Independent Order of Foresters v. The King

Independent Order of Foresters v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2023-08-17
Neutral citation
2023 TCC 123
File numbers
2018-4815(IT)G
Judges and Taxing Officers
Monica Biringer
Subjects
Income Tax Act
Decision Content
Docket: 2018-4815(IT)G
BETWEEN:
THE INDEPENDENT ORDER OF FORESTERS,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeal heard on October 24, 25, 26, 27, and 31, 2022, November 1, 2022, February 17, 2023 and February 20, 2023 at Toronto, Ontario, Written submissions of both parties received on March 27, 2023
Before: The Honourable Justice Monica Biringer
Appearances:
Counsel for the Appellant:
Daniel Sandler
Marie-Claude Marcil
Osnat Nemetz
Counsel for the Respondent:
Craig Maw
Jenna Clark
Lalitha Ramachandran
JUDGMENT
UPON hearing from the parties and upon reading the written submissions of the parties, filed;
AND in accordance with the Reasons for Judgment attached;
The appeal from an assessment made under the Income Tax Act in respect of the Appellant’s 2014 taxation year is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with my attached reasons. More specifically, the Minister shall reassess the Appellant in respect of its 2014 Taxation Year on the basis that:
(a) World Surplus assets in the amounts of $110,116,000 for the 2013 taxation year CIF and $217,025,000 for the 2014 taxation year CIF are not to be included;
(b) assets and liabilities of the A&S Business in the amounts of $982,000 for the 2013 taxation year CIF and ($3,299,000) for the 2014 taxation year CIF are to be included; and
(c) the Appellant is correct in designating Investment Property in respect of its A&S Business pursuant to ITR paragraphs 2401(2)(b) and (d), including, pursuant to ITR paragraph 2401(2)(d), any additional Excess CIF determined in accordance with these reasons.
The Appellant has 30 days from the date of this decision to provide written submissions on costs, not to exceed 10 pages. The Respondent has a further 30 days to provide written submissions on costs in response to the Appellant’s submissions.
Signed at Toronto, Ontario, this 17th day of August 2023.
“Monica Biringer”
Biringer J.
Citation: 2023 TCC 123
Date: 20230817
Docket: 2018-4815(IT)G
BETWEEN:
THE INDEPENDENT ORDER OF FORESTERS,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
REASONS FOR JUDGMENT
Biringer J.
[1] The Independent Order of Foresters (“Appellant”) is a Canadian resident fraternal benefit society and a life insurer that provides fraternal benefits and individual life insurance to its members. The Appellant appeals an assessment for the 2014 taxation year[1] involving the taxation of investment income.
I. BACKGROUND FACTS
[2] The parties filed a partial agreed statement of facts (“PASF”) which is reproduced in Appendix A.
[3] The Appellant called three fact witnesses – Mr. Frank Lochan, director[2], Mr. Stephen McDonald, Vice-President International Finance Officer and Mr. Peter Boyko, Vice-President Capital Management. The Respondent called two fact witnesses - Paul Reaburn, Chief Financial Officer and Sharon Giffen, CEO of the Canadian Division. I found all witnesses to be credible.
[4] The Appellant was formed on May 16, 1913 under the Federal Independent Order of Foresters Consolidated Act (3&4 Geo. 5, c.113). It is owned by its members and has a representative form of government. Individuals who purchase insurance or an annuity from the Appellant become members of the fraternal benefit society. During the 2014 taxation year, the Appellant had approximately 1.2 million members in Canada, the United States and the United Kingdom.[3]
[5] The purpose of a fraternal benefit society is to provide benefits for its members who share a common bond.[4] For the Appellant, members obtain benefits through insurance products (life insurance and accident and sickness), community activities and various other personal development services.[5]
[6] Members who purchase a life insurance policy are entitled to various other benefits (e.g. an illness benefit) (“Fraternal Benefits”)[6]. In addition to providing Fraternal Benefits to members, the Appellant spends money on various community and personal development projects (e.g. building playgrounds, providing scholarships) (“Good Works”).[7]
[7] The Appellant is subject to the Insurance Companies Act[8] and is regulated by the Office of the Superintendent of Financial Institutions (“OFSI”). The Appellant operates insurance businesses in Canada and in the United States. During the Relevant Period, the Appellant carried on its life insurance business (“Life Business”) and its accident and sickness insurance business (“A&S Business”) in both Canada and the United States.[9] The Appellant carried on its fraternal operations in Canada and through branches in the United States and the United Kingdom.[10]
[8] Subsidiaries of the Appellant, which are not fraternal benefit societies, carry on life insurance businesses in Canada, the United States and the United Kingdom[11]. The Canadian subsidiary is Foresters Life Insurance Company. Other subsidiaries of the Appellant carry on asset management businesses in the United States and the United Kingdom.[12]
II. TAXATION OF CANADIAN RESIDENT LIFE INSURERS
[9] The issues in this appeal involve rules in the Income Tax Act (Canada) (“ITA”)[13] relevant to the taxation of a life insurer and those relevant to the taxation of a fraternal benefit society. I start with a brief overview of both.
