Standard Life Assurance Company of Canada v. The Queen

Standard Life Assurance Company of Canada v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2015-04-20
Neutral citation
2015 TCC 97
File numbers
2012-1431(IT)G, 2013-203(IT)
Judges and Taxing Officers
Frank J. Pizzitelli
Subjects
Income Tax Act
Decision Content
Dockets: 2012-1431(IT)G
2013-203(IT)G
BETWEEN:
THE STANDARD LIFE ASSURANCE
COMPANY OF CANADA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on October 6, 7, 8, 9, 2014 and March 26 and 27, 2015, at Toronto, Ontario
Before: The Honourable Justice F.J. Pizzitelli
Appearances:
Counsel for the Appellant:
Hemant Tilak
Pooja Samtani
Al Meghji
Alexander Cobb
Victoria Creighton
Counsel for the Respondent:
Naomi Goldstein
Stephen Oakey
Jenna Clark
JUDGMENT
The appeal from the reassessments made under the Income Tax Act for the 2006 and 2007 taxation years is dismissed with costs to the Respondent.
Signed at Ottawa, Canada, this 20th day of April 2015.
“F.J. Pizzitelli”
Pizzitelli J.
Citation: 2015 TCC 97
Date: 20150420
Dockets: 2012-1431(IT)G
2013-203(IT)G
BETWEEN:
THE STANDARD LIFE ASSURANCE
COMPANY OF CANADA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Pizzitelli J.
[1] The Appellant, a Canadian resident corporation carrying on the business of life insurance in Canada, appeals from reassessments of the Minister of National Revenue (the “Minister”) for the 2006 and 2007 taxation years, which effectively reduced the Appellant’s cost base of its designated insurance property in both years resulting in increases in taxable income on such property pursuant to Part I of the Income Tax Act (the “Act”).
[2] For the 2006 taxation year, the Minister reassessed the Appellant so as to reduce the cost base of the property in question by $1,160,214,582 resulting in an increase in taxable income from $66,550,675 to $78,966,698. For the 2007 taxation year, the Minister reassessed so as to increase the Appellant’s taxable income as a result of the 2006 downward adjustment in cost base of the relevant property which carried over to 2007 and which I will discuss in more detail later. The change in cost base had of course consequential impact on not only taxable income but on reserve levels, interest accrued and related items, all of which flow from the same adjustment and are reflected in the reassessments in question.
[3] The parties entered into a Statement of Agreed Facts before trial which is attached as Appendix A to this decision. Most of the facts and evidence in dispute relate to the factual issue as to whether the Appellant carried on business in Bermuda in 2006 and 2007 and will be discussed during analysis of that issue.
[4] The key issue to be decided in these appeals, which were heard at the same time and on common evidence, is whether the Minister correctly reduced the Appellant’s cost base of certain of its properties on the basis that the Appellant was not entitled to a bump in its cost base due to the inapplicability of subsection 138(11.3) of the Act.
[5] Before discussing the position of the parties it is necessary to understand the provisions of subsection 138(11.3) of the Act, which reads as follows:
138(11.3) Deemed disposition. Subject to subsection (11.31), where a property of a life insurer resident in Canada that carries on an insurance business in Canada and in a country other than Canada or of a non-resident insurer is
(a) designated insurance property of the insurer for a taxation year, was owned by the insurer at the end of the preceding taxation year and was not designated insurance property of the insurer for that preceding year, or
(b) not designated insurance property for a taxation year, was owned by the insurer at the end of the preceding taxation year and was designated insurance property of the insurer for that preceding year,
the following rules apply:
(c) the insurer is deemed to have disposed of the property at the beginning of the year for proceeds of disposition equal to its fair market value at that time and to have reacquired the property immediately after that time at a cost equal to that fair market value,
(d) where paragraph (a) applies, any gain or loss arising from the disposition is deemed not to be a gain or loss from designated insurance property of the insurer in the year, and
(e) where paragraph (b) applies, any gain or loss arising from the disposition is deemed to be a gain or loss from designated insurance property of the insurer in the year.
