Principal Issues: [TaxInterpretations translation]
A broker is the sole shareholder of an insurance company. The broker acquired a life insurance policy of which he is the beneficiary and holder. Should the commission received by the corporation as a result of the broker's acquisition of the life insurance policy be added in computing the corporation's income?
Position: Yes.
Reasons:
Assuming that the broker is legally permitted by contract or statute to assign his commissions to his corporation and that the corporation is engaged in the business of insurance, the commission received by the corporation must be added to the corporation's income under subsection 9(1) of the Act. In the absence of a sham, the legal relationship between the broker and the corporation must be respected for tax purposes.
August 26, 2005
Quebec Tax Services Office Headquarters
Audit and Enforcement Division Danielle Bouffard
(613) 957-8953
Attention: Mr. Robin Tremblay
2005-012187Life insurance commission
This is in response to your email of March 18, 2005 in which you requested our opinion on the above subject.
Facts
1. A corporation is engaged in the insurance business. The broker's licence is in the name of the shareholder (the "broker").
2. All commission income is included in the corporation's income.
3. The broker is remunerated by the corporation by way of professional fees and no commission is paid by the corporation to the broker in respect of the sale of insurance policies.
4. The broker takes out a life insurance policy. He is the beneficiary and holder of the policy.
5. An amount related to commissions received by the corporation on the broker's life insurance policy has not been included in the corporation's income.
Questions
1. Should the commission received by the corporation as a result of the broker's acquisition of a life insurance policy be added in computing the corporation's income?
2. If not, does the following position expressed in Technical Interpretation No. 2001-0070655 apply in this situation: [TaxInterpretations translation]
Paragraph 27 of Interpretation Bulletin IT-470R 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. It is the Agency's view that this position also applies to self-employed sellers of life insurance.
Our Comments
Assuming that a broker is legally permitted by contract or by statute to assign his commissions to his corporation (see Income Tax Technical News No. 22 of January 11, 2002) and that the corporation is engaged in the business of insurance, it is our opinion that the commission received by the corporation from the sale of a life insurance policy to the broker must be included in the corporation's income under subsection 9(1) of the Income Tax Act.
As stated by the Supreme Court of Canada in Shell Canada Ltd. v. The Queen, 99 DTC 5669, in the absence of any indication that the transaction at issue is a sham, the legal relationship established by the broker and the corporation must be respected for tax purposes. Recharacterization is only possible where the taxpayer's characterization of the transaction does not adequately reflect its true legal effects.
Consequently, in our opinion, the position expressed in Technical Interpretation Request No. 2001-0070655 does not apply to the present situation.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
Milled Azzi, CA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Directorate General for Policy and Planning