[10] The Appellant is a Canadian resident “life insurer” and “life insurance corporation” for purposes of the ITA. The general rule – that Canadian residents are liable to tax on worldwide income – does not apply to life insurers. Pursuant to paragraph 138(2)(a), a Canadian resident multinational life insurance corporation/life insurer (“MNLI”) that carries on an insurance business in Canada and elsewhere is taxable under the ITA on income from carrying on an insurance business only to the extent that the income is from carrying on the insurance business in Canada.
[11] MNLIs hold portfolio investments against all of their liabilities. Subject to regulatory requirements, the insurer may not hold investments in each country in which it operates in proportion to its liabilities, capital and surplus in that country. For example, a Canadian resident MNLI may hold all capital and surplus in support of worldwide operations, not only those in Canada. Accordingly, the ITA has special rules (the “designated property regime”) to determine the appropriate level of investment revenue and gains and losses attributable to the Canadian resident MNLI’s Canadian insurance businesses.
[12] Paragraph 138(9)(a) requires a Canadian resident MNLI to include in its income from carrying on an insurance business in Canada the “gross investment revenue” (“GIR”)[14] from “designated insurance property” (“DIP”)[15]. GIR from investment property that is not DIP is not included.[16] Paragraph 138(9)(b) requires a prescribed amount to be included in income, pursuant to a complex formula in Income Tax Regulations[17] (“ITR”) section 2411, if, in general terms, the GIR from DIP that is to be included in computing income does not reflect the average GIR from all of the insurer’s investment property. Paragraph 138(9)(b) is not in issue in this appeal.[18]
[13] DIP is defined in subsection 138(12) to mean property determined in accordance with prescribed rules.[19] The prescribed rules require an insurer to first determine its “Canadian investment fund” (“CIF”)[20] at the end of the relevant taxation year and the end of the immediately preceding year to arrive at the “mean CIF”[21] for the year. The CIF represents the amount of the insurer’s investment property that is considered to be used in the Canadian insurance businesses at the end of the year. The insurer must then designate “investment property”[22] (“Investment Property”) equal in amount to the mean CIF (or the total of the “mean Canadian reserve liabilities” in respect of the insurer’s insurance businesses, if greater).[23] A detailed discussion of the CIF and the designation rules is provided further below.
III. TAXATION OF FRATERNAL BENEFIT SOCIETIES
[14] Paragraph 149(1)(k) exempts from Part I tax payable the taxable income of a fraternal benefit society. Subsection 149(3) provides an exception to paragraph 149(1)(k) in respect of the taxable income of a fraternal society from carrying on a life insurance business. Subsection 149(4) provides that for the purposes of subsection 149(3), the taxable income of a fraternal benefit society from carrying on a life insurance business shall be computed on the assumption that “it had no income or loss from any other sources.”
[15] Thus, a fraternal benefit society is taxable under Part I on taxable income from carrying on a life insurance business. If the fraternal benefit society is a Canadian resident MNLI, like the Appellant, this will be its taxable income from carrying on a life insurance business in Canada.
IV. THE ASSESSMENT
[16] For the 2014 taxation year, the Minister of National Revenue (“Minister”) reassessed the Appellant to include in the Appellant’s CIF the amount of its “World Surplus” assets which the Appellant had deducted in computing its CIF. The Minister says that the World Surplus assets were “used or held in the course of carrying on an insurance business”. The Minister also reassessed the Appellant to exclude from the Appellant’s CIF amounts in respect of the A&S Business and deny the Appellant’s designation of Investment Property in respect of the A&S Business. All issues are raised in this appeal. I address the latter issues first.