[6] The definition of “designated insurance property” is found in subsection 138(12) which reads as follows:
“designated insurance property” – “designated insurance property” for a taxation year of an insurer (other than an insurer resident in Canada that at no time in the year carried on a life insurance business) that, at any time in the year, carried on an insurance business in Canada and in a country other than Canada, means property determined in accordance with prescribed rules except that, in its application to any taxation year, “designated insurance property” for the 1998 or a preceding taxation year means property that was, under this subsection as it read in its application to taxation years that ended in 1996, property used by it in the year in, or held by it in the year in the course of, carrying on an insurance business in Canada;
[7] In brief, the relevant portions of the subsection provide that where property of a life insurer resident in Canada that carries on an insurance business in Canada and in a country other than Canada, is designated insurance property of the insurer for a taxation year, was owned by the insurer at the end of the preceding taxation year but was not designated insurance property of the insurer for that preceding year, then the insurer is deemed to have disposed of that property at the beginning of the year for fair market value proceeds and to have reacquired it for such fair market value without having to realize a gain or loss from the deemed disposition. The result is a bump up in the cost base of the property in question at the beginning of the year to its fair market value for the purpose of calculating any gain or loss on it for the year in which a gain or loss is triggered.
[8] The Appellant takes the position that it has met all the conditions of the subsection; namely that it is a life insurer corporation resident in Canada that for both 2006 and 2007 carried on an insurance business in both Canada and Bermuda through a branch. It argues that it meets the conditions, as a matter of fact and as deemed under subsection 138(1). Further it argues that it designated property in each of 2006 and 2007 that was owned by it in the preceding year but not designated in the preceding year and hence argues on the basis of statutory interpretation that it qualified for the cost base bump up in question. In the alternative it argues that it was entitled to the cost base bump up on property designated in 2007 only.
[9] The Respondent argues that the provision does not apply to the Appellant for two reasons, namely:
1) that the Appellant did not carry on business in Bermuda either in 2006 or 2007, but only gave the “illusion” of doing so through transactions that were “window dressing” as set out in its Replies; and
2) that the subsection 138(11.3) did not apply even if it did carry on business in Bermuda in one or both of the years in question, so there could be no bump up in cost base. More specifically the Respondent says that for 2006 the properties in question could not have been “designated” in the preceding year since there is no dispute that in 2005 the Appellant admittedly did not carry on business in Bermuda. In effect, the Respondent is saying that an insurer cannot take a bump up in the first year of its branch operations in another country as an insurer must carry on the business of a multinational life insurer in both the year of designation and the preceding year. For 2007, the Respondent argues that the Appellant could only have taken a bump in cost base had there been a change in investment assets forming part of the designated insurance property in 2007 from those designated in 2006, which in fact there was not since the same such assets were designated in both years.
[10] As earlier indicated, most of the evidence, both in the Statement of Agreed Facts and from the testimony of several witnesses, deals with the factual dispute as to whether the Appellant in fact carried on a business in Bermuda in 2006 and/or 2007, by addressing generally the indicia of commerciality through positive acts or lack of activity or supporting documents entered into evidence; that is, the “window dressing” as referred to by the Respondent. Even though the issue may be moot if it is found subsection 138(11.3) did not apply to either 2006 or 2007, I intend to address the factual issue regardless of the outcome of the first legal issue.
A. The Legal Interpretation Issue [11] As per the Statement of Agreed Facts, the Appellant did not carry on business in Bermuda, or any other country other than Canada, during its 2005 taxation year. In such prior year, the Appellant only carried on a life insurance business in Canada.
[12] If, as the Respondent contends, property can only be designated property for a year when the Appellant carried on business both in Canada and a country other than Canada in the preceding year, the Appellant would fail in its appeal for at least 2006 as it did not carry on a business in 2005. It will possibly fail in 2007 if it is also found, on the factual issue, that it did not carry on business in Bermuda in 2006 and 2007. The Respondent also argues that if the Appellant is not successful on the legal issue in 2006, then it might also fail in 2007 because there was no change to the list of designated insurance properties so as to merit a bump up in cost base in 2007, which the Appellant disputes.
[13] The parties both argue that the plain meaning of the subsection’s text supports their position and should be sufficient to decide the issue. In the event I find there is ambiguity as to the plain meaning of the text, they argue that regard must be had to the contextual and purposive approach which each argues also supports their position. Both rely on and agree that the rules for statutory interpretation were summarized by the Supreme Court of Canada in Canada Trustco Mortgage Co. v Canada, [2005] 2 SCR 601, 2005 SCC 54 at paragraph 10:
… The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words plays a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole.
[14] If the textual, contextual and purposive (“TCP”) approach renders an interpretation that is still ambiguous, the Appellant argues and the Respondent does not dispute that the provision must be interpreted in favour of the Appellant in accordance with the dictum that “… reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer,” as stated by the Supreme Court of Canada decision of Johns-Manville Canada Inc. v The Queen, [1985] 2 SCR 46, 85 DTC 5373 at page 5384.
[15] I will start by an analysis of the textual or “plain meaning” of the subsection and thereafter with an analysis of the contextual and purposive approach referred to in Canada Trustco above.
1. Textual or “Plain Meaning” Approach [16] The preamble of the subsection in question reads as follows:
138(11.3) Deemed disposition. Subject to subsection (11.31), where a property of a life insurer resident in Canada that carries on an insurance business in Canada and in a country other than Canada or of a non-resident insurer is …
[17] The subject of the preamble is the “property” which is described as being “of” and thus effectively belonging to an owner having the following traits:
1) the owner must be a life insurer resident in Canada; and
2) that same owner, i.e. the “life insurer” must carry on an insurance business both in Canada and a country other than Canada.
[18] In other words, the owner of the property must logically be a multinational life insurer before the remaining requirements are met. In paragraph 138(11.3)(a) for example, the provision uses the words “the insurer” in each of the three phrases that set out the other conditions applicable to the subject property that must be met, namely:
1) the property of the insurer is designated insurance property for the taxation year;
2) the property was owned by the insurer at the end of the preceding taxation year; and
3) the property was not designated insurance property of the insurer in the preceding year.
[Underlined for Emphasis]
[19] In each case, the insurer refers to the insurer described in the preamble, the one who must, an absolute condition and not an optional one, carry on an insurance business both in Canada and another country. The “insurer” with these qualities flows to the phrases below the preamble in paragraph (a), which sets the three conditions pertaining to the property itself rather than the owner of it, who is already defined by the preamble. [Underlined for Emphasis]
[20] The French version of the subsection is as follows:
138(11.3) Présomption de disposition – Sous réserve du paragraphe (11.31), lorsque le bien d’un assureur sur la vie résidant au Canada qui exploite une entreprise d’assurance au Canada et à l’étranger ou le bien d’un assureur non‑résident remplit l’une des conditions suivantes:…
a) il est un bien d’assurance désigné de l’assureur pour une année d’imposition qui, bien que lui appartenant à la fin de l’année d’imposition précédente, n’était pas son bien d’assurance désigné pour cette année précédente,
b) il n’est pas un bien d’assurance désigné pour une année d’imposition, mais appartenait à l’assureur à la fin de l’année d’imposition précédente et était son bien d’assurance désigné pour cette année précédente,
les règles suivantes s’appliquent:
c) l’assureur est réputé avoir disposé du bien au début de l’année pour un produit de disposition égal à sa juste valeur marchande à ce moment et l’avoir acquis de nouveau immédiatement après ce moment à un coût égal à cette juste valeur marchande;
d) en cas d’application de l’alinéa a), le gain ou la perte éventuel découlant de la disposition est réputé ne pas être un gain ou une perte provenant d’un bien d’assurance désigné de l’assureur pour l’année;
e) en cas d’application de l’alinéa b), le gain ou la perte éventuel découlant de la disposition est réputé être un gain ou une perte provenant d’un bien d’assurance désigné de l’assureur pour l’année.
[21] I also agree with the Respondent that the French version of the text refers to the property as “son bien”, with “son” being a possessive pronoun referring to the “l’assureur” or insurer, confirming the English interpretation that the property is that of the same insurer, the one who must be a multinational life insurer resident in Canada at all the relevant times.
[22] Accordingly, I cannot agree with the Appellant’s contention that the Respondent’s plain meaning interpretation would require we read into it the words found in requirement number 3 from paragraph [18] above “was not designated insurance property” as reading “was not designated insurance property but could have been designated insurance property”. It is simply not necessary to read those words in as it follows that if we substitute the words describing “the insurer” in the preamble as the “life insurer resident in Canada that carries on an insurance business in Canada and in a country other than Canada” in requirement number 2 from paragraph [18] above so that the phrase reads “the property was owned by the life insurer resident in Canada that carried on an insurance business in Canada and in a country other than Canada at the end of the preceding taxation year”, then such insurer must have been able to make the designation in the previous year for the purposes of the said requirement in number 3 above based on the definition of “designated insurance property” in subsection 138(12) above, which requires the insurer be a multinational life insurer resident in Canada to make the designation.
