Principal Issues: Is commission income earned by an insurance salesperson on a policy purchased for personal purposes taxable?
Position: Question of fact
Reasons: The CRA's administrative policy, as described in paragraph 27 of IT-470R, only applies where the income received is not significant and the insurance policy has no investment component or business use.
XXXXXXXXXX 2011-040712 C. Underhill January 9, 2012
Dear XXXXXXXXXX :
Re: Commission Income on Personal Insurance Policies
We are writing in response to your letter of March 24, 2011, concerning the taxation of commissions received by you on the purchase of personal insurance policies owned by you. You have also enquired whether the commissions you received on the purchase of personal insurance policies for your spouse and your dependants are taxable as income to you. You have stated that you are personally obligated to pay the premiums for all the policies.
Generally, commissions received by a salesperson is taxable, either under section 5 or section 9 of the Income Tax Act (the "Act"), depending on whether the particular salesperson is an employee or self-employed.
However, Interpretation Bulletin IT-470R, Employees' Fringe Benefits Consolidated, outlines the administrative position of the Canada Revenue Agency (CRA) concerning non-taxable commissions received on personal sales. In particular, paragraph 27 of IT-470R, states, in part:
"...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."
It has been the view of the CRA that the above-noted administrative position does not apply where the amount of the commission received is significant and/or the particular life insurance policy has an investment component or a business use.
In Jacques Bilodeau v. Her Majesty the Queen, 2009 DTC 1757, the Tax Court of Canada (TCC) addressed the issue of whether the commissions received by a life insurance agent on a personal 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. The commission income received by the taxpayer was significant and the insurance policies appeared to have an investment component.
Although the final TCC decision in Bilodeau is consistent with the CRA's administrative policy on commissions received by a salesperson on the purchase of life insurance policies for themselves, the comments of the TCC regarding the CRA's statements in paragraph 27 of IT-470R was of concern to the CRA and it is currently reviewing its administrative policy. Any changes in the policy will be applied on a prospective basis and will be publicly announced.
We trust these comments will be of assistance.
Yours truly,
Nerill Thomas-Wilkinson
Manager
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch