Cattanach, J:—These are appeals by the plaintiff from its assessments to income tax by the Minister of National Revenue under the Income Tax Act in respect to the laintiff's 1968 and 1969 taxation years.
In assessing the plaintiff as he did the Minister disallowed deductions claimed by the plaintiff in its returns for the said years in computing its taxable income as business losses incurred in prior years.
Prior to 1835 Zachariah Allen had operated a successful textile mill. The building was virtually fireproof by reason of its stone construction. Mr Allen was particularly conscious of the possibility of loss by fire and to guard the contents of the building from such loss he caused buckets of water to be placed at strategic locations throughout the building. When he sought to place insurance upon his business he was aghast at the amount of the premiums demanded and felt that, because of the kind of construction of the building, the nature of the business conducted by him and the extraordinary precautions taken to protect against loss, the premium should be much less.
With true Yankee ingenuity Mr Allen, therefore, devised a method whereby, when the factors contemplated by him were present, insurance could be provided at a reasonable rate.
The result was a variation of a mutual insurance company based upon two additional concepts (1) the cost of insurance is related directly to the risk, and (2) a premium deposit is required to be made by the insured at the inception of the policy of insurance out of which deposit will be retained at the expiration or termination of the policy an amount to cover the cost of the insurance which is tantamount to a premium and is referred to as the absorbed portion of the deposit.
The deposits received by the insurer from its policyholders are intermingled so as to become indistinguishable and becomes the property of the insurer. However, upon the expiry of the policy and when the absorbed portion of the policy has been determined, the unabsorbed portion of the deposit is returned to the policyholder by the insurer from its funds.
A line or stock insurance company exacts a premium from the insured at predetermined rates. The excess of the premiums received over the losses paid and normal business expenses incurred represents the surplus of the company available to its shareholders as dividends. A normal mutual insurance company operates in much the same way as a stock insurance company. It charges its policyholders premiums at rates determined in the same manner as rates in stock companies are determined. However it does not have share capital but its policyholders become members and as members the profits earned by the mutual insurance company are distributed to the members in much the same way as dividends are distributed to the shareholders in a stock insurance company.
lt was my impression from the evidence that Zachariah Allen was the originator of the type of mutual insurance requiring the policyholder to make a premium deposit in a substantial amount at the outset. It is also my understanding that this type of mutual insurance company has become known as a factory mutual.
In a factory mutual the directors meet and determine a percentage multiple which, when multiplied by the number of months a policy is in effect, determines the amount of the absorbed portion, or the cost of insurance, in a premium deposit and incidentally the amount of the unabsorbed portion of the deposit.
The usual or normal rate of return of unabsorbed premium deposits on policies for one year is approximately 89%. So for every dollar in a premium deposit the holder of a one-year policy receives a refund of 89 cents. On the basis of a 50 cent premium deposit rate, this results in a cost of insurance or premium of 5.5 cents for each $100 of insurance.
The risks covered by factory mutuals are in large amounts. Industry must build large plants for efficient operation. This is the type of risk insured by factory mutuals which undoubtedly explains the name. The average risk is in excess of $1,500,000. It therefore follows since the losses will be large that large premium deposits must also be required even though experience has shown that only about 10% is required as cost of insurance or premiums.
Furthermore most jurisdictions require that a company licensed in those respective jurisdictions must not accept insurance on any single risk in excess of 10% of its net assets. For that reason if a factory mutual. were only to exact a deposit approximate to the cost of the insurance its assets would be correspondingly reduced and its underwriting capacity reduced accordingly.
After having worked out this method of insurance Zachariah Allen and others became the incorporators of Manufacturers Mutual Fire Insurance Company of Rhode Island incorporated by an act of the General Assembly of the State of Rhode Island passed at the October session in 1835.
Another company to operate in the same manner was incorporated under the name of Firemen’s Mutual Insurance Company by an act of the General Assembly of the State of Rhode Island passed at the May session in the year 1854.
A further company to operate in the same manner was incorporated under the name of The Blackstone Mutual Fire Insurance Company by an Act of the General Assembly of the State of Rhode Island passed at the May session in the year 1868.
Fer convenience I shall refer to these companies hereinafter as Manufacturer’s, Firemen’s and Blackstone.
Under the laws of the State of Rhode Island and more particularly the general corporation statute of that state ordinary business corporations could be incorporated, “merged” or “consolidated” and their articles of incorporation amended without recourse to the legislature but insurance companies were expressly excluded from the operation of the general statute.