[23] It follows that, since the Appellant was not a multinational insurer in 2005, it did not and could not make any designation for that year and hence the property was not “designated or not designated” for the purposes of subsection 138(11.3) for the previous year. It simply did not fall within the scheme of the provision. The Appellant may have designated the property in 2006 once it was a multinational life insurer resident in Canada, but it did not and could not do so in 2005 as it was not a multinational then. I use the words the Appellant “may” have been a multinational life insurer in 2006 above because there is factual disagreement as to whether it was carrying on an insurance business in Bermuda in 2006, which remains to be decided at this point. Consequently the Appellant’s position that the property must either be “designated” or “not designated” in the previous year is not accurate. I agree with the Respondent that there is a third option, namely that it is neither.
[24] I also agree with the Respondent that it is the Appellant’s interpretation of the provision that would require adding words, as highlighted and underlined below, to the end of the provision so it would read “… was not designated insurance property of the insurer for that preceding year even though the property was not owned by a multinational insurer in the preceding year”. Clearly no such wording exists.
[25] I agree with the Respondent’s argument that subsection 138(11.3) only applies to the property of multinationals that was designated or not designated, in a year when it was a multinational. In my opinion, there is simply no real and reasonable ambiguity at the textual level that merits any further analysis of the contextual and purposive approach referenced in Canada Trustco. The Appellant agreed it was not a multinational insurer in 2005 and hence could not satisfy the condition in the aforesaid requirement number 2 from paragraph [18] above that it owned the property in the preceding year as a multinational life insurer and could not have “not designated” the property in the previous year to comply with the requirement number 3 from paragraph [18] above as there was no way or ability to do so. Consequently, as the Appellant did not meet the requirements of subsection 138(11.3) in 2006, it could not rely on the deemed disposition rule in that subsection and its cost base for such property could not be bumped to the fair market value for the 2006 year, and its appeal for such year must fail.
[26] The next question to be asked is whether the plain meaning of the subsection would allow a bump up in cost base for the 2007 year if the Appellant is found to have carried on business in Bermuda in the 2006 year. In 2007 the Appellant designated virtually the same investment assets it designated in 2006, which constituted 100 percent of its investment assets, so there was no actual change in the assets designated. The Respondent takes the position that subsection 138(11.3) operates to bump up cost base only when there has been a change in the designated assets or “change in use” of same; or in other words when different investment assets come into or leave the designated list. The Appellant argues that the bump occurs automatically once investments first become designated, so if it is found the Appellant carried on business in Bermuda and hence another country in 2006, so as to meet that condition, the designation that occurred in 2007 would bring those investment assets into “designated insurance property” and they would be deemed to have been disposed of on January 1, 2007 at fair market value and its cost base would be the same, leading to a bump in cost base.
[27] The Appellant is in fact using the same argument of interpretation it used to justify its position for the 2006 taxation year above, save and except that for 2007 it argues that the issue of whether it was a multinational in the previous year is no longer a factor. I do not agree with the Appellant’s position with respect to 2007 either.
[28] It is clear to me the plain wording of subsection 138(11.3) requires that there be a change in the make-up of the investment assets forming part of the “designated insurance property”. The Appellant itself argues in its Memorandum that the rule is a transitional rule that applies upon a change in the designated status of property and I agree. If the property was designated in 2006 and the same property is designated in 2007 there has been no change in the designated status of the property. This is consistent with the textual wording of paragraph (a) thereof that speaks of property that is “designated insurance property for a taxation year…was not designated insurance property for that preceding year” and with the textual wording of paragraph (b) that speaks of property that is “not designated insurance property for a taxation year…was designated for that preceding year”. The wording does not include property that was designated in a previous year and is designated in a following year, nor does it include property that was not designated in a previous year and is not designated in the current year. [Underlined for Emphasis]
[29] Accordingly it is clear to me that assets first coming into designated insurance property in a year when the taxpayer is a multinational following a year when it was not, as in this case, would retain its existing cost base and be subject to gains or losses based on same as a result of any subsequent actual or deemed disposition in the Act that may otherwise apply. For example, the mark to market rules in section 142 would trigger a disposition at fair market value for the 2007 taxation year.
