Life insurance commissions are taxable

In a decision sure to rock the insurance advisory world, the Tax Court of Canada has ruled that, notwithstanding the longstanding published administrative position of the Canada Revenue Agency, insurance commissions on the sale of two policies on the advisor’s own life were fully taxable.

The case (Bilodeau v. the Queen, 2009 TCC 315) involved Jacques Bilodeau, a life insurance broker with Force Financière Excel who earns his income from life insurance company commissions.

In 2003, Bilodeau personally took out two $1 million Transamerica Life universal life insurance policies, one under which he was the insured person and his wife was the beneficiary and the other under which his wife was the insured person and he the beneficiary.

On his policy, he paid $38,000 of premiums over the first two years and on his wife’s policy, he paid nearly $20,000.

When Bilodeau filed his 2003 tax returns, he initially included in his income the amount of the commission he received from Transamerica totaling about $43,000 for the two life insurance policies. He then deducted that same amount as an expense, calling it an insurance rebate.

This tax position – that commissions received upon purchasing personal life insurance policies are considered to be tax-exempt – is widely relied upon in the insurance industry and is based on Interpretation Bulletin IT-470R, originally issued by the CRA on April 8, 1988, and revised some 11 years later in August 1999.

The Bulletin, entitled “Employees’ fringe benefits” (but also relevant to taxpayers who are self-employed like Bilodeau), states under the heading, “Discounts on Merchandise and Commissions on Sales,” paragraph 27, that “(a) commission received by a sales employee on merchandise acquired for that employee’s personal use is not taxable. Similarly, 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.”

The CRA refused to allow Bilodeau to reduce his commission income by the $43,000 on the grounds that the life insurance policies “were not purchased with a view to obtaining personal protection but for investment purposes.”

This is based on earlier comments the CRA made at the May 2000 Conference for Advanced Life Underwriting (CALU) in which the CRA issued a number of “clarifications” regarding its position as set out in the IT Bulletin.

At CALU, the CRA stated that the phrase “life insurance policy” used in the Bulletin, “was never intended to be used in the same sense as in…the Act. In fact, it was aimed specifically at life insurance policies acquired for the purpose of obtaining personal protection. Therefore, commissions received by a life insurance salesperson following the acquisition of an annuity contract or a segregated fund policy as an investment are taxable for the salesperson.”

Mr. Bilodeau argued that even after six years, there was no cash surrender value on the two policies and as a result, he argued that that he “did not take out these two policies for investment purposes, but rather to secure the protection of personal life insurance.”

He also stated “if he had not been a life insurance broker, he probably would not have purchased this type of insurance…(He) acknowledged it is the receipt of a commission that he considered non-taxable, as of the first year, which allowed him to absorb the elevated cost of the universal (life) insurance.”

This testimony may not have been the most helpful.

The Judge concluded that the $43,000 of commissions received was taxable income that Bilodeau earned from his business. As the Judge wrote, “Had he not been a broker, he would not have received that commission…That the two policies were acquired by him for personal purposes…does not change the fact that he earned the commission in issue as part of his professional activities as a broker. It is precisely because he was a professional broker that he was entitled to that commission.”

Advisors should be reminded that, in all tax matters, the CRA’s Interpretation Bulletins are no substitute for the Income Tax Act itself. As the Judge wrote, “The bulletin only reflects the opinion of the Minister, and does not bind either the Minister, the taxpayer or the courts.”

That being said, the Judge did not add insult to injury and refused to award any legal costs to the CRA, despite its victory. As she wrote, “I recognize that the CRA misleads taxpayers by adopting an administrative position, which seems to be applied at its discretion. Internal policies that go against Interpretation Bulletins should be made public so as to avoid confusion.”

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.