Mainville, Sansfaçon, Beaupré

Appeal from a judgment of the Court of Québec dismissing an appeal from tax assessments. Allowed in part.

The appellant was persuaded by an insurance broker to participate in an illegal strategy allowing him to purchase a “universal” life insurance policy at no cost to him. This type of policy provided both flexible life insurance protection and a financial investment mechanism. The tax advantages were quite significant because the income generated was not taxable insofar as it was an exempt policy.

The strategy sought to enrich the broker through the generous commissions paid by insurers when a client takes out this type of financial product. Because the payments needed to maintain the policies in force during the first few years were lower than the commissions paid to the broker, the broker reimbursed the clients the full amount of the payments made to the insurers for the period required for him to obtain the commissions. Once this period was over, the client could choose to stop making the payments to the insurer, which would result in the forfeiture of the contract, or continue making the payments to maintain the contract in force. The appellant decided to stop making the payments once he was no longer being reimbursed by the broker.

The Agence du revenu du Québec (ARQ) assessed the appellant and attributed $250,000 to him in additional income for 2008 and $44,250 for 2009. According to the ARQ, the amounts he received from the broker in reimbursement of the payments made under the contract were taxable inducements pursuant to section 87(w) of the Taxation Act (CQLR c. I-3). The trial judge found that the conditions for the application of this provision were fulfilled.

The appellant submits that the judge erred in concluding that the contract entered into with the insurer was income from property. He submits that he did not actually earn income from the contract because he never collected the investment income credited to his account, given that, during the entire period the contract was in force, its cash surrender value was nil. Therefore, there was no income from property within the meaning of section 87(w) of the Act. The appellant also claims that this provision does not apply to life insurance policies.

Section 87(w) of the Act and section 12(1)(x) of the Income Tax Act (R.S.C. 1985, c. 1 (5th Suppl.)) share the same objectives and must be interpreted the same way.

In this case, the insurance coverage set out in the contract is not income from property, but the predominant aspect of the contract – that is, the investment account – can undoubtedly be used to generate income. This investment account is therefore property used for the purpose of earning income to which section 87 (w) of the Taxation Act applies.

In addition, the fact that income generated from an exempt policy is tax exempt does not exclude the application of section 87(w) of the Taxation Act. In this case, the portion of the inducements received for the payments the appellant made to the insurers for the purposes of the investment account under the contract is covered by this provision. However, the part of the inducements received for the life insurance coverage alone is not.

Finally, the fact that the appellant did not receive the income generated under the contract because it ended before he could exercise his right of surrender does not exclude the application of section 87(w) of the Taxation Act. If the property is reasonably capable of generating income, this provision may apply, regardless of whether the property in fact generates income or the taxpayer decides to dispose of it before it does.

Legislation interpreted: section 87(w) of the Taxation Act and 12(1)(x) of the Income Tax Act.

Text of the decision: http://citoyens.soquij.qc.ca