[30] Having regard to the above only, the Appellant would not be successful in its appeals either for 2006 or 2007 based on the plain meaning of the provision.
[31] However, even if I were to have found that there is ambiguity in the plain meaning of the provision so that it is also capable of supporting the Appellant’s position that the insurer need not be a multinational insurer in a preceding year or that there is no need for a change in the assets designated from year to year, the TCP approach would in my view also support the Respondent’s interpretation over that of the Appellant’s.
2. The TCP Approach [32] The Appellant stated in opening argument that the purpose of section 138 is to provide that for the insurance business the general rule of taxing residents in Canada on worldwide income is modified so that insurance corporations are only taxed on a “territorial” basis or “Canada only” basis. The Respondent challenges the Appellant’s categorization of the subsection, arguing no territorial or new system of taxation is created by the provision, which it argues creates special rules within the only system of taxation applicable in Canada under the Act.
[33] Regardless of the categorization of the provision by the parties, logically, the exception only comes into play when an insurer is operating in more than one “country” to use the exact word used in subsections 138(2) and (11.3) specifically. Without a particular exception, it is trite law that any increase in the cost base of a particular asset on acquisition is generally matched by an inclusion of a gain into income, whether capital or otherwise, in accordance with the general scheme of the Act to tax a taxpayer on a disposition of property in the year of disposition. Absent such specific exception, to permit a bump up in cost base without a corresponding gain into income by one of the parties would result in a windfall as the Respondent has alluded.
[34] Section 138 is found in Division F of the Act titled “Special Rules Applicable in Certain Circumstances”. Section 138 itself is titled “Insurance Corporations”, and thus it is clear so far that we are dealing with special rules applicable in certain circumstances to insurance corporations. Frankly, the Respondent is correct that Division F, as part of the same Act, does not create a new system of territorial or Canada only taxation, but creates a set of special rules within the existing Canadian income tax system. There is no mention of a new “territorial” or “Canada only” system within any wording of the provision or in the Act itself as far as I am aware.
[35] The Respondent has in argument explained that the practice of the insurance industry to carry on business in another country as a branch instead of incorporating separate corporations or other legal entities in those jurisdictions is the reason such special rules exist. The rules ensure a Canadian resident insurer, that would otherwise be taxed on worldwide income under Section 3 of the Act, is not taxed on income from a foreign insurance business or on investment revenue attributable to such foreign business. The Appellant has not disputed this statement.
[36] The Appellant’s description of these special rules or “Canada only” system as it describes them, is found in paragraph 103 of its Memorandum of Fact and Law, submitted as its initial written argument in this matter, which reads as follows:
103. The “Canada only” system is a departure from the general scheme of the Act. For a Canadian multinational life insurer, the rule is set out in paragraph 138(2)(a) and is supported by several specific rules. Paragraph 138(2)(a) specifies that the “Canada only” system applies to a Canadian resident life insurer that is a multinational life insurer. It provides that, if a life insurer resident in Canada is a multinational life insurer in a taxation year, its income or loss for the year from carrying on an insurance business is the amount of its income or loss for the taxation year from carrying on the insurance business in Canada.
[37] Subsection 138(2)(a) reads as follows:
138(2) Insurer's income or loss. Notwithstanding any other provision of this Act,
(a) if a life insurer resident in Canada carries on an insurance business in Canada and in a country other than Canada in a taxation year, its income or loss for the year from carrying on an insurance business is the amount of its income or loss for the taxation year from carrying on the insurance business in Canada;
[38] The above provision clearly states the overriding special rule for multinational life insurers resident in Canada; namely that its income or loss for the year is limited to its income or loss from carrying on the insurance business in Canada. The obvious corollary is that any income or loss from carrying on a life insurance business in another country during that year is not included in its Canadian tax. In this sense, one might label the special rules as “territorial” or “Canada only” as the Appellant has done, but it is clear its income or loss is only determined by the portion of its insurance business that is carried on in Canada, and not in another country as reflected in these special rules.
[39] It is also clear that a life insurer resident in Canada does not fall into this special scheme or rules in any year unless it also carries on an insurance business in another country. Clearly, in 2005 the Appellant did not carry on business in another country and so its treatment of income and loss for that year would fall within the general scheme of taxing worldwide income including capital gains and losses on disposition only, deemed or otherwise and not be subject to this special scheme or set of rules.
