Verrier v. Agence du revenu du Québec, 2024 QCCA 298

The taxpayer (Verrier) and other clients of an insurance broker (Chabot) participated in a scheme of Chabot to defraud life insurance companies which rested on the commissions generated to Chabot from the sale of universal life policies substantially exceeding the premiums payable under those policies during the first two years of their term (beyond which, they could be cancelled without Chabot being required to repay his commissions). Accordingly, Chabot sold a large policy to Verrier in January 2008, and Cabot commenced reimbursing Verrier for the monthly premiums payable by him under the policy. However, Chabot stopped the reimbursements after July 2009 as a result of interventions by the financial markets regulators, and the policy was subsequently cancelled by the insurer for non-payment of premiums. Approximately 1/3 of the premiums were used by the insurer to purchase insurance and 2/3 were used to purchase investments chosen by Verrier. However, the policy had no cash surrender value for the first two years.

The Court of Quebec had confirmed the inclusion of the reimbursement payments in Verrier’s income pursuant to s. 87(w) of the Taxation Act (Quebec) (similar to s. 12(1)(x) of the Income Tax Act). At issue in this appeal was whether the reimbursement payments qualified under s. 87(w) as being “received by the taxpayer in the year, in the course of earning income from a business or property”. Mainville JCA found that the insurance coverage provided under the policy did not constitute income from property and instead represented a non-taxable benefit. However, the investment account contemplated under the policy constituted property exploited for the purpose of deriving income therefrom and, therefore, came within s. 87(w).

Although the income generated on the investment account was exempted, it effectively would be subject to deferred taxation when the policy was redeemed for its cash surrender value under the Quebec equivalent of s. 148(1). Mainville JCA stated (at para. 72, TaxInterpretations translation):

[T]he portion of the incentives received in respect of payments made by the appellant to the insurers for the purpose of the investment account provided for in the Contract (approximately two-thirds in the appellant's case) come within paragraph 87(w) … but … the portion of the incentives received in respect of payments made by the appellant to the insurers for the purpose of life insurance coverage only (approximately one-third in the appellant's case) are not.

In further finding that it was irrelevant that in fact Verrier did not generate any income from the policy under s. 148(1), Mainville JCA stated (at para. 75):

If the property in question is reasonably likely to generate income, paragraph 87(w) … can apply, regardless of whether the property actually generates income or whether the taxpayer decides to dispose of it before it generates income.

In finding that s. 87(w) of the Taxation Act (Quebec) should be accorded the same interpretation as s. 12(1)(x) of the Income Tax Act Canada), Mainville JCA stated (at para.48, TaxInterpretations translation):

In fact, the English and French versions of the T.A. have the same legal value and must be interpreted first by looking to their common meaning, and then by determining whether this is consistent with the intent of the legislator. Furthermore, although the tax regime established pursuant to the T.A. is distinct and autonomous from the tax regime set out in the I.T.A., there is no doubt that these two regimes act in harmony with each other in most of their provisions, particularly when it comes to the fundamental principles governing the computation of income. In this case, I agree with the parties that paragraph 87(w) T.A. and paragraph 12(1)(x) I.T.A. have the same objectives and must be interpreted in the same way, and that the difference in wording between the French and English versions of paragraph 87(w) T.A. is a matter of drafting style rather than substantive difference.