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: Where an insurance advisor or salesperson pays a rebate to a client who has purchased a life insurance policy:
1. What is the tax treatment of the rebate to the insurance advisor?
2. What is the tax treatment of the rebate to the policyholder?
3. Alternatively, can the policyholder reduce the adjusted cost basis of the policy?
Position: 1. Subject to the general limitations in the Act (e.g., sections 18 and 67), the rebate is deductible pursuant to subsection 9(1).
2. Taxable pursuant to paragraph 12(1)(x).
3. No.
Reasons: 1. The rebate is a general business expense.
2. The rebate is property income of the policyholder.
3. There is nothing in subsection 148(9) to allow the reduction in the adjusted cost basis and no election, similar to subsection 53(2.1) available.
CALU CRA Roundtable - 2010
8. Tax treatment of 'rebate' paid by an advisor to a policyholder.
In certain provinces, a licensed insurance advisor is permitted and may agree to pay a portion of the commission he or she has earned as a "rebate" to a client purchasing an insurance policy. The "rebate" effectively reduces the advisor's commission income as well as the amount of the initial premium that is paid by the purchaser for the policy coverage.
Question:
Can the CRA confirm the tax treatment of the rebate to the policy purchaser and to the paying advisor? Can the purchaser reduce what would otherwise be his or her adjusted cost basis for the policy by the amount of the rebate?
CRA Response:
We can confirm that the position taken in technical interpretation letter 2008-0271381E5 continues to reflect our view of the tax treatment of the rebate to the insurance advisor and the policy purchaser. The insurance advisor will include the full amount of the sales commission in business income pursuant to subsection 9(1) and, except as otherwise limited by the Act (e.g., sections 18 and 67), can deduct the rebate that is paid to the policy purchaser. The policy purchaser will include the rebate in income pursuant to paragraph 12(1)(x).
With regard to the second question, we are of the view that there is no basis that would permit the policy purchaser to reduce the adjusted cost basis of the life insurance policy by the amount of the rebate.
Subsection 148(9) defines the adjusted cost basis of a life insurance policy and includes in variable A "the total of all amounts each of which is the cost of an interest in the policy..." This would include the initial premium paid for the policy. It is our understanding that any rebate paid by the insurance advisor to the policy purchaser would be made independent of the insurance company and would not, in fact, reduce the initial premium paid for the policy. Consequently, the cost of the policy for the purpose of variable A would not be reduced. Variables H through L of the definition of adjusted cost basis reduce the adjusted cost basis in a number of situations; however, none of those situations are applicable to the type of rebate in question.
The treatment you have asked for is similar to that provided by the election pursuant to subsection 53(2.1) for an amount that a taxpayer has received in respect of a capital property. This election generally allows the taxpayer to elect to reduce an amount that would otherwise be included in income pursuant to paragraph 12(1)(x), by reducing the adjusted cost base of the property in question by the amount so elected pursuant to paragraph 53(2)(s). However, as you indicated, the election does not allow the same treatment to be accorded to the adjusted cost basis of a life insurance policy.
Absent an election similar to subsection 53(2.1), it is our view that the policy purchaser does not have the option of reducing the adjusted cost basis of the policy in lieu of including the rebate in income.
Terry Young
2010-035940
May 4, 2010
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