Insurance companies in Rhode Island can only be incorporated by an act passed by the General Assembly of that State and any amendment to such an act may only be effected by a further act of the legislative body.
There is no provision in the general law of Rhode Island which permits of the “merger” or “consolidation” of insurance companies.
I have enclosed the words “merger” and ‘‘consolidation” in quotation marks because I am given to understand that they are technical words under the law of Rhode Island.
In 19 Corpus Juris Secundum under the title “Corporations”, “Consolidation” is defined in 81603 as follows:
There is a consolidation of corporations where the rights, franchises, and effects of two or more corporations are united in a single corporation, the stockholders of which are, so far as they choose to become such, composed of those of the companies so uniting. The term is elastic, however, and has been given other meanings.
Later in the text it is stated:
. . . Although it would be in the interest of clearness of definition that “consolidation” be limited to signify such union of two or more corporations as necessarily results in the creation of a third new corporation, the term “consolidation” is an elastic one and may include a union of two or more corporations into a new one with a different name with or without extinguishing the constituent corporations, ...
In the concluding paragraph of 81603 reference is made to “amalgamation” as follows:
“Amalgamation” is a term employed in England apparently in the same sense that “consolidation” is used in this country, and is used by the English courts, as consolidation is used by the American courts, to designate a merger as what is properly designated as a consolidation.
It is stated:
A true consolidation, which exists where a new corporation springs into existence to assume the liabilities of the former corporations and the prior corporations are dissolved and cease to exist, should be distinguished from a merger, which “means something more than a mere consolidation, and which exists where one corporation is continued and the others are merged in it without the formation of a new corporation.
The effect of consolidation is described in §1626 as follows:
The usual effect of a consolidation is to create a new corporation and dissolve the constituent corporation, which thereafter cannot issue stock but Is not precluded from winding up its affairs. A merger in the strict sense does not create a new corporation but the corporation into which the original corporations are merged continues to exist. Other results may follow a consolidation or merger according to the terms of the statutes and agreements under which the transaction is effected. A consolidation is. effective when, and only when, actual consolidation takes place.
In the text of §1626 it is stated:
The effect of a consolidation, with respect to extinction of the constituent corporations and the creation of a new corporation or the continued existence of one or both of the constituent corporations, depends upon the statute under which the consolidation is effected, and on the preexisting relations of the constituent corporations to which the statute and contract relate. Consideration is sometimes given to the intent and purpose of the contracting parties as expressed in the agreement, but this must be done in the light of, and in subordination to, the statute under which the union:is effected. The general. rule is that a consolidation effects the dissolution of the original corporations and brings into existence a new corporation. Where the legislature simply ' authorizes a consolidation, without expressly declaring its effect, it must be deemed to have this general rule in view, and to intend that it shall apply. Other results which may, and sometimes do, follow are the merger of one corporation into another and the continuance in existence of the latter; . . .
lt is clear from the foregoing extracts from Corpus Juris Secundum that whether the original corporations continue in existence following a consolidation is dependent on the intent of the statute by which consolidation is effected.
In late 1967 Manufacturer’s, Firemen’s and Blackstone considered it advisable to combine the operations of the companies and obtained legal advice as to how to best achieve that desired end.
The procedures of transferring all assets of each company to a new company incorporated by legislative act or by a transfer of the assets of two of the companies to the third company and by having the newly incorporated company or the third company assume all liabilities were rejected.
The management of the three companies were reluctant to have a new company take over the three companies or one of the companies take over the other two because of their reluctance to forego the history of the three companies having been in business for over one hundred years. Importance was attributed to antiquity and tradition.
Further, and of more practical importance, the transfer of assets by two of the three companies to the third and the assumption of their liabilities by the third or the transfer of assets by the three companies and the assumption of their liabilities by a newly formed company would not qualify as a tax free reorganization under the provisions of the United States Internal Revenue Code.
The expedient adopted was the passage of a Special Act by the General Assembly of Rhode Island in 1968 whereby Manufacturer’s, Firemen’s and Blackstone were combined to form MFB Mutual Insurance Company, which corporate name was subsequently changed to Allendale Mutual Insurance Company, by which name the plaintiff is described in the style of cause herein. This combination was accomplished by the Special Act of 1968 amending the acts by which the three companies were incorporated. Each of those original acts continue in existence as amended by the Special Act of 1968.
The salient provisions of the amending Special Act of 1968 may be expressed in summary form as follows: \ :
1. By virtue of section 1 the “associates, successors and: assigns” of the original incorporators of Manufacturer’s, Firemen’s and Blackstone are “made and consolidated into a corporation by the name of MFB Mutual Insurance Company” (which name was changed sub that it is 138 years old as at 1973 with an increased age in subsequent years.
6. By section 4 each person who was a member of a constituent corporation becomes a member of “this corporation,” during the currency of the policy of insurance held.
A member is entitled to one vote for every $10,000 of insurance held but only to a maximum of 20 votes regardless of the insurance held. Because no risk is accepted for less than an amount of $1,500,000 as a matter of policy, it follows that each member is entitled to 20 votes.
7. By section 10 it is possible that “this corporation” (and I assume the constituent corporations had like authority) might issue policies which do not entitle the insured to membership in the corporation nor to participate in unabsorbed premium deposits or surplus but such insured are exempt from liability to assessment if losses exceed the funds of the corporation. It was established that no such non-assessable policies were ever issued.
8. By section 9 on liquidation persons who were members of “this corporation” six years before the date of the vote to go into liquidation are entitled to share in surplus reserve rateably in proportion to the amount of premium deposits paid by them to “this corporation” or to any of the constituent corporations within the said six year period.
Persons who were members of the constituent corporations became members of “this corporation” by virtue of section 4. If they are not members they do not share in the distribution on liquidation.
However, expert testimony was given that if the vote of liquidation occurred within six years of the effective date of the Special Act of 1968, members of the constituent corporations within the six-year period, whether members or not after the effective date, would be entitled to participate in such liquidation by reason of the continuance of the corporate existence of the constituent corporations after the effective date.
Under paragraph 27(1 )(e) of the Income Tax Act for the purpose of computing the income of a taxpayer for a taxation year, there may be deducted from income for that year business losses sustained in the five taxation years immediately preceding and the taxation year immediately following the taxation year.
Manufacturer’s and Blackstone incurred business losses in their 1968 and prior taxation years.
The plaintiff herein, Allendale Mutual Insurance Company, in computing its income for its 1968 and 1969 taxation years sought to deduct the business losses previously incurred by Manufacturer’s and Firemen’s, two of its constituent corporations.
Subsection 851(1) of the Income Tax Act is as follows:
851. (1) In this section, an amalgamation of two or more corporations means a merger of such corporations (each of which is hereinafter in this section referred to as a “predecessor corporation’’) to form one corporate entity (hereinafter in this section referred to as the “new corporation’’) in such a manner that
(a) all of the property of the predecessor corporations immediately before the merger becomes property of the new corporation by virtue of the merger,
(b) all of the liabilities of the predecessor corporations immediately before the merger become liabilities of the new corporation by virtue of the merger, and
(c) all of the shareholders (except any predecessor corporation) of the predecessor corporations immediately before the merger become shareholders of the new corporation by virtue of the merger,
otherwise than as a result of the acquisition of property of one corporation by another corporation, pursuant to the purchase of such property by the other corporation or as a result of the distribution of such property to the other corporation upon the winding up of the corporation.
The foregoing definition of amalgamation contemplates a merger of two or more corporations (referred to as “predecessor corporations”) in such a way as to form “one corporate entity” (referred to as a “new corporation”). In short, two or more corporate entities must merge to form one new corporate entity. If the emergence of a new corporate entity does not result in a particular circumstance then there is not an amalgamation.
Paragraph 851(2)(i) provides that “for the purpose of paragraph (e) of subsection (1) of section 27, business losses sustained by a predecessor corporation are not deductible in computing the taxable income of the new corporation”.
The purpose of this provision is obvious. It is designed to thwart the amalgamation of a profitable corporation with an unprofitable one in order to take advantage of the latter’s accumulated business losses under paragraph 27(1 )(e).
An amalgamation for the purposes of the Income Tax Act does not include a merger which is brought about by the purchase of the assets and business of one corporation by another or as the result of a distribution of its property to another corporation on winding up (see subsection 851(1)). In both these instances the corporation acquiring the assets continues unaltered as the same legal entity as before. This is not the case in an amalgamation where a new corporation comes into being.
Thus the issue to be resolved in the present appeals stands forth in stark relief.
If what was effected under the Special Amending Act of 1968 of the General Assembly of the State of Rhode Island as outlined above constitutes an amalgamation of Manufacturer’s, Firemen’s and Blackstone into Allendale Mutual Insurance Company within the definition of that term in subsection 851(1), as is contended on behalf of the Minister, then the Minister was right in disallowing the deductions claimed by the plaintiff and assessing it accordingly.
