Citation: 2009TCC242
Date: 20090430
Docket: 2007-3707(IT)I
BETWEEN:
ZACARIUS DESTACAMENTO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2007-3713(IT)G
BETWEEN:
NELIA DESTACAMENTO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller, J.
[1]
These appeals were
heard on common evidence. The issues are whether Nelia Destacamento (Mrs. D.)
was entitled to claim a reserve for the amounts of $27,790.97 and $65,950.86[1] in 2003 and 2004
respectively; and, whether Zacarias Destacamento (Mr. D.) was entitled to claim
a reserve for the amounts of $22,349.17, $17,457.58[2] in 2002, 2003
respectively. The amounts at issue in these appeals are amounts the Appellants
received as commissions for the sale of life insurance policies.
[2]
Mr. D. is an accountant
and prepared both his and his spouse’s income tax returns for the years under
appeal. He gave the majority of the testimony concerning their employment. Both
Appellants described their occupations as insurance agents.
[3]
Mr. D. signed a
contract with World Financial Group Insurance Agency of Canada Inc. (“WFG”) in
2002 whereby he became a member and an associate of WFG. As such, he was
employed as an independent contractor to sell WFG’s products and to recruit
“downline associates” to sell WFG’s products. I assume from the evidence that
Mrs. D was recruited by her husband to sell WFG’s products. She as well was an
independent contractor.
[4]
Mr. D. stated that for
each of the years under appeal, the T4As which he and his spouse received from
WFG included both commissions which they had earned and cash advances which
they had received during the year. He and his spouse included the amount on the
T4A in their income and claimed a reserve for the amount of the cash advance.
Mr. D stated that he claimed a reserve only because there was no line in the
income tax return for cash advances.
[5]
In each of his returns
Mr. D. calculated his gross commissions from selling life insurance as follows:
|
|
2002
|
2003
|
2004
|
|
Commissions on T4A
|
$22,808.97
|
$18,916.21
|
$ 725.05
|
|
Advances deducted
from prior year
|
|
22,349.17
|
39,806.75
|
|
Total
|
$22,808.97
|
$41,265.38
|
$40,531.80
|
|
Less: Advances
|
(22,349.17)
|
(39,806.75)
|
(31,822.07)
|
|
Gross Commission
|
$ 459.80
|
$ 1,458.63
|
$ 8,709.73
|
[6]
Mrs. D. calculated her
gross commissions from selling life insurance as follows:
|
|
2003
|
2004
|
|
Commissions on T4A
|
$32,549.62
|
$ 75,873.89
|
|
Advances deducted from
prior year
|
|
27,790.97
|
|
Total
|
$32,549.62
|
$103,664.86
|
|
Less: Advances
|
(27,790.97)
|
(93,741.83)
|
|
Gross Commissions
|
$ 4,758.65
|
$ 9,923.03
|
[7]
It was the Appellants’
position that the monies which they received each year from WFG were “advance
commissions” or cash advances. They stated that the amounts represented a loan
from WFG to them. In support of their position, the Appellants relied on the
contract which Mr. D. signed with WFG. In particular, Mr. D. referred to the
section of the contract named “Glossary and Explanation of Terms” for the
following definitions:
“Advance Commissions”
Any monies that may be paid to Associate as an advance against
Associate’s commissions, or Associate’s Override Compensation, either or both
of which are yet to be earned, that may become due and payable by WFG.
“Debit Balance”
The balance remaining from time to time after subtracting the
commissions and earned commissions actually earned but unpaid, which are due
and payable by WFG to Associate, from any money and value owed (regardless of
whether it is then due or not) by Associate to WFG, including but not limited
to expenses; license fees; commissions and expenses that Associate is required
to refund to WFG because of Customer or customer cancellations, rights of
withdrawal, non-renewals, terminations, lapses or otherwise; Advance
Commissions; Debit Balances of Associate’s Downline Associate(s); expenses and
fees incurred by WFG in attempting to register prospective Downline Associates
of Associate; WFG for indemnification against Associate; and other claims by
WFG against Associate; and any and all money and value which may be paid,
advanced, or credited by or on behalf of WFG to, or for the benefit of, Associate.
