Verrier - Quebec Court of Appeal finds that reimbursements for life insurance policy premiums should be prorated between portions taxable under s. 12(1)(x), and non-taxable portions

Verrier participated in a scheme of an insurance broker (Chabot) to defraud life insurance companies which rested on the commissions generated to Chabot from the sale of universal life policies substantially exceeding the premiums payable under those policies during the first two years of their term (beyond which, they could be cancelled without Chabot being required to repay his commissions). Chabot sold a large policy to Verrier, and after Chabot subsequently ceased making reimbursement payments to Verrier, the policy was subsequently cancelled by the insurer for the resulting non-payment of premiums by Verrier.

At issue in this appeal was whether the reimbursement payments qualified under the Quebec equivalent of s. 12(1)(x) as being “received by the taxpayer in the year, in the course of earning income from a business or property”.

Mainville JCA found that the insurance coverage provided under the policy did not constitute income from property and instead represented a non-taxable benefit. However, the investment account provided for by the policy was property exploited for the purpose of deriving income therefrom and, therefore, came within the s. 12(1)(x) equivalent. However, although the income generated on the investment account was exempted, it effectively would be subject to deferred taxation when the policy was redeemed for its cash surrender value under the Quebec equivalent of s. 148(1). Approximately 1/3 of the premiums were used by the insurer to purchase the (non-taxable) insurance coverage and 2/3 were used to purchase investments chosen by Verrier (a source of deferred taxable income). Mainville JCA found that the reimbursement payments should be apportioned on the same basis, so that 2/3 of each payment was taxable under the Quebec s. 12(1)(x) equivalent.

In further finding that it was irrelevant that in fact Verrier did not generate any income from the policy under s. 148(1), Mainville JCA stated:

If the property in question is reasonably likely to generate income, [the s. 12(1)(x) equivalent] can apply, regardless of whether the property actually generates income or whether the taxpayer decides to dispose of it before it generates income.

Neal Armstrong. Summary of Verrier v. Agence du revenu du Québec, 2024 QCCA 298 under s. 12(1)(x) and Statutory Interpretation - Provincial Law.