On the other hand it was contended on behalf of the plaintiff that the consolidation of Manufacturer’s, Firemen’s and Blackstone as Allen- dale Mutual Insurance Company by the Special Act of the legislation of Rhode island did not constitute an amalgamation under subsection 851(1) because, (1) the constituent companies continue to exist as legal entities, and (2) even if the first contention is not accepted what was done does not fall within subsection 851(1) because all of the three conditions do not apply.
In my opinion it is immaterial that the term “amalgamation” is unknown to the law of the United States and to the State of Rhode Island. Apparently the term “consolidation” is used in those jurisdictions in a sense synonymous with “amalgamation”. As I have indicated before if what was accomplished under the Special Act of Rhode Island falls within the definition of amalgamation in subsection 851(1) that concludes the matter.
Under subsection 851(1) three conditions must be present for the section to be applicable.
First, under paragraph 851(1 )(a), all of the property of the predeces: sor corporations immediately before the merger must become the property of the new corporation by virtue of the merger.
This condition has been satisfied by section 2 of the Special Act which provides that all the property of the “. . . constituent corporations” is “transferred to and vested in this corporation” so that this corporation shall hold and enjoy all (such: property) in the same manner and to the same extent as such (property was) held and enjoyed by any one of the constituent corporations immediately prior to such time”.
Second, under paragraph 851(1 )(b) ail of the liabilities of the predecessor corporations immediately before the merger must become the liabilities of the new corporation formed by the merger.
This second condition has also been satisfied by section 2 of the Special Act which provides that all of the liabilities of the constituent corporations are transferred to and made enforceable against MFB Mutual Insurance Company, which is the former name of the plaintiff, to the same extent as if the said liabilities had been incurred or contracted by it. Further, section 2 requires the plaintiff to issue every policyholder of any of the constituent corporations, on demand, an endorsement evidencing the liability of the plaintiff under the policy.
The third condition required to be fulfilled under paragraph 851(1)(c) is that all shareholders (except any predecessor corporation) of the predecessor corporations immediately before the merger shall become shareholders of the new corporation by virtue of the merger.
Because Manufacturer’s, Firemen’s and Blackstone are mutual insurance companies they were incorporated without share capital and as such had no shareholders. The plaintiff, being a mutual insurance company, likewise has no share capital and accordingly no shareholders.
By paragraph 139(1)(ao) the ordinary meaning of the word “shareholder” as used in the Income Tax Act is extended to include ‘‘a member or other person entitled to receive payment of a dividend”.
In paragraph 139(1)(k) “dividend” is not specifically defined and accordingly its ordinary meaning would be ascribed thereto but by virtue of paragraph 139(1)(k) a stock dividend is not included in the meaning of dividend.
Obviously the extended definition of “shareholder” was designed to include those persons who, while not holding a share of capital stock because there is no capital stock, by virtue of their participation in a corporation without share capital carrying on a commercial venture to make a profit and by reason of the structural organization of the corporation, are entitled to share in any profits of the corporation.
Accordingly the members of mutual insurance companies of the usual type would fall within the extended definition of a shareholder because membership in the corporation follows from becoming a policy- holder and the policyholders or members share in the profits of the company through receipt of dividends.
However factory mutual companies are different. Manufacturer’s Firemen’s and Blackstone and the plaintiff are factory mutuals. They do not charge premiums as such but require their policyholders to deposit a sum of money at the outset. Semi-annually the directors determine a percentage multiple which when multiplied by the number of months the policy is in force determines the cost of the insurance. On expiration of the policy the cost of the insurance is deducted as the absorbed portion of the premium deposit. An amount representing the balance is refunded to the policyholder. The ‘advantage to the policyholder is that he gets his insurance coverage at a lower rate than he could otherwise. He does not receive dividends as such and accordingly he is not a shareholder within the meaning of that word for the purposes of the Income Tax Act even though he is a member of the corporation and exercises voting rights. The unabsorbed portion of the premium deposit refunded to the policyholder is merely the return of an advance made by him.
In section 9 of the Special Act the members are given the right on liquidation or winding up to share in the distribution of the surplus reserve and other assets on a pro rata basis. This right extends to those persons who were members of the constituent corporations in the prior six years. A distribution of assets on winding up is essentially a return of capital and is not the payment of a dividend.
in interpreting a statute the intention of the legislature is to be determined as expressed in the words used but to understand those words it is helpful to consider them in conjunction with the object the legislature had in view.