[40] In my view the remaining provisions of section 138 clarify or provide specific treatment to types of income or deductions by addressing limits to inclusion of income, deductions taken of interest and inter-corporate dividends, deniability of foreign tax credits, the inclusion of prescribed amounts in the computation of income and, to deal with the provision in issue in this matter, the tax treatment of properties which go from designated in one year to not designated in another or vice versa while in this scheme or special set of rules. [Underlined for Emphasis]
[41] As an example of these clarifying or specific provisions, one need only look at paragraph 138(2)(b) also applicable to a multinational life insurer resident in Canada which is clearly stated to be for “greater certainty”:
(b) if a life insurer resident in Canada carries on an insurance business in Canada and in a country other than Canada in a taxation year, for greater certainty,
(i) in computing the insurer's income or loss for the taxation year from the insurance business carried on by it in Canada, no amount is to be included in respect of the insurer's gross investment revenue for the taxation year derived from property used or held by it in the course of carrying on an insurance business that is not designated insurance property for the taxation year of the insurer, and
(ii) in computing the insurer's taxable capital gains or allowable capital losses for the taxation year from dispositions of capital property (referred to in this subparagraph as “insurance business property”) that, at the time of the disposition, was used or held by the insurer in the course of carrying on an insurance business,
(A) there is to be included each taxable capital gain or allowable capital loss of the insurer for the taxation year from a disposition in the taxation year of an insurance business property that was a designated insurance property for the taxation year of the insurer, and
(B) there is not to be included any taxable capital gain or allowable capital loss of the insurer for the taxation year from a disposition in the taxation year of an insurance business property that was not a designated insurance property for the taxation year of the insurer;
[42] As the Appellant has pointed out in its argument, subparagraph 138(2)(b)(i) above ensures that in computing income or loss of the multinational in carrying on business in Canada no amount is included in calculating its “gross investment revenue” from property used or held by it in the course of carrying on such business in Canada unless such property is designated property. It should be noted that this is the only applicable provision here since the parties agree the disputed bump in cost base applies only to this type of property.
[43] Clearly, two requirements stand out for inclusion of income specified in subparagraph 138(2)(b)(i), namely, in gross investment revenue: that the property giving rise to the income must be “used or held by it in the course of carrying on an insurance business” in Canada and that the property must be “designated insurance property”. It logically follows that if, in the “Canada only” scheme described by the Appellant and referenced in paragraph 138(2)(a) above, only the multinational life insurer’s income or loss from carrying on a business in Canada is included for taxation purposes and under paragraph 138(2)(b) gross investment revenue and capital gains or losses are calculated from property used or held in carrying on its business, that the reference to “its business” in the latter can only mean the insurance business carried on in Canada.
[44] It is, however, possible that such property may be used or held in carrying on such business in Canada but not be “designated property” for the year and hence would clearly not be included in calculating income or loss of the multinational life insurer in carrying on the insurance business in Canada. That is not to say that any such income would not be taxed in Canada at all, as the treatment of such income may be subject to tax as income from property or sources other than from business, which is what section 138 addresses, or taxed in another jurisdiction in which the Canadian resident corporation also carries on business. That of course is not something in issue here.
[45] I make this distinction between “used and held” and “designated” at this time because it is relevant to resolving the dispute between the parties as to the purpose and meaning of subsection 138(11.3). The Respondent takes the position that such subsection is a “change in use” rule and in paragraph 274 of its Written Representations states:
274. The textual reading of the provision reveals that it applies to change in use of property of a multinational, not to the introduction of property into the multinational taxation regime. A purposive analysis reveals the purpose of the provision was to tax assets used in Canada, and a contextual analysis supports that this provision is meant to tax assets used in Canadian insurance business.
[46] The Appellant however takes the position in paragraphs 118 and 119 of its initial Memorandum of Fact and Law, relying on a 1996 historical Explanatory Note, that the subsection is a “transitional rule that applies upon a change in the designated status of an investment property” to “ensure that gains or losses from the property accrued prior to the particular taxation years are not taxed thereafter by deeming disposition at fair market value and a reacquisition at a cost equal to that fair market value at the start of a particular taxation year”. Moreover, in that case, the deemed gain or loss that arises in the particular year is expressly deemed not to be a gain or loss from designated insurance property for the particular year, thereby ensuring that the gain or loss is also not included in the multinational life insurer’s income from its insurance business in the particular taxation year under the “Canada only” system. Furthermore, argues the Appellant, there is no requirement that the property designated be factually used in the Canadian insurance business of the multinational.
