J.W. Baker Agency (1976) Ltd. v. Her Majesty the Queen, [1988] 1 CTC 8, 88 DTC 6030

Reed, J.: —The issue in this case is a narrow one: is the plaintiff who is an insurance broker and agent entitled to treat commissions he has received from the Insurance Corporation of British Columbia (hereinafter referred to as ICBC) as commissions for which a reserve may be claimed under section 32 of the Income Tax Act, R.S.C. 1952, c. 148 as amended.

The commissions in question relate to the ICBC automobile insurance plan. There is no dispute that once the commissions are paid there is no reduction or refund of commission if the policy on which the commission is based is cancelled. There is also no dispute that the ICBC Autoplan operates in such a way that once the policy is issued the policy-holder does not thereafter need to deal with his broker, except to change the policy; a service for which an additional fee is charged. Should the policy-holder be involved in an accident he or she makes a claim directly to ICBC and deals with ICBC adjusters. These facts are not set out in the agreed statement of facts but both counsel before me described the system as operating in that fashion.

The relevant sections of the Act are:

S. 20(1)(m)

Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted . . . where amounts described in paragraph 12(1)(a) have been included in computing the taxpayer's income from a business for the year or a previous year, a reasonable amount as a reserve in respect of

(i) goods that it is reasonably anticipated will have to be delivered after the end of the year,

(ii) services that it is reasonably anticipated will have to be rendered after the end of the year,

(iii) periods for which rent or other amounts for the possession or use of land or chattels have been paid in advance, or

(iv) repayments under arrangements or understandings of the class described in subparagraph 12(1)(a)(ii) that it is reasonably anticipated will have to be made after the end of the year on the return or resale to the taxpayer of articles other than bottles;

S. 32(1)

Paragraph 20(1)(m) does not apply to allow a deduction to an insurance agent or broker in respect of unearned commissions but a taxpayer may, in computing his income from a business as an insurance agent or broker for a taxation year, deduct as a reserve in respect of unearned commissions an amount equal to the proportion of an amount that has been included in computing his income for the year or a pervious year as a commission in respect of an insurance contract, other than a life insurance contract, that

(a) the number of days in that portion of the period provided for in the insurance contract that is after the end of the taxation year,

is of

(b) the whole of that period.

(2) There shall be included as income of a taxpayer for a taxation year from a business as an insurance agent or broker, the amount deducted under subsection (1) in computing his income therefrom for the immediately preceding year.

The plaintiff's argument is simple. Without paragraph 20(1)(m) a taxpayer would be required to take into income the commissions he receives in the year in which they are received regardless of whether they are earned or unearned. Paragraph 20(1)(m) provides for exceptions to that rule. If these exceptions were applicable to insurance brokers and agents highly subjective determinations would be required: high subjective determinations relating to whether or not services would be required to be rendered in the subsequent taxation year; highly subjective determinations as to what would be a reasonable amount to set aside as a reserve on that account. For example, it is extremely difficult to estimate how many policy-holders are likely to have accidents and therefore will require a broker's services in the subsequent taxation year. Since such determinations are highly impractical for the insurance industry, section 32 was enacted to provide an independent regime for insurance brokers and agents. Thus that section provides a mathematical formula which treats commissions as income spread over the life of the policy, without any determination having to be made as to whether there are future services to be rendered or whether the commissions are earned in the taxation year or not. Counsel for the plaintiff argues that in order for the Minister’s argument to prevail additional words must be read into the relevant text of subsection 32(2), to alter it to read:

an insurance agent or broker [may] for a taxation year, deduct as a reserve in respect of unearned commissions an amount. . . as a commission in respect of an insurance contract in which there are unearned commissions . . .

Counsel for the defendant argues that sections 12(1)(a), 20(1)(m) and 32(1) must be all read together; that the commissions earned by the plaintiff with respect to the ICBC Autoplan do not fall within that regime because they do not fall within paragraph 12(1)(a); they are not unearned. There is nothing left for the broker to do in so far as providing additional services to a policy- holder; there is no contingent aspect to the commissions. Paragraph 12(1)(a) of the Act reads:

There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(a) any amount received by the taxpayer in the year in the course of a business

(i) that is on account of services not rendered or goods not delivered before the end of the year or that, for any other reason, may be regarded as not having been earned in the year or a previous year, or

(ii) under an arrangement or understanding that it is repayable in whole or in part on the return or resale to the taxpayer of articles in or by means of which goods were delivered to a customer.

The decision in Kenneth B.S. Robertson, Ltd. v. M.N.R., [1944] Ex. C.R. 170; [1944] C.T.C. 75, is referred to. That decision dealt with an insurance agent who set aside, as a reserve, amounts which had been received as premiums under policies which the agent considered not to have yet been earned. These were attributable to the term of the policy which extended into the subsequent taxation year. Mr. Justice Jackett held that this treatment was appropriate with respect to premiums to which some contingency or future service attached but not with respect to premiums to which the agent had an absolute right. The Robertson case, of course, was decided outside the context of the present sections 20(1)(m) and 32(1). It is cited, as I understand it, merely for the general principle for which it stands: that unearned income is not to be treated as income for tax purposes. The decision in Dixie Lee (Maritimes) Ltd. v. M.N.R., [1981] C.T.C. 2840; 81 D.T.C. 647 (T.R.B.) was also cited as an illustration of this same principle, albeit that case relates to a fast-food franchise, not the insurance industry.

In any event, in my view, the general principles and the state of the law pre-existing the enactment of subsection 32(2) are not of much assistance. It is clear in reading subsection 32(2) that it does, as counsel for the plaintiff contends, set up an independent rule for insurance brokers and agents. As a matter of statutory drafting it does not read as a qualification to 12(1)(a) or as dependent on paragraph 20(1)(m), although it states that 20(1)(m) is not applicable to insurance agents and brokers. The operative wording as it relates to insurance agents and brokers is:

an insurance agent . . . [may] . . . deduct as a reserve in respect of unearned commissions an amount equal to . . .

and then follows the formula which contains no requirement that the commissions, being spread over the life of the policy, must be unearned. Indeed, were it to do so insurance agents and brokers would be required to make the subjective type of decisions the section was designed to avoid.

I have considered one other aspect of the wording of subsection 32(1) and that is the wording which states that an insurance agent "may deduct as a reserve in respect of unearned commission an amount. . .." Counsel for the plaintiff argues that this is nothing more than an arbitrary label, a term of art, and that the operative words are those which follow. I think this is the case. That interpretation is borne out by the French text:

. . . un contribuable peut. . . déduire comme réserve au titre de commissions non gagnées un montant . . .

For the reasons given the plaintiff's appeal is allowed and his reassessment will be referrred back to the Minister for reconsideration and recalculation in accordance with these reasons.

Appeal allowed.