V. ISSUE #1 – THE A&S BUSINESS – CIF AND DESIGNATION ISSUES
[17] This issue involves the possible impact of subsection 149(4) on the computation of the CIF and on the designation rules in ITR subsection 2401(2). There are two parts to this issue:
Computation of CIF: Whether the Appellant correctly included the assets and liabilities in respect of its A&S Business in determining its CIF or whether subsection 149(4) precluded the Appellant from doing so; and
Designation under Regulation 2401: Whether the Appellant correctly designated an amount pursuant to ITR paragraph 2401(2)(b) in respect of its A&S Business and any Excess CIF amount (later defined) pursuant to ITR paragraph 2401(2)(d) in respect of its A&S Business or whether subsection 149(4) precluded the Appellant from doing so.
[18] The facts relevant to Issue #1 are not in dispute.
[19] Throughout the 2013 and 2014 taxation years, the Appellant carried on the Life Business and the A&S Business in Canada and the U.S. The premiums from the A&S Business policies and the Life Business policies and annuities were: $27,000 and $37,897,679, respectively, in 2013 and $ 24,000 and $40,291,370, respectively, in 2014. The A&S Business accounted for less than 0.1% and the Life Business accounted for more than 99.9% of the Appellant’s premium income.[24] The A&S Business was being wound down.
[20] The Appellant included the following amounts of assets and liabilities in respect of its A&S Business in determining its CIF for the 2013 and 2014 taxation years:[25]
Total A&S Business 2013
Total A&S Business 2014
Assets
$5,011,000
$3,966,000
Liabilities
$4,029,000
$7,265,000
Net
$982,000
($3,299,000)
[21] In reassessing the Appellant the Minister removed from the Appellant’s CIF the items and amounts described in paragraph 20 above, because they were in respect of the A&S Business.
[22] In filing its tax return for the 2014 taxation year, the Appellant designated Investment Property of $516,923,660 under ITR paragraph 2401(2)(a), $843,728 under ITR paragraph 2401(2)(b) and $199,462,344 under ITR paragraph 2401(2)(d) (a total of $717,229,732). According to the Appellant, the designation under ITR paragraph 2401(2)(a) was in respect of the Life Business and the designations under ITR paragraphs 2401(2)(b) and (d) (a total of $200,306,062) were in respect of the A&S Business.
[23] The Minister did not change the designation under ITR paragraph 2401(2)(a), designated nil under ITR paragraph 2401(2)(b) and designated $265,211,607 under ITR paragraph 2401(2)(d) “to the Appellant’s Life Business”.[26] The increase in amount designated under ITR paragraph 2401(2)(d) (from $199,462,344 to $265,211,607) arose from eliminating the designation under ITR paragraph 2401(2)(b), excluding the Appellant’s net A&S Business assets and including the amount of the Appellant’s net World Surplus assets that the Appellant had deducted in computing the CIF.[27] The World Surplus inclusion is addressed under Issue #2.
Issue 1A: Are the assets and liabilities of the Appellant’s A&S Business correctly included in computing its CIF?
(1) Canadian Investment Fund and Designated Insurance Property – Blend and Separate
[24] The rules for allocating the investment income of a Canadian resident MNLI to its Canadian insurance business are complex. They include detailed definitions and intricate formulas.
[25] First, the insurer must determine its CIF and its “Canadian reserve liabilities”[28] (“CRL”) at the end of the previous taxation year and the end of the current taxation year, to arrive at the mean CIF and mean CRL, respectively, for the current taxation year.[29] The insurer then determines its DIP by designating Investment Property in accordance with ITR subsections 2401(2)-(7).
