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: Whether life insurance commissions received by a self-employed agent are taxable in the year of receipt and whether a reserve is available.
Position: Taxable in the year of receipt. No reserve is available.
Reasons: The legislation.
April 2, 2013
Re: Life insurance commissions
We are writing in response to your e-mail dated January 15, 2013 concerning the taxation of life insurance commissions. We also acknowledge our telephone conversation on February 14, 2013 regarding this matter (XXXXXXXXXX/Danilchenko).
You advise that you work for a financial services company selling life insurance policies. You are self-employed and are compensated exclusively by commissions. When a life insurance policy is sold, the financial services company pays you an amount referred to as an "advance commission" that represents the commission relating to 12 months of premiums under the policy. The advance commission is reported on a T4A slip for the year of receipt. If the life insurance policy is cancelled or lapses for any reason at a later date, all or a portion of the advance commission must be returned to the financial services company. The amount an agent is required to pay back is referred to as a "chargeback". If a downline agent you have recruited fails to pay back the required chargeback, then you become responsible for paying the chargeback to the financial services company. In this regard, you have asked whether the advance commission is fully taxable in the year of receipt or whether the amount represents a loan that does not have to be included in income in the year of receipt. You would also like to know how to treat the chargebacks for tax purposes.
Written confirmation of the tax implications inherent in a particular transaction may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. We are, however, prepared to provide the following general comments.
The situation described in your email is similar to a case considered by the Tax Court of Canada. In Destacamento et al v The Queen, 2009 TCC 242, the taxpayers (husband and wife) were independent insurance agents who received commissions on the sale of life insurance contracts. They included both commissions earned and cash advances received in income and claimed a reserve for the cash advances. Their position was that the amounts received were advance commissions or cash advances which represented a loan. In their view, the amounts were not fully earned until two years had elapsed because they were required to be paid back if the life insurance policies were cancelled or lapsed. The Tax Court noted that there was no interest charged on the advance commissions received and concluded that such commissions paid to the taxpayers were not loans. The Tax Court also found that there were no restrictions on the taxpayers' right to utilize the amounts received as commissions. The taxpayers had full use and enjoyment of the funds. Consequently, the advance commissions received by the taxpayers had the quality of income and had to be included as income in the year of receipt. Furthermore, even if the life insurance commissions were unearned, paragraph 32(1)(a) of the Income Tax Act (the "Act") would apply to preclude the taxpayers from deducting a reserve with the result that the entire commission must be included in income in the year of receipt.
We note that in a more recent case, Demeterio v. Her Majesty the Queen, 2011 TCC 192, the issue of when advance commissions must be included in income was considered again by the Tax Court. The facts in the Demeterio case were similar to those in the Destacamento case and the Tax Court reached the same conclusion.
Therefore, in fact situations that are substantially similar to Destacamento and Demeterio, the tax implications of advance commissions received by a self-employed life insurance agent may be summarized as follows:
- The advance commissions have the quality of income in the year of receipt and should be included in computing income pursuant to section 9 of the Act.
- Even if the amounts constitute advances and are not earned, the result would be the same since unearned amounts must be included in income in the year of receipt pursuant to paragraph 12(1)(a) of the Act and a reserve to offset advances in respect of life insurance contracts is precluded by paragraph 32(1)(a) of the Act.
- If there is a chargeback, the amount of the chargeback would be deductible in computing the taxpayer's profit to the extent that it was incurred for the purpose of earning income from a business.
Finally, we are unable to comment on the legality of the advance commission compensation arrangement described in your email as that is beyond the scope of this letter and the responsibility of the CRA.
We hope that our comments will be of assistance to you.
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2013
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2013