Scotti – Court of Quebec agrees with CRA position that broker-paid rebates of life insurance policy premiums are taxable under s. 12(1)(x)

CRA has taken the position (most recently in 2008-0271381E5 and 2010-0359401C6) that a rebate paid by a life insurance broker out of its commission to the client purchasing the policy is taxable to the client under s. 12(1)(x), stating, for example, in 2008-0271381E5, that:

[B]ecause income from a life insurance policy is taxed under section 12.2 or paragraph 56(1)(j) … an amount received as an inducement to purchase a life insurance policy would be an amount received in the course of earning income from property for the purposes of paragraph 12(1)(x).

Croteau, J.C.Q. referred approvingly to these CRA technical interpretations (and a similar ARQ one), which she described as a view 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.”

The facts before her were more extreme. An insurance broker, whose licence subsequently was revoked, engaged in a scheme to cheat insurers, resulting in his pocketing commissions from them in excess of the amounts he agreed to pay to his clients.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, 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. The $90,000 was taxable to him under the Quebec equivalent of s. 12(1)(x).

Neal Armstrong. Summary of Scotti v. Agence du revenu du Québec, 2019 QCCQ 7579 under s. 12(1)(x).