[26] ITR subsection 2401(2) requires an insurer to make designations of Investment Property in respect of its insurance businesses equal in value to the mean CRL of each business.[30] To the extent that the mean CIF in respect of all of its insurance businesses is greater than the total required to be designated, an insurer is required to make an additional designation.[31]
[27] GIR (defined to include taxable dividends, interest, mark-to-market gains and losses, realized capital gains and losses, and other income in respect of specified debt obligations)[32] derived from the DIP is included in computing the insurer’s income for the year from carrying on its insurance businesses in Canada.[33]
[28] Both the CIF and the CRL definitions include items from life and non-life insurance businesses.[34] Paragraph (a) in the CIF definition, which applies to a life insurer resident in Canada, is relevant to the Appellant. As defined, a “life insurer”, includes a corporation that carries on a life insurance business and a non-life insurance business.[35] The CIF definition, in “I”, includes assets of the insurer used or held by the insurer “in the course of carrying on an insurance business” (i.e., any insurance business).
[29] The CRL definition[36] takes into account liabilities from various insurance businesses. It includes in “A”, the total of the insurer’s liabilities and reserves in respect of Canadian life insurance policies, fire insurance policies and insurance policies of any other class.
[30] The designation of Investment Property is done for each business. ITR paragraphs 2401(2)(a)-(c) require designations of Investment Property in respect of a life insurance business, an accident and sickness insurance business and another insurance business, respectively, based in part on the mean CRL for the year in respect of the relevant business. ITR paragraph 2401(2)(d) prescribes that the excess of the mean CIF over the aggregate of designations required to be made pursuant to ITR paragraph 2401(2)(a) – (c) (“Excess CIF”) must also be designated “in respect of a particular insurance business”.
[31] This disaggregation of Investment Property – to produce DIP in respect of a particular insurance business and therefore GIR in respect of a particular insurance business - further demonstrates that the determination of an insurer’s CIF is on a blended basis, taking into account all of the insurer’s insurance businesses. The Respondent argues that subsection 149(4) effectively overrides that process.
(2) The Statutory Provisions
[32] The CIF definition is in ITR subsection 2400(1). The definition has been amended several times, but during the Relevant Period read (in relevant parts) as follows:
“Canadian investment fund” of an insurer at the end of a taxation year means
(a) in the case of a life insurer resident in Canada, the total of
(i) […]
and
(ii) the greater of
(A)[…]
(B) the amount determined by the formula
(I - J + K + L) x (M / N)
where
I is the total of all amounts each of which is the amount of an item reported as an asset of the insurer as at the end of the year (other than an item that at no time in the year was used or held by the insurer in the course of carrying on an insurance business),
J is the total of all amounts each of which is the amount of an item reported as a liability of the insurer (other than a liability that was at any time in the year connected with an asset that was not used or held by the insurer in the course of carrying on an insurance business at any time in the year) as at the end of the year in respect of an insurance business carried on by the insurer in the year,
K […]
[33] Paragraph 149(1)(k), subsections 149(3) and (4) read as follows:
Miscellaneous Exemptions
149
(1) Miscellaneous exemptions No tax is payable under this Part on the taxable income of a person for a period when that person was
[…]
Labour organizations
(k) a labour organization or society or a benevolent or fraternal benefit society or order;
[…]
Application of s. (1)
(3) Subsection 149(1) does not apply in respect of the taxable income of a benevolent or fraternal society or order from carrying on a life insurance business or, for greater certainty, from the sale of property used by it in the year in, or held by it in the year in the course of, carrying on a life insurance business.
Idem
(4) For the purposes of subsection 149(3), the taxable income of a benevolent or fraternal benefit society or order from carrying on a life insurance business shall be computed on the assumption that it had no income or loss from any other sources.
(3) The Parties’ Positions
[34] The Appellant submits that in determining its CIF, all assets and liabilities used in its insurance businesses must be considered. They submit that subsection 149(4) does not require it to ignore the A&S Business entirely, but only to disregard any income or loss from the A&S Business when computing its taxable income from the Life Business.
[35] The Respondent submits that the Appellant incorrectly included assets and liabilities of the A&S Business in computing its CIF. The Respondent says that subsection 149(4) requires the Appellant to compute both income and taxable income from the Life Business as if it had no other sources of income or loss. They say that in determining the Appellant’s CIF the A&S Business must be disregarded entirely.
(4) Analysis
[36] Interpreting the provisions of the ITA requires a “unified textual, contextual and purposive” approach. This approach, and the dominant role that “precise and unequivocal” language plays in the interpretation of the provisions of the ITA was recently stated by the Supreme Court in Canada v. Loblaw Financial Holdings Inc.:[37]
[41] This narrow question of statutory interpretation requires us to draw upon the well-established framework that “statutory interpretation entails discerning legislative intent by examining statutory text in its entire context and in its grammatical and ordinary sense, in harmony with the statute’s scheme and objects” (Michel v. Graydon, 2020 SCC 24, at para. 21). Where the rubber hits the road is in determining the relative weight to be afforded to the text, context and purpose. Where the words of a statute are “precise and unequivocal”, their ordinary meaning will play a dominant role (Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, at para. 10). In the taxation context, a “unified textual, contextual and purposive” approach continues to apply (Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, [2006] 1 S.C.R. 715, at para. 22, quoting Canada Trustco, at para. 47). …
[37] The impact of subsection 149(4) on the determination of the Appellant’s CIF is a matter of statutory interpretation. Accordingly, I consider the text, context and purpose of these statutory provisions.
(a) Text – Does not say “no other sources”
[38] The Appellant submits that the “source” principle, embodied in section 4, supports the position that in order to compute the Appellant’s income from its Life Business, it must also compute its income from other sources, including its A&S Business. Section 4 provides, in general terms, that a taxpayer’s income or loss is determined on a source-by-source basis, including the determination of income or loss from each separate business.
[39] While the Appellant determines income or loss from each separate business in accordance with section 4, that does not answer the question before me, which is the potential impact of subsection 149(4) in computing the Appellant’s income and taxable income from carrying on the Life Business. The answer lies not in section 4, but in the detailed rules in sections 138 and subsections 149(3) and (4).
[40] Subsection 149(4) is a computational rule for determining the taxable income of a fraternal benefit society from carrying on a life insurance business. It provides that the taxable income “shall be computed on the assumption that it had no income or loss from any other sources.”
[41] In the relevant parts of the CIF definition, under items “I” and “J” in subparagraph (a)(ii), a Canadian resident life insurer must include in computing the CIF amounts of items that are reported as assets and liabilities of the insurer (unless they are not used or held by the insurer in the course of carrying on an insurance business). The formula is based on assets and liabilities.
[42] As the assumption in subsection 149(4) is that there is “no income or loss” and the CIF definition is based on assets and liabilities, the text of both provisions support a conclusion that subsection 149(4) does not preclude including A&S Business assets and liabilities in determining the Appellant’s CIF.
(b) Context – Does not suggest “no other sources”
[43] The text of subsection 149(4) is unambiguous. It does not impose an assumption that the fraternal benefit society had no other sources of income, but rather that it had no income or loss from any other sources. By contrast, the definition of “attributed surplus” in ITR subsection 2400(1) (not applicable here, as it is only applicable to a non-resident insurer) requires the determination of amounts under subparagraph (a)(ii) of the definition of CIF “as if ... the insurer had been a life insurer resident in Canada and had not carried on any insurance business other than a life insurance business or an accident and sickness insurance business”. If similar words were in subsection 149(4), it would support the approach advocated by the Respondent – to assume that the Appellant had no A&S Business, and hence no A&S Business assets and liabilities. They are not.
(c) Text – “taxable income”, not “income”
[44] Subsection 149(1) provides an exemption from Part I tax on the taxable income of persons identified in that subsection. Subsection 149(3) provides an exception to the exemption in subsection 149(1) in respect of the taxable income of a fraternal benefit society from carrying on a life insurance business. Subsection 149(4) imposes an assumption in computing taxable income of a fraternal benefit society. The text of subsections 149(1), 149(3) and 149(4) provides that subsections 149(3) and 149(4) apply in determining taxable income.
[45] Taxable income, determined under subsection 2(2), is a taxpayer’s income for the year plus the additions and minus the deductions permitted by Division C (Computation of Taxable Income). Division C includes, for example, the rules in section 111 relating to the deductibility of losses in computing taxable income. Thus, for example, subsection 149(4) applies to preclude the deduction of losses arising from a business other than a life insurance business in computing the taxable income from carrying on a life insurance business.
[46] Special rules for insurance corporations are in section 138, found in Division F (Special Rules Applicable in Certain Circumstances). Subsection 138(1) provides that for insurance corporations, income shall, except as otherwise provided in section 138, be computed in accordance with the income computation rules applicable for the purposes of Part I. Subsection 138(2) provides rules for computing income of an insurer, “[n]otwithstanding any other provision of this Act”. Paragraphs 138(2)(a) and (b) provide rules for Canadian resident MNLIs and apply to the Appellant. These are income computation rules. Even if the assumption in subsection149(4) were applicable to the computation of income, which it is not, the “notwithstanding” language in subsection 138(2) expressly provides that the rules in subsection 138(2) have paramountcy.[38]
[47] Subsection 138(9) is also an income computation rule applicable to MNLIs including the Appellant, requiring GIR from DIP to be included. Computing the CIF is necessary to determine DIP. Both are relevant when income is computed, not taxable income.
[48] The text of the relevant provisions in section 149 and section 138 supports a conclusion that subsections 149(3) and 149(4) do not affect the determination of the Appellant’s CIF.
(d) Context – Income vs Taxable Income
[49] The Respondent argues that since the determination of income must be done in order to determine taxable income, the assumption in subsection 149(4) applies to both the computation of income and taxable income. I disagree.
[50] It is helpful to contrast subsection 149(4) with subsection 149(5). Subsection 149(5) provides an exception to an exemption from Part I tax on taxable income, generally investment income, of certain otherwise tax-exempt clubs. Paragraphs 149(5)(e) sets out an assumption that is relevant to both the computation of income and taxable income:
(e) the income and taxable income of the trust for each taxation year shall be computed on the assumption that it had no incomes or losses other than
(i) incomes and losses from property, and
(ii) taxable capital gains and allowable capital losses from dispositions of property, other than property used exclusively for and directly in the course of providing the dining, recreational or sporting facilities provided by it for its members;
[Emphasis added.]
[51] Paragraph 149(5)(f) provides an additional rule relevant in computing taxable income:
(f) in computing the taxable income of the trust for each taxation year
(i) there may be deducted, in addition to any other deductions permitted by this Part, $2,000, and
(ii) no deduction shall be made under section 112 or 113; and
…
[Emphasis added.]
[52] The difference between the assumption in subsection 149(4) and the assumption in paragraph 149(5)(e) further supports a conclusion that the reference to the computation of taxable income in subsection 149(4) does not include the computation of income. Where an assumption is to apply to the computation of income, the statute provides for it.
(e) Purpose – Legislative History
[53] The legislative history of subsections 149(3) and (4) further confirms that the provisions apply in computing taxable income, not income. Subsections 149(3) and 149(4), formerly subsections 62(1a) and 62(1b), were introduced in 1969.[39] Former subsections 62(1a) and 62(1b) read as follows:
(1a) Subsection (1) does not apply in respect of the taxable income of a benevolent or fraternal benefit society or order from carrying on a life insurance business;
(1b) For the purposes of subsection (1a), the taxable income of a benevolent or fraternal benefit society or order from carrying on a life insurance business shall be computed on the assumption that it had no income or loss from any other source.
The wording of subsections 149(3) and (4) remained largely the same from 1969 through the Relevant Period.[40]
[54] A reference to “taxable income” is found in the explanatory notes for 62(1a) and 62(1b):[41]
This amendment is consequential upon the amendment proposed by clause 15 and would provide that the taxable income that a benevolent or fraternal benefit society earns from carrying on a life insurance is not exempt from tax under Part 1 of the Act.
[Emphasis added.]
[55] Subsections 62(1a) and 62(1b) were introduced in 1969 at the same time that significant changes were made to the taxation of Canadian life insurers. Canadian life insurers were virtually exempt from tax until 1969, when they first became subject to tax on Canadian source income. Prior to 1969, the taxable income of a life insurance corporation was determined under (former) section 30, which essentially taxed the corporation when it paid dividends.
[56] Prior to these amendments, in British Pacific,[42] the Exchequer Court determined that a “life insurance corporation” was any corporation that had a bona fide life insurance business, regardless of its size. Thus, despite the fact that the taxpayer’s business was 2% life insurance and 98% non-life insurance, section 30 applied to all of the taxpayer’s taxable income, not only to the source that was the life insurance business.
