The taxpayer (Quintal) and other clients of an insurance broker (Chabot) participated in a scheme of Chabot to defraud life insurance companies which rested on the commissions generated to Chabot from the sale of whole life policies substantially exceeding the premiums payable under those policies during the first two years of their term (beyond which, they could be cancelled without Chabot being required to repay his commissions). Chabot sold a large policy to Quintal, and Chabot’s company (Élan) paid Quintal in amounts equaling the premiums initially payable by him, with the policy subsequently being cancelled by the insurer after Quintal had ceased paying the premiums.
The principal argument of Quintal that the payments received by him from Élan were not includible in his income pursuant to TA s. 87 (similar to ITA s. 12(1)(x)) was that those amounts were not received by him “in the course of earning income from … property”: the intention was that the policy would be cancelled before he had any right to surrender the policy for any positive amount. In rejecting this submission, Gosselin JCQ stated (at paras. 47, 49, TaxInterpretations translation):
The TA requires a life insurance policyholder to include in computing income on the disposition of an interest in the policy the amount by which the proceeds of disposition of the interest exceed the adjusted cost basis of the interest. …
The Court notes, however, that the cash surrender value actually increased as soon as the first excess premiums were paid to the insurer, which deposited them in the Policy's investment account in search of financial performance resulting in interest on those investments, even though the cash surrender value could not be cashed out by Mr. Quintal in the short term.
Regarding the “inducement” requirement under the equivalent of s. 12(1)(x)(iii), Gosselin JCQ further stated (at para. 71):
The advances paid to Mr. Quintal by Élan were inducement payments since without them … he would never have purchased such an insurance policy at such a cost.
The ARQ was also justified in having reassessed Quintal under s. 87 beyond the normal reassessment period.