[8]
He also referred to the
section of the contract titled “Associate’s Compensation”. In particular, he
read paragraphs (D) and (E) of that section. I have attached the entire section
as an Appendix to these reasons.
D.
Any money and value owed by Associate to
WFG, any Debit Balance, and any money and value which have been advanced or
credited by or on behalf of WFG, or for the benefit of Associate, represents a
loan. Associate hereby expressly authorizes WFG to offset and deduct from any
commissions or other money or value then or thereafter owed by WFG to Associate
any amounts due WFG from Associate. WFG is hereby authorized by Associate to
deduct from commissions due the amount of any commissions paid to Associate in
connection with any payment or amount that WFG refunds to Associate’s Customer.
E. All Debit Balances shall be
repaid immediately by Associate upon notice thereof to Associate by WFG. Any
Debit Balances not paid within thirty (30) days from the effective date of such
notice shall bear interest from the end of such thirty (30) days at a rate
equal to the prime rate of the Toronto Dominion Bank plus ten percent (10%).
[9]
Mrs. D. included a
statement from WFG called “Commission Summary” with her 2003 and 2004 income
tax returns. Mr. D included a similar statement with his 2003 income tax
return. It was the Appellants’ position that these statements showed the cash
advances which were given to them during the year.
[10]
Mr. D. stated that he
and his spouse were paid one year in advance by WFG. The commissions were not
fully earned until two years had elapsed. If, during the first two years the
insurance policy was cancelled or lapsed due to non-payment of the premiums,
they had to return the total amount of the commissions they had received. They
described the amount that they had to repay as a chargeback.
[11]
The Appellants stated
that in 2008, WFG conducted an audit of the Appellants’ accounts. It found that
it had failed to chargeback $8,487.57 to Mr. D. and $25,254.20 to Mrs. D. It
was the Appellants’ position that they had actually overstated their income for
the years under appeal. They asked if the court could give them a deferral on
their taxes for two years.
[12]
Counsel for the
Respondent stated that the commissions were either earned or unearned. In
either scenario, the Appellants had to include the commissions in their income
when they received them.
[13]
Counsel stated that the
commissions were only received by the Appellants after they sold an insurance
policy. They had full use and enjoyment of the funds. The commissions were only
called advances because there could be a chargeback. The possibility of a
chargeback was a condition subsequent. The amounts received by the Appellants
had the quality of income and had to be included as income in their returns. If
there was a chargeback, the Appellants could deduct the reimbursement in the
year it is made.
[14]
It was the Respondent’s
further position that if the commissions were unearned, then paragraph 32(1)(a)
of the Income Tax Act (“the Act”) precludes the Appellant from taking a
reserve and the entire commissions must be included in income.
Analysis and Conclusion
[15]
I agree with the
Respondent. The evidence established that the Appellants were paid a commission
whenever they or a downline associate which they had recruited, sold an
insurance policy.
[16]
WFG imposed the
condition that the insurance agent had to return a portion of the commission if
the policy was surrendered or lapsed within 24 months. The chargeback was a
percentage of the first year earned commission. The percentage varied according
to the number of months that the premium was paid. For example, if the policy
lapsed after 14 months, the chargeback was 55% whereas, if it lapsed after 20
months, the chargeback was 25% of the first year earned commission.[3]
[17]
The “Commission
Summary” statements which the Appellants filed with their income tax returns
included an “Advanced Commission Summary” and an “Earned Commission Summary”.
The “Advanced Commission Summary” was a calculation of the total advances less
the chargebacks for a particular period. This amount was claimed as a reserve
by the Appellants for each year[4].
[18]
The evidence disclosed
that there was no interest charged on the commissions that the Appellants
received. The Appellants had to pay interest only if there was a chargeback
which created a debit balance and that balance was not paid within 30 days from
the date notice was given to the Appellants. I conclude that the commissions
advanced to the Appellants were not loans.
