Principal Issue: [TaxInterpretations translation]
Can the deduction of life insurance policy acquisition expenses, including commissions directly related to the acquisition of the policy in the year they are incurred, be accepted according to the Supreme Court's decision in Canderel?
Position:
The decision in Canderel does not apply in this case. Generally, those expenses are deductible in the year in which they are incurred. However, in the present situation, the facts did not allow us to reach that conclusion.
Reason:
931008
May 18, 2000
Montreal Tax Services Office Headquarters
Financial Industries Division
Attention: Mr. Joseph G. Fortin
L. J. Roy, CGA2000-000603
XXXXXXXXXX
This is further to your memo of November 23, 1999, in which you asked for our opinion on the application of Canderel Ltd. v. The Queen, 98 DTC 6100 (S.C.C.) to the situation submitted.
Our understanding of the facts of the submitted situation is as follows.
FACTS
XXXXXXXXXX
Taxpayer's Position
According to the taxpayer's representative, it is customary for insurers to treat commissions paid in advance to brokers or agents as deductible for tax purposes, even if those commissions are deferred in the financial statements. This position has been accepted by the tax authorities to date and is supported by Canderel Ltd. v. The Queen, 98 DTC 6100 (S.C.C.) and Toronto College Park Ltd. v. The Queen, 98 DTC 6088 (S.C.C.). Indeed, it seems clear that those expenses are current expenses within the meaning of the tax legislation, that is, expenses incurred in the normal course of business on a regular and ongoing basis. Expenses of this type have been clearly considered by the courts to be deductible in the year in which they are incurred. In this regard, the Supreme Court has very clearly indicated that matching for accounting purposes does not constitute a rule of law.
Furthermore, the representative is of the view that the Agency is in no way disadvantaged by such treatment since agents are taxed for employment income as soon as they receive such commissions, which are included on the T4 forms issued to employees.
Your Position
Since the commissions paid by the corporation are taxed to the agents as soon as they are paid, you believe that the taxpayer is justified in claiming the expense in the same year. In addition, the Canderel decision indicates that generally accepted accounting principles are not the only factors to be considered when accepting that an expense is deductible for tax purposes.
You also raise the fact that, as of the 2000 taxation year, new subsection 18(9.02) of the November 30, 1999 draft technical amendments provides that, for the purposes of paragraph 18(9), the acquisition costs of certain insurance policies will be deemed to be expenses incurred in consideration for services rendered on a regular basis throughout the term of the policy. Consequently, the taxpayer will no longer be able to deduct commissions paid in the year of payment.
Our Comments
Whether the costs of acquiring a life insurance policy, including commissions directly related to the acquisition of the policy, are deductible expenses in the year they are incurred is a question of fact that can only be determined after a detailed examination of the insurer's tax reserve calculations.
In a telephone conversation, Mr. Duncan McKay indicated that normally, in the life insurance field, the common practice is to deduct acquisition costs as they are paid. This deduction is taken into account when establishing tax reserves to ensure that there is no duplication of expenditure.
Due to the lack of facts regarding the calculation of tax reserves in the case under review, we are unable to answer your question on the deductibility of commissions. We suggest that you ask XXXXXXXXXX to demonstrate that the calculation of its tax reserves for the years in question took into account the fact that the acquisition expenses were otherwise deductible in the year. If you need more information on the audit of tax reserves, you can contact Jacques Dion, insurance specialist for the Quebec region, at 418-649-4993 ext. 3157.
We are of the view that the matching principle mentioned in Interpretation Bulletin IT-417R2 as well as the Agency's comments on the Canderel and Toronto College decisions set out in Income Tax Technical News No. 16 of March 8, 1998 and in Question 51 of the Technical Advisors' Roundtable (F9913160) do not apply to acquisition expenses incurred by an insurer. It should also be noted that, in accordance with the policy set out in paragraph 4(e) of Information Circular 75-7R3, the Agency will not process requests for adjustments to create refunds in order to take into account the Supreme Court decisions in those cases.
Should you conclude that the commissions were deductible in the years in which they were incurred, we are of the view that only expenses incurred in the taxation year of the adjustment should be allowed. No adjustment should be granted in a taxation year in respect of expenses incurred in a previous taxation year.
In conclusion, please note that new subsection 18(9.02) proposed in the November 30, 1999 draft technical amendment applies only to life insurance policies referred to in paragraph 1401(1)(b) of the Income Tax Regulations (after 1995 - 1404(3)(C)) and to certain damage insurance policies referred to in subsection 1400(3).
For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. 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 Legislative Access Bank 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 that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
Manager
Financing and Plans Section
Financial Industries Division
Income Tax Rulings Directorate
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