Tax treatment of rebates paid by an advisor

By Doug Carroll | May 17 2013 06:50PM

At issue
In some provinces, licensed insurance advisors are permitted to pay a portion of earned commission to the purchaser of a life policy. If an advisor chooses to use this device, there can be tax implications for both advisor and client – and possibly even for parties extending beyond that immediate relationship.

Here are a couple of Canada Revenue Agency rulings and a Tax Court case on the issue.

CRA 2008-0271381E5 – Commission Rebates
The CRA was asked whether a rebate payment served to reduce an advisor’s commission, or if it was instead a deductible expense.

In general, where the advisor has the absolute right to the commission without restriction, the total amount of the commission would be included in income. However, the rebate would generally be a deductible expense so long as it fulfills the Income Tax Act requirements of being incurred for the purpose of earning income and being reasonable.

The recipient of such a payment will be treated as having received an amount that is income from property, the property being the life insurance policy. In fact there is a specific income inclusion section in the ITA for inducements received from someone (ie., an advisor) who has made the payment in the course of earning income.

CRA 2010-0359401C6 – Rebate Paid by an Advisor to a Policyholder

At the 2010 Conference for Advanced Life Underwriting program, the CRA was asked again about this issue. The Agency representatives referred back to the above ruling, reaffirming its position regarding the payor advisor and payee policyholder. An additional leg of the question inquired whether the payment would reduce the policy’s adjusted cost basis. In response, the representative noted that an election is available for similar payments in respect of capital property. Life insurance is not however capital property, and there is no corresponding provision in the ITA section dealing with the ACB of a life insurance policy.

Lapalme v. R. 2011 TCC 396

A corporation purchased life insurance coverage on each of four brothers who were its shareholders and directors. Shortly thereafter, each received a cheque in his personal name from the advisor’s insurance-licensed corporation, which each claimed as a non-taxable gift. The amounts approximately equaled the respective first year policy premiums.

The court upheld the CRA assessment of a shareholder benefit having been conferred on each of the brothers. Further, it allowed the assessment despite being outside the normal assessment period, finding there to have been misrepresentation in filing the personal returns. Penalties were also upheld, attributable to a finding of gross negligence.

The case did not address what the tax implications may have been to the advisor, who was not present at the hearing.

Practice points
1- Obviously, verify your provincial rules on the legality of rebating.

2- Keep in mind the implications and complications if it is contemplated that the payment will be made to someone other than the policyholder.

3-With respect to advising the client, be aware of CRA’s position as stated in the first cited ruling above that “clients should be notified of the CRA’s position that the rebate received must be included in their income.”