[19]
The concept of quality
of income was discussed by Thorson J. in Robertson Ltd. v. M.N.R.[5] at paragraphs 18
and 24:
18 The
law is the same in the United
States. Losses that have been
sustained are deductible but the American courts have not allowed any
deductions from profits for the purpose of meeting losses or liabilities that
were apprehended or contingent on the happening of an uncertain future event.
The Supreme Court of the United States dealt with the matter in Brown v.
Helvering, 291 U.S. 193. In that case, the facts were: a general
agent of fire insurance companies received "overriding commissions"
on the business written each year, subject however to the contingent liability
that when any of the policies was cancelled before its term had run, a part of
the commission thereon, proportionate to the premium money repaid to the policy
holder, must be charged against the agent in favour of the company. In his
accounts and income tax returns involved in this case, he deducted from the
accrued commissions of each year a sum entered in a reserve account to
represent that part of them which, according to the experience of earlier
years, would be returnable because of cancellations. It was held that he was
not entitled to make any deduction for such purposes. Mr. Justice Brandeis, in
delivering the opinion of the Supreme Court of the United States, said, at page 199:
"The overriding commissions
were gross income of the year in which they were receivable. As to each such
commission there arose the obligation -- a contingent liability -- to return a
proportionate part in case of cancellation. But the mere fact that some portion
of it might have to be refunded in some future year in the event of
cancellation or reinsurance did not affect its quality as income .... When
received, the general agent's right to it was absolute. It was under no
restriction, contractual or otherwise, as to its disposition, use or
enjoyment."
…
24 This
does not, however, dispose of this appeal, for the question remains whether all
of the amounts received by the appellant during any year were received as
income or became such during the year. Did such amounts have, at the time of
their receipt, or acquire, during the year of their receipt, the quality of
income, to use the phrase of Mr. Justice Brandeis in Brown v. Helvering
(supra). In my judgment, the language used by him, to which I have
already referred, lays down an important test as to whether an amount received
by a taxpayer has the quality of income. Is his right to it absolute and under
no restriction, contractual or otherwise, as to its disposition, use or
enjoyment? To put it in another way, can an amount in a taxpayer's hands be
regarded as an item of profit or gain from his business, as long as he holds it
subject to specific and unfulfilled conditions and his right to retain it and
apply it to his own use has not yet accrued, and may never accrue?
[20]
In the present appeals, there were
no restrictions on the Appellants’ right to dispose of the amounts received as
commissions. They had the full use and enjoyment of the commissions when they
received them. The entire commissions must be included in income in the year
the Appellants received them.
[21]
In any event, the Appellants
cannot claim a reserve in respect of the commissions as they were earned from
the sale of life insurance contracts. A portion of paragraph 32(1)(a) of
the Act reads as follows:
32. (1) Insurance agents and brokers [unearned
commissions] -- In computing a
taxpayer's income for a taxation year from the taxpayer's business as an
insurance agent or broker, no amount may be deducted under paragraph 20(1)(m)
for the year in respect of unearned commissions from the business, but in
computing the taxpayer's income for the year from the business there may be
deducted, as a reserve in respect of such commissions, an amount equal to the
lesser of
(a) the total
of all amounts each of which is that proportion of an amount that has been
included in computing the taxpayer's income for the year or a preceding
taxation year as a commission in respect of an insurance contract (other
than a life insurance contract) that (emphasis added)
[22]
The benefit that an insurance
agent has of deferring commission income pursuant to section 32 of the Act does
not extend to commissions earned from life insurance contracts.
[23]
The appeals are dismissed. The
Respondent is awarded costs in the appeal of Nelia Destacamento.
Signed at Ottawa, Canada, this 12th
day of May 2009.
“V.A. Miller”
Appendix
Associate’s Compensation
A.
Associate acknowledges and
understands that the Associate earns income only from the sale of the Products
and Services and no income is earned by or paid to Associate for recruiting. The
Associate’s sole compensation under and during the term of this Agreement shall
be commissions paid by, or caused to be paid by, WFG pursuant to this Agreement
and paid in the manner provided in, and subject to the terms and conditions
contained in, those Associate Agreement Guidelines and commission schedules,
which are published by WFG from time to time. The Preferred Companies are
generally not obligated to pay Associate any money. There is no guarantee that
Associate will be financially rewarded solely by virtue of becoming a member of
Word Financial Group.
