11 February 2009 External T.I. 2008-0271381E5 - Commision Rebates

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues:

1. Whether the rebate payment reduces the broker's commission income or is deductible as a promotion expense?

2. Whether the amount received by broker's client is taxable?

Position:

1. The rebate payment should be treated as an expense subject to the limitations in sections 18 and 67.

2. Generally, the amount should be included in income pursuant to paragraph 12(1)x).

REASONS:

1. The decision of a broker to pay a rebate to a customer is not a factor in determining the amount of commission that the broker is required to include in income. However, the rebate would generally be an expense that is deductible by the broker in computing his income from business.

2. A life insurance policy is generally a property acquired for the purpose of earning income from property.

XXXXXXXXXX 2008-027138

February 11, 2009

Dear XXXXXXXXXX

Re: Rebates Payments

We are writing in response to your letter in which you requested a ruling on the tax treatment of rebates paid to clients.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject of an advance income tax ruling request submitted in a manner set out in Information Circular 70-6R5. As stated in paragraph 22 of Information Circular 70-6R5, written opinions are not advance income tax rulings and, accordingly, are not binding on the Canada Revenue Agency ("CRA"). Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office.

Your question concerns the tax consequences of a payment that a broker chooses to make to a customer from the commissions he or she earns from an insurance company. You advise that this rebate payment is allowed by legislation of the Insurance Council of British Columbia. The legal form of transactions must be considered in determining the application of the Income Tax Act ("Act"). Without the opportunity to review all the relevant agreements which define the rights and obligations of each party, there is insufficient information for us to determine the tax consequences to any party. We are prepared however, to make the following general comments.

Unless otherwise stated, all statutory references are to the Act.

Subject to provisions in Part I of the Act, section 9(1) provides that a taxpayer's income for a taxation year from a business or property is its profit therefrom for the year. The term profit is not defined in the Act. With respect to the nature of profit for tax purposes, the Supreme Court of Canada in Canderel Ltd v The Queen 98 DTC 6100 stated:

While the concept has been variously expressed, perhaps the clearest and most concise articulation of the term is to be found in the oft-quoted decision of this Court in M.N.R. v. Irwin, [1964] S.C.R. 662, at p. 664, where profit in a year was taken to consist of "the difference between the receipts from the trade or business during such year... and the expenditure laid out to earn those receipt." (emphasis in original) This definition was echoed by Jackett P. in Associated Investors of Canada Ltd. v. M.N.R., [1967] 2 Ex. C.R. 96, where he stated at p. 102:

Ordinary commercial principles dictate, according to the decisions, that the annual profit from a business must be ascertained by setting against the revenues from the business for the year, the expenses incurred in earning such revenues.

Generally, amounts have to be included in income under subsection 9(1) if such amounts have the quality of income. It is our general view that an amount has the quality of income if the recipient's right to such an amount is absolute and under no restriction, contractual or otherwise, as to its disposition, use or enjoyment. It is our view that the broker must include in income the total amount of commission.

In such a case, it is our view that, subject to the limitation in sections 18 and 67, the amount of the rebate paid by the broker to a client would generally be deductible under subsection 9(1) in computing the broker's income from business for the year in which the amount is incurred.

With respect to the tax implications to the recipient of the rebate, it is our general view that the amount received by a client would be taxable pursuant to paragraph 12(1)(x).

Paragraph 12(1)(x) provides, inter alia, that a taxpayer must include in calculating his income from property, the amount he received in the course of earning income from property from a person who pays the amount in the course of earning income from a business or property where the amount can reasonably be considered to have been received as an inducement.

The term "property" is very broadly defined in subsection 248(1) and includes "any property whatever whether real or personal or corporeal or incorporeal and, without limiting the generality of the foregoing, includes a right of any kind whatever...". It is our view that a life insurance policy is a property for the purpose of the Act.

As well, because income from a life insurance policy is taxed under section 12.2 or paragraph 56(1)(j), it is generally our view that 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).

With respect to the issuance of information slips for the rebates paid, there is no reporting requirement in respect of such income. However, clients should be notified of the CRA's position that the rebate received must be included in their income.

Yours truly,

Louise J. Roy, CGA
Manager
for Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch