At issue
An oft touted perk of being a life agent is the presumed entitlement to receive tax-free commissions on one’s own life insurance.
Look this up in the Income Tax Act, however, and you won’t find it. That’s because it is based on a Canada Revenue Agency administrative position. And as two agents discovered when they pressed their respective exemption claims before the courts a couple of years back, CRA is not the law.
In the wake of these judicial determinations, the danger for the rest of the advisor population was somewhat put in limbo, not knowing whether the CRA would retract or otherwise not be able to apply this administrative practice in future. A subsequent CRA technical letter clarified the agency’s continuing position.
Li v. R., 2009 TCC 530
The appellant was employed as a commissioned salesperson with a life insurance company. She appealed an income tax assessment that disallowed numerous deductions claimed as employment expenses, including commissions on own life insurance.
The Judge held that there are no provisions in section 8 (re: employment deductions) of the Income Tax Act that allow a deduction for commissions on own insurance. No mention is made of CRA administrative practice.
Bilodeau v. R., 2009 TCC 315
The appellant, a life broker, appealed from assessments disallowing $43,115 of claimed deductions against commission income. The commissions arose out of two universal life policies held by the broker on his life and his wife’s life. A significant portion of commissions were attributable to excess premium deposits.
With respect to an agent’s own coverage, the broker relied primarily on paragraph 27 of Interpretation Bulletin IT-470R and CRA’s longstanding administrative practice. While the judge acknowledged that Interpretation Bulletins may reflect the opinion of the Minister of National Revenue, he made it clear that they are not binding on the Minister, the taxpayer or the courts. To the point, those opinions are not a substitute for the ITA.
It was held that it is irrelevant whether the policies were acquired for personal reasons or to obtain a tax-free investment returns. The intended purpose of the insurance did not change the fact that the commission was taxable.
CRA 2010-0388111M4 F – Commissions – Life insurance salesperson
Following the Bilodeau decision, the CRA was asked whether it would continue to apply its past administrative practice. The agency responded that the practice would indeed continue, but that insurance policies held for investment or business purposes would not qualify for the exemption, nor had they in the past for that matter.
Practice points
- It may be advisable for an advisor to hold pure personal risk policies separately from policies held for other purposes. Though that recent CRA letter does not explicitly bar combined-use policies, such an arrangement could present challenges in isolating the commission entitled to the preferred treatment, with the potential that all of it will be taxable.
- By the way, the CRA administrative position has never applied to accumulation products such as segregated funds.