just over $4,500, was immediately deposited by Standard Life in the Policy's investment accounts, which fluctuated according to the amounts and the interest that accumulated in them. …

Mr. Scotti was fully aware of the benefits he would derive from the purchase of a $5 million universal life insurance policy whose insurance premiums would be fully paid, for two years, by means of the amounts paid by Mr. Chabot and the major part of which would accumulate in an investment fund, from which he could then benefit as he wished. These same advantages made the offer attractive to Mr. Scotti, who, by his own admission, had no need for insurance at the time … .

In a footnote 15, Croteau, J.C.Q. further noted that CRA (most recently in 2008-0271381E5 and 2010-0359401C6) had “concluded that the holder of a policy that includes both a life insurance component and a savings component holds property that is a source of income” and that the ARQ concurred.

An insurance broker (Mr. Chabot) agreed with the taxpayer (Mr. Scotti), as an inducement for Mr. Scotti to acquire a universal whole life policy from Standard Life with an insured sum of $5 million and providing for initial monthly premiums of $1,490.87) to pay him $6,000 per month for 24 months (for a total of $144,000). It was agreed that Mr. Scotti would keep the policy in force during this period and that, thereafter, he could terminate it or renew it for a lesser insured sum. This was subsequently determined to be part of a scheme of Mr. Chabot to cheat insurers, resulting in his pocketing commissions from them in excess of the amounts he agreed to pay to his clients. Here, the payments ceased in June 2009 after Mr. Scotti had received a total of $90,000 and when the scheme of Mr. Chabot (who had his brokerage licence taken away) was exposed.

The principal issue in determining whether the $90,000 paid by Mr. Chabot was includible in Mr. Scotti’s income under the Quebec equivalent of s. 12(1)(x) was whether it was received “in the course of earning income from a business or property.” In finding that this test was satisfied, Croteau, J.C.Q. stated (at paras. 31-32, 44, TaxInterpretations translation):

Mr. Scotti's Policy had an investment savings component that allowed him to pay a monthly premium in excess of the cost of insurance and accumulate the excess in an accumulating fund. The accumulated amounts were then invested by Standard Life in the investment funds chosen by Mr. Scotti.

Thus, of the $6,000 that Standard Life withdrew from the bank account to which Mr. Scotti deposited Mr. Chabot's cheques, only $1,490.87 was used to pay the monthly premium and insurance fees. The surplus, of just over $4,500, was immediately deposited by Standard Life in the Policy's investment accounts, which fluctuated according to the amounts and the interest that accumulated in them. …

Mr. Scotti was fully aware of the benefits he would derive from the purchase of a $5 million universal life insurance policy whose insurance premiums would be fully paid, for two years, by means of the amounts paid by Mr. Chabot and the major part of which would accumulate in an accumulating fund, from which he could then benefit as he wished. These same advantages made the offer attractive to Mr. Scotti, who, by his own admission, had no need for insurance at the time … .

In a footnote 15, Croteau, J.C.Q. further noted that CRA (most recently in 2008-0271381E5 and 2010-0359401C6) had “concluded that the holder of a policy that includes both a life insurance component and a savings component holds property that is a source of income” and that the ARQ concurred.

An insurance broker (Mr. Chabot), whose licence subsequently was revoked, engaged in a scheme to cheat insurers, resulting in his pocketing commissions from them in excess of the amounts he agreed to pay to his clients. One of these clients was the taxpayer (Mr. Scotti), who received amounts ($90,000) that were well in excess of the premiums he was required to pay under a universal whole life policy before he was able to terminate the premium obligations. After finding that the $90,000 was taxable to Mr. Scotti under the Quebec equivalent of s. 12(1)(x), Croteau, J.C.Q. went on to sustain the ARQ assessment made under such provision notwithstanding that it had been made beyond the normal reassessment period, and in the face of Mr. Scotti’s testimony that he had been advised by Mr. Chabot (as well as a garage owner, who had been the initial contact) that the amounts were non-taxable. She stated (at paras. 72-75), TaxInterpretations translation:

… Mr. Scotti knew, or ought to have known, that he was participating, without any financial contribution on his part, in a scheme which would provide him and Mr. Chabot with a significant pecuniary advantage.

In this context, how could Mr. Scotti, as a seasoned businessman, have validly relied on the statements of an insurance broker directly interested in the scheme, as well as on those of a garage owner who was the source of his meeting with Mr. Chabot, to determine whether or not he should include in his income the $60,000 received in 2008 and the $30,000 received the following year?

Such a decision certainly cannot be characterized as a "considered position" in the sense that it was defined in Cameron v. R. [2008-4063 (IP)G] … .

In addition to all of this, Mr. Scotti was able to rely, on a daily basis, on the independent support and advice of the accounting firm he employs for his business, as well as the comptrollers who work for each of his 14 automobile dealerships. Yet he admits that he never sought their assistance. Why did he not seek their assistance? In the context of this case, to ask the question is to answer it.