4 May 2010 Roundtable, 2010-0359451C6 - Commission Income on Life Insurance Policies

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: What is the impact to the CRA's longstanding administrative policy not to tax commission income earned by a life insurance salesperson, whether employed or self-employed, as essentially described in paragraph 27 of IT0470R as the result of the TCC decision in Bilodeau.

Position: See Response.

Reasons: See Response.

CALU CRA Roundtable - 2010

Question 5 - Taxable benefit on commission paid for personally owned life insurance policies

Paragraph 27 of Interpretation Bulletin IT-470R, Employees' Fringe Benefits (Consolidated), contains the following statement:

"...where a life insurance salesperson acquires a life insurance policy, a commission received by that salesperson on that policy is not taxable provided the salesperson owns that policy and is obligated to make the required premium payments thereon."

Since the publication of IT-470R, the CRA has modified the above-described administrative position through various technical interpretations and other public statements so that it now applies to both self-employed salespersons as well as those who are employed by a life insurer where the particular salesperson has purchased the particular life insurance policy for personal use rather than investment or business purposes.

We understand that the reason for this administrative position is that the commission income in such circumstances is analogous to an employee product discount (i.e., the amount of the commission received by the salesperson is effectively netted against the premium that is payable by the salesperson).

However, recently the Tax Court of Canada ("TCC") in Bilodeau v. The Queen, 2009 D.T.C. 1757 addressed the issue of whether commission income received by a life insurance agent on a life insurance policy was taxable. The TCC found that the commission income was fully taxable as business income in the hands of the agent, who was an independent agent and that the CRA's administrative position was misleading.

Question:

Can the CRA provide further guidance as to the situations or fact patterns where it may seek to apply the Bilodeau decision rather than following its administrative position as described above?

Response:

As noted in various technical interpretations, including 2009-032451 (F), 2006-019716 (F) and 2001-007065 (F), the CRA had indicated that the administrative position described in paragraph 27 of IT-470R would not apply where the amount of commission income was significant. This position is also consistent with the following comment that appears in paragraph 2 of IT-470R:

"In the second group there may well be a point beyond which the "privilege" concept is no longer valid, i.e., the advantage to the employee is, in fact, a form of remuneration."

Furthermore, the CRA has opined that the administrative position is not intended to apply where the insurance was obtained for investment or business purposes. Accordingly, where based on the facts, circumstances and any other relevant factors, the CRA is of the view that the amount of commission income is significant and/or the particular life insurance policy has an investment component or a business use, the above-described administrative policy will not apply.

In respect of the particular situation addressed by the TCC in Bilodeau, the amount of commission income received by the taxpayer ($43,115) was not only significant, the particular life insurance policies acquired by the taxpayer, in our view, appeared to have an investment component (i.e., a cash surrender value). Thus, even though the taxpayer in Bilodeau maintained that the acquisition of the two universal life insurance policies was purely for personal protection, since the commission income on these two policies was clearly substantial and such policies did appear to have an investment component, whether intended by the taxpayer or not, the administrative policy should not have applied.

Given the comments of the TCC in Bilodeau, we have commenced a review of the administrative position in IT-470R. If CALU would like to submit representations in this regard, we will consider them in the course of our review. Any changes to the position will first be published in an Income Tax Technical News with a prospective effective date.

Michael Cooke
2010-035945
May 4, 2010