[57] Section 30 was repealed and section 68A introduced a complex regime by which life insurers (and other insurers) were taxed. One aspect was a system for MNLIs to allocate investment income between their Canadian and non-Canadian insurance businesses. The amendments included definitions of a “life insurer” and a “life insurance corporation” as an insurer who carries on a life insurance business and other insurance business.
[58] Subsections 62(1a) and 62(1b) were introduced and provided that a fraternal benefit society would no longer be exempt from tax under Part I in respect of taxable income from carrying on a life insurance business. In 1969, the taxable income of a corporation was, pursuant to subsection 2(3), its income less the deductions allowed under sections 27 and 28.[43] Paragraph 27(1)(e) permitted the deduction by a corporation of an amount for business losses. Section 28 permitted the deduction by a corporation of the amount of share dividends received from another taxable Canadian corporation; however, under section 68A this deduction was denied to “life insurers”. Instead, a similar deduction was allowed under subsection 68A(6) but only with respect to a portion of the “[life] insurer’s” “aggregate of dividends received”.
[59] Accordingly, due to subsection 62(1b), a “life insurer” which was a fraternal benefit society could not reduce its taxable income from its life insurance business by business losses from its other sources under paragraph 27(1)(e) or by a portion of its “aggregate of dividends received” from other sources of income under subsection 68A(6).
[60] These provisions in (former) sections 27 and 68A demonstrate that when paragraph 62(1b) was introduced, it had potential impact in computing taxable income of a life insurer that was also a fraternal benefit society.
(f) Conclusion
[61] I have determined that the text, context and legislative history of subsections 149(3) and (4) support a conclusion that the assumption in subsection 149(4) is not relevant in determining the assets and liabilities to be included in determining the Appellant’s CIF. Accordingly, the Appellant correctly included A&S Business assets and liabilities in computing its CIFs for the 2014 taxation year.
Issue 1B: Whether the Appellant Correctly Designated Amounts Pursuant to ITR subsection 2401(2) in Respect of its A&S Business
[62] This issue turns on the interpretation of ITR subsection 2401(2) and whether subsection 149(4) applies to alter the designation of Investment Property. This is a matter of statutory interpretation. Accordingly, I consider the text, context and purpose of these statutory provisions.
(1) The Statutory Provisions
[63] The rules for determining DIP in ITR 2401 are prescriptive, mandating amounts and ordering the manner in which Investment Property is designated. The designation is made by the insurer in its tax return, unless the insurer does not designate according to the prescribed rules, in which case the Minister designates.[44]
[64] ITR subsection 2401(2) provides:
Designation Rules
2401(2) For the purposes of subsection (1), an insurer, or the Minister if paragraph (1)(b) applies,
(a) shall designate for a taxation year investment property of the insurer for the year with a total value for the year equal to the amount, if any, by which the insurer’s mean Canadian reserve liabilities for the year in respect of its life insurance business in Canada exceeds the total of the insurer’s mean Canadian outstanding premiums and mean policy loans for the year in respect of that business (to the extent that the amount of the mean policy loans was not otherwise deducted in computing the insurer’s mean Canadian reserve liabilities for the year);
(b) shall designate for a taxation year investment property of the insurer for the year with a total value for the year equal to the amount, if any, by which the insurer’s mean Canadian reserve liabilities for the year in respect of its accident and sickness insurance business in Canada exceeds the insurer’s mean Canadian outstanding premiums for the year in respect of that business;
(c) shall designate for a taxation year in respect of the insurer’s insurance business in Canada (other than a life insurance business or an accident and sickness insurance business) investment property of the insurer for the year with a total value for the year equal to the amount, if any, by which the insurer’s mean Canadian reserve liabilities for the year in respect of that business exceeds 50% of the total of all amounts each of which is the amount, as at the end of the year or as at the end of its preceding taxation year, of a premium receivable or a deferred acquisition expense (to the extent that it is included in the insurer’s Canadian reserve liabilities as at the end of the year or preceding taxation year, as the case may be) of the insurer in respect of that business;
(d) if
(i) the insurer’s mean Canadian investment fund for a taxation year
exceeds
(ii) the total value for the year of all property required to be designated under paragraph (a), (b) or (c) for the year,
shall designate for the year, in respect of a particular insurance business that the insurer carries on in Canada, investment property of the insurer for the year with a total value for the year equal to that excess;
[Emphasis added.]