B.
WFG will publish Associate
Agreement Guidelines and commission schedules from time to time which relate to
sales position designations, performance standards, commission rates of WFG or
the Preferred Companies and other matters affecting the terms of the members’
compensation. WFG may, from time to time, in the exercise of its sole
discretion, and without notice, increase or decrease the rates and amounts of
commissions or the sales position of Associate; provided, however, that any
such changes may be prospective only, but may affect any new business and any
commissions earned thereafter on existing business.
C.
Associate acknowledges and
agrees that Associate’s commissions are a share of WFG’s commissions and
Associate’s commissions are earned by, and shall be payable to, Associate only
after all of the following have occurred: i) the order or application for
Products and Services is submitted by Associate is accepted and approved by WFG
or a Preferred Company at its principal office, or by an approved WFG designee;
ii) actual payment for the same has been made by and received from the
Customer; and iii) WFG has actually received payment from a Preferred Company,
if applicable, of WFG’s commission (subject to the terms of this Agreement).
D.
Any money and value owed by
Associate to WFG, any Debit Balance, and any money and value which have been
advanced or credited by or on behalf of WFG, or for the benefit of Associate,
represents a loan. Associate hereby expressly authorizes WFG to offset and
deduct from any commissions or other money or value then or thereafter owed by
WFG to Associate any amounts due WFG from Associate. WFG is hereby authorized
by Associate to deduct from commissions due the amount of any commissions paid
to Associate in connection with any payment or amount that WFG refunds to
Associate’s Customer.
E.
All Debit Balances shall be
repaid immediately by Associate upon notice thereof to Associate by WFG. Any
Debit Balances not paid within thirty (30) days from the effective date of such
notice shall bear interest from the end of such thirty (30) days at a rate
equal to the prime rate of the Toronto Dominion Bank plus ten percent (10%).
From time to time in its sole discretion, WFG may cause a reduction in all or
any portion of the Associate’s Debit Balance in any of the following ways: i)
by applying any commissions or other forms of compensation payable to
the Associate by WFG to reduce the Associate’s Debit Balance; or ii) by
exercising any other legal rights and remedies available to WFG, including any
rights or remedies that are included in Associate Agreement Guidelines and
Rules. The Associate is also obligated to repay WFG for the Debit Balances of
any Associate’s Downline Associates. The formula and procedure for this Debit
Balance repayment is more specifically set out in the Associate Agreement
Rules.
F.
Except as otherwise
provided in this Agreement, and subject to the terms of this Section III.F., if
and when Associate qualifies for and attains certain sales position
designations established by WFG from time to time pursuant to Associate
Agreement Guidelines, Associate shall become Vested and entitled to receive
commissions upon termination. However, Associate acknowledges and agrees that
since Associate’s commissions are a share of WFG’s commissions, Associate
shall, upon becoming Vested, be vested in commissions only to the extent that
WFG actually receives commissions with respect to the applicable Customers from
the Preferred Companies and Associate can legally receive such commissions. In
the event that Associate, at the time of termination, has not qualified and
attained the sales position designation(s) established by WFG as a condition to
becoming Vested, Associate shall have no right to commissions or any compensation
of any kind.
G.
In the exercise of its sole
discretion, WFG reserves the right to, and may, refund to any Customer all or
any part of payments made by Customer, and Associate agrees to promptly
reimburse WFG for its expenses in connection therewith. Associate further agrees
to promptly repay WFG all commissions by Associate with respect to any refunds
to Customers, and WFG is hereby authorized to deduct from any other commissions
due or that may become due to Associate hereunder, the amount due WFG for any
such expenses or commissions to be repaid by Associate.
H.
Except as set forth above
in Section III.A. and III.F., Associate shall receive no other compensation of
any kind whatsoever under this Agreement. Associate will not receive any fringe
benefits under this Agreement whatsoever, including but not limited to
insurance benefits, disability income, paid vacation, expense reimbursement, or
retirement benefits unless otherwise specifically provided for in this
Agreement.
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