Taxing Decisions

FORUM Magazine

2010-03-01


How a flurry of CRA developments will affect life insurance and advisors

Just in time for tax season, there have been a number of recent tax developments that affect both the planning and structuring of life insurance policies, as well as the sale of life insurance itself. This column will focus on three tax issues.

Commissions on sale of advisors’ own policies

Two recent cases from the Tax Court of Canada concluded that, notwithstanding the longstanding published administrative position of the Canada Revenue Agency, insurance commissions on the sale insurance policies on an advisor’s own life are fully taxable.

The first case, Bilodeau v. the Queen (2009 TCC 315), involved Jacques Bilodeau, a life insurance broker who took out two $1 million Transamerica Life universal life insurance policies on both his own and his wife’s lives. When Bilodeau filed his 2003 tax returns, he deducted the $43,000 of commissions he received on the sale of the two life insurance policies as an expense.

The position that commissions received upon purchasing personal life insurance policies are considered to be tax-exempt is based on CRA Interpretation Bulletin IT-470R, which states that “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 denied Bilodeau’s deduction on the basis that the life insurance policies “were not purchased with a view to obtaining personal protection but for investment purposes.”

The Judge concluded that the $43,000 of commissions received was taxable income. 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.”

A similar conclusion was reached a few months later in Li v. The Queen (2009 TCC 530) where insurance advisor Linzi Li was denied a $7,000 commission income deduction offset against the commission earned on a life insurance policy on her own life as “there are no provisions in (the Act) that allow such a deduction.”

Something to think about when you file your own tax returns this tax season!

Corporate-owned life insurance

It’s common for advisors to ensure that where corporate-owned life insurance is required, the corporation should be the beneficiary of the life insurance policy so that the death-benefit flows directly from the life insurance company into the corporation’s capital dividend account (CDA).

In some case, however, a lender offering creditors’ life insurance will insist on being named as the beneficiary of the policy. Upon the death of the key shareholder, will the death benefit, paid from the insurance company directly to the third party creditor, still be credited to the corporation’s CDA?

According to a recent case, Innovative Installation Inc. v. the Queen (2009 TCC 580), the answer is yes.

In 1999, Innovative borrowed money from RBC and obtained key person insurance from Sun Life Financial on the life of its founder. When he died, Sun Life paid the death benefit directly to RBC.

The CRA denied the addition to Innovative’s CDA since it was RBC that “received” the death benefit, not Innovative itself.

Fortunately, the Judge disagreed and concluded that the word “receive” in the Tax Act refers to the party that receives the benefit of the insurance proceeds and thus Innovative was entitled to add the proceeds of the death benefit to its CDA.

Parentco as beneficiary of Subco’s policy

In late December, the CRA issued technical interpretation 2009-0347291C6 dealing with corporate owned life insurance and whether or not a shareholder’s benefit might apply in a particular situation.

The situation described was where an individual shareholder (“A”) holds 100% of the voting shares of “Parentco.” Parentco holds 100% of the voting shares of “Subco.” Subco is the policyholder of a life insurance policy on the life of A and pays the premiums. The beneficiary of the life insurance policy is Parentco.

The CRA responded that in this scenario, Subco would indeed have conferred a benefit on its shareholder, Parentco, in paying the premiums relating to the life insurance policy of which Parentco is the beneficiary. As a result, subsection 15(1) would apply, such that Parentco, in computing its income for the year, would have to include the amount of the benefit conferred on it by Subco.

Advisors should note that this represents a change in CRA’s administrative policy and will apply as of the 2010 calendar year. In cases of life insurance policies already issued, however, the amount of the benefit conferred will be not be included in the shareholder’s income until 2011. (A more detailed discussion of this case appears in our Corporate Insurance column on page 32).