By: Florence Marino B.A., LL.B., TEP | Vice President, Tax & Estate Planning
On August 15, the CRA updated its published guidance for mandatory disclosure rules (which include reportable transactions and notifiable transactions). In respect of the reportable transactions regime, in the past, concern had been expressed and questions raised regarding whether or not life insurance commissions could, in and of themselves, be seen as contingent “fees” – one of the hallmarks that would trigger mandatory disclosure. (See: As a matter of tax – August 2022 | Manulife Advisors). While always a question of fact, the original explanatory notes and subsequent CRA commentary emphasized that product related fees and commissions will generally not fall within the definition of a fee for these rules.
General guidance vs. specific concerns
Concerns have continued to linger. And they should, especially in situations where the sale of life insurance is connected to what might be interpreted as an aggressive tax planning strategy that may involve other elements such as payment of fees to an advisor by a third-party promoter or where referral fees are conveyed between professional and insurance advisors in connection with these strategies.
To summarize, an obligation to file an information return in respect of a reportable transaction can arise where there is a contingent fee. That is, where the fee paid is based on the amount of tax benefit from an avoidance transaction or series, is contingent upon obtaining the tax benefit, or is attributable to the number of persons who participate or who have been provided access to advice or an opinion given by an advisor or promoter.
What does the recent CRA guidance say?
Recent guidance
The following new guidance was added:
“In the context of estate freezes, life insurance policies are commonly acquired under standard commercial terms to fund taxes arising on death that result from a deemed disposition of shares of a private corporation. In some situations, a client may have been referred to an insurance advisor by a third-party advisor to assist the client with acquiring a life insurance policy. In other cases, the insurance advisor may refer the client to a third-party advisor for assistance in respect of a separate series of transactions including an estate freeze. When, in these circumstances, the insurance advisor’s or third-party advisor’s entitlement to a referral fee is based on the successful referral of a client to each other and the total fees received increase by the number of successful referrals received, the contingent fee hallmark will not be met.”
This is good news for mainstream non-aggressive tax planning where there is a connection to life insurance and clients may have been referred from one advisor to the other accompanied by a referral fee. (The legal and ethical considerations for the advisors and professionals involved in these types of referral arrangements is another question!)
Our take
This guidance is positive but is not a carte blanche. Where a “fee” is paid in connection with aggressive tax planning using life insurance, whether a freeze is involved or not, this positive guidance won’t save you. This guidance cannot be stretched beyond the mere circumstance described.
What this guidance indicates to us is that referral fees could be considered “fees” when not within the confines of this guidance. Where no hallmark is present reporting is not mandatory, but GAAR is always still on the table. (See: A new GAAR – Pretty chilly right now – Tompkins Insurance) Reporting may be made voluntarily by taxpayers who want to protect against GAAR penalties and elongated reassessment periods. So even if the requirements of the definition of “fee” are not present, there is still GAAR to grapple with.
FOOTNOTE:
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