[47] To some extent both parties are correct. The Respondent is correct in that the contextual analysis regarding subsection 138(2) above clearly demonstrates that the property giving rise to the specific gross investment revenue and/or capital gains or losses must “be used or held” in carrying on the multinational life insurer’s business in Canada to form part of the special rules. The Appellant refers to the historical wording of subsection 138(11.3), which included the phrase “used” in carrying on the business before amendments to the provisions introduced the “designated insurance property” concept. It is clear the historical reference to “use” has been retained in subsection 138(2) above, which informs 138(11.3), and so I agree that the amendments to the latter are consistent with the historical purposes to some extent.
[48] However, as the Appellant has pointed out, such property must also be “designated” property and so I also agree with the Appellant’s statement that the rule is a transitional rule that applies upon a change in the designated status of property. The definition of designated insurance property itself may not specifically contain the requirement of use, but it is clear subsection 138(2) requires it be “used or held” and so either requirement must be met for the property to fall within the special rules. In any event, as indicated later, the requirements for holding and listing designated insurance property as a form of financial backstop to cover the insurer’s Canadian reserve liabilities or obligations suggests they would be automatically “used” for such Canadian business once designated and there is no question they are at least “held” for such purposes.
[49] Moreover, the Respondent agreed the property did not have to be used in the insurance business in Canada in the factual sense, and so it seems the Respondent’s emphasis on this issue is misdirected.
[50] I fully agree with the Appellant’s position that notwithstanding the historical requirement that such property be factually used in carrying on a Canadian business, the concept of “designation” replaced this wording for years after 1996 and it is clear that the investment assets no longer had to be factually used in the business in order to qualify as designated insurance property. This is also clearly evidenced by the definition of “investment property” in Regulation 2400, which includes reference in paragraph (b) to “land, depreciable property or property that would have been depreciable property if it had been situated in Canada and used or held by the insurer in the year in the course of carrying on an insurance business in Canada…”. Likewise Regulation 2401(3), dealing with the Order of Designation of Properties, expressly references investment property to be designated for the year in respect of the insurer’s business carried on by it in Canada as including investment property owned by the insurer other than Canadian investment property. It is clear that the property must be owned or held by the insurer, but need not be factually used in the business as previously required. Nevertheless such property is actually used in the business as a result of its designation.
[51] I also agree with the Appellant’s argument that a review of the designation system is necessary to properly frame the competing positions of the parties. As mentioned earlier, subsection 138(12) defines “designated insurance property” for a taxation year of a multinational as meaning property determined in accordance with prescribed rules. As the Appellant has pointed out in paragraph 106 of its Memorandum, “The definition does not apply to a Canadian resident life insurer that only carries on its business in Canada”. I agree with this statement and have to logically conclude that there can be no “designated insurance property” before becoming a multinational and so there could not have been any designation for a previous year before becoming one and hence no change in designation at the time of first designation that would put subsection 138(11.3) into play.
[52] The applicable regulations that define “designated insurance property” are found in Part XXIV of the Regulations to the Act, particularly in Regulation 2401 which sets out that “designated insurance property” means property that is designated in accordance with the rules set out in subsections 2401(2) to (7) of the Regulations. These provisions provide ordering rules for the designation of different types of investments as earlier mentioned and provide limits on the amounts so designated. As the Appellant has stated in paragraph 108 of its Memorandum:
108. In simple terms, the Act and the prescribed rules require that a multinational life insurer designate, in its return of income for each taxation year, “investment property” having a total “value” for the taxation year equal to the amount of the “mean Canadian investment fund” for the taxation year.
[53] The above terms in quotations are defined in Regulation 2400, and although detailed and complex, it is clear that the purpose of such designation, which may be done by the Minister if the taxpayer fails to do so or fails to do so in accordance with the rules, is to provide a minimum reserve of investment assets owned by the Canadian resident life insurer to ensure it can meet its Canadian liabilities under its policies of insurance, life, disability or otherwise. In this sense the designation is not optional as the insurer must designate a minimum amount and type of investment asset.
[54] As mentioned earlier, only a multinational life insurer resident in Canada is required to designate investment