(2) The Parties’ Positions
[65] The Respondent makes the same “no source” argument with respect to the designation process under ITR 2401 as it makes in respect of the CIF. They submit that the Appellant should not include the A&S Business when designating Investment Property as this allows the A&S Business to affect the Appellant’s income from the Life Business which is subject to tax, contrary to subsection 149(4).
[66] The Respondent also submits that ITR 2401 does not provide for assets to be designated to a particular insurance business, but rather designates assets to “fill the bucket” that is DIP. They say that the system is notional, not actual. The Respondent submits that the Appellant was not permitted, pursuant to ITR paragraphs 2401(2)(b) or (d), to designate assets “to” or “in respect of” the A&S Business.
[67] The Appellant submits that ITR 2401 involves a designation of Investment Property “in respect of” the different insurance businesses carried on by a taxpayer. They submit that the text of ITR 2401 and the legislative history of the designated property regime support this interpretation. They say that the Appellant was authorized to designate Investment Property under ITR paragraph 2401(2)(b) in respect of the A&S Business and that ITR paragraph 2401(2)(d) affords them full discretion to designate the Excess CIF amount in respect of either its Life Business or A&S Business. They chose the latter.
(3) Analysis - ITR para 2401(2)(b) - Designating Investment Property in respect of the A&S Business
[68] ITR paragraphs 2401(2)(a), (b) and (c) require an insurance company to designate Investment Property to the extent of its mean CRL for the year in respect of a particular insurance business (life, accident and sickness and “other”, respectively) less certain amounts, including premiums outstanding for the particular business. ITR paragraph 2401(2)(d) requires an additional designation to the extent an insurer’s mean CIF for the year exceeds the total value of property required to be designated under paragraphs 2401(2)(a), (b) and (c). Paragraph 2401(2)(d) expressly requires the designation of this Excess CIF “in respect of a particular insurance business that the insurer carries on in Canada”. While the designation process under ITR subsection 2401(2) determines a total amount of DIP, the text of ITR subsection 2401(2) supports a conclusion that the designation process in ITR 2401 also establishes amounts of DIP “in respect of” each particular insurance business that the insurer carries on.
[69] The context in the ITA and ITRs provides further support. ITR subsection 2401(5) which deals with property exchanges, refers to “designated insurance property of the insurer in respect of a particular business of the insurer”. Also, subsection 138(11.1) provides that for the purposes of the identical property rules in section 47, property of a life insurance corporation can only be identical if both properties are:
DIP “of the insurer in respect of a life insurance business carried on in Canada”; or
DIP “of the insurer in respect of an insurance business in Canada other than a life insurance business”.
[70] Further, the definition of “gross Canadian life investment income” in ITR subsection 2400(1) specifically requires the determination of an insurer’s GIR from the DIP “in respect of” its life insurance business. Subparagraph 2400(1)(a)(i) of this definition includes “the insurer’s gross investment revenue for the year, to the extent that the revenue is from Canadian business property of the insurer for the year in respect of the insurer’s life insurance business.” Paragraph 2400(1)(b) of the definition of “Canadian business property” provides that the Canadian business property of an MNLI means the “designated insurance property of the insurer for the year in respect of the business”.[45]
[71] The legislative history of the designated property regime reflects that designating Investment Property in respect of a particular insurance business has been an element of the system for decades.
[72] Under the system introduced in 1969, two methods of determining GIR attributable to the Canadian business were provided for MNLIs: the proportional method and the branch accounting method. An insurer could use the branch accounting method where their books and records were such that property used or held in the course of carrying on an insurance business in Canada could be identified and the gross revenue therefrom readily determined.[46] If not, and where the insurer carried on both a life insurance business and a non-life insurance business, the investment income would be allocated in accordance with the “life proportion” and the “non-life proportion” of the insurer’s businesses.
[73] As part of the 1978 tax reform of the life insurance industry, the proportionate method for allocating investment income was eliminated. The branch accounting method was adopted, with significant modifications. The very complex rules had a simple objective: to determine the investment property used or held in the Canadian portion of a particular insurance business. The actual revenue from that i