The object of paragraph 851(1 )(c) is that the persons who form the predecessor corporations will continue to be the persons who form the new corporation. This object is sought to be achieved by requiring that all shareholders of the predecessor corporations and all members of predecessor corporations entitled to payment of dividends im- mediately before the merger shall be shareholders or members of the new corporation.
Obviously by section 1(a), (b) and (c) of the Special Act, the associates, successors and assigns of the incorporators of the Manufacturer’s, Firemen’s and Blackstone are thereby made and consolidated into the plaintiff. Those persons who formed the predecessor corporations immediately prior to the merger continue to form the new corporation but the hiatus in paragraph (c) of subsection 851(1) occurs in that those persons are not shareholders or members entitled to receive payment of dividends by reason of the peculiarities inherent in factory mutual companies.
It is a condition precedent to the contention made on behalf of the plaintiff that amalgamating corporations must have shareholders. There are instances when that is not so in which event it follows that paragraph (c) of subsection 851(1) is not susceptible of being applicable and compliance with the conditions of paragraph (c) would not be necessary to constitute amalgamation as defined.
A further answer appears to me to be that since there were no shareholders in the predecessor corporations and no shareholders in the new corporation it follows that the shareholders in the predecessor corporations and in the new corporation are the same so that the condition contemplated in paragraph (c) of subsection 851(1) are complied with.
I now turn to the first contention on behalf of the plaintiff that, because under the Special Act of Rhode Island the constituent corporations have a continued existence as corporate entities although devoid of assets, without liabilities or capital but with amended articles of incorporation, it follows that there has been no amalgamation.
This result presupposes that there can be no amalgamation within the meaning of subsection 851(1) if the predecessor corporations continue in their existence.
In the Special Act of Rhode Island it is stated that the ‘‘constituent corporations”, that is Manufacturer’s, Firemen’s and Blackstone, shall be consolidated into and continued in “this corporation” that is the plaintiff, which shall be deemed to be the same corporation as each of the constituent corporations.
In the extract from 81603 in 19 Corpus Juris Secundum quoted above, it is stated in the last paragraph thereof that “amalgamation” is a term employed in England (and in Canada) in the same sense that the term “consolidation” is used in the United States.
It is also stated in 81603 that the term “consolidation”, which I consider to be synonomous with “amalgamation”, is an elastic term which signifies the union of two or more corporations which results in the incorporation of a new corporation, but the term may also include a union of two or more corporations into a new corporation with or without extinguishing the existing corporations. Which course was adopted must be determined by the statute under which the union was effected.
In the Deltona Corporation v MNR, [1971] CTC 297: 71 DTC 5186, I had occasion to consider when an amalgamated corporation was incorporated under the provisions of section 128A of the Canada Corporations Act. . -
Under subsection (13) of section 128A upon the issue of letters patent the amalgamation agreement has full force and effect and by paragraph (a), “the amalgamating companies are amalgamated and are continued as one company ...”.
I pointed out at page 320 [5199] that upon the “issue” of the confirming letters patent the two “amalgamating companies” ae continued as “one company” called the “amalgamated company”. As previously stated there were two companies and after the issue of the letters patent there is only “one company” it seems to follow that that “one company” is a company that did not previously exist and that came into existence at that time.
It was then stated on page 321 [5200] :
... In my view, once it is accepted that amalgamation results in a corporation that did not exist before, it follows that it is among other things, the “incorporation” of that new corporation.
In a footnote it was stated that,
The only alternative view would appear to be that the amalgamated corporation is not a new corporation at all but is merely a continuation of the existence of the two amalgamating corporations in a unified form, . . .
From the evidence adduced and from the terms of the Special Act which were interpreted in evidence the only logical inference to be drawn is that there was the creation of a new corporation by the three constituent corporations being consolidated into it.
The three groups of persons who formed Manufacturer’s, Firemen’s and Blackstone were blended into or consolidated into a corporation by the ultimate name of Allendale Mutual Insurance Company in such a manner that all the property of the predecessor corporations became that of the new corporation and all the liabilities of the predecessor corporations became those of the new corporation.
Accordingly the provisions of subsection 851(1) have been complied with notwithstanding that the predecessor corporations continue to have a technical corporate existence.
As I have said before, it is subsection 851(1) which governs. The language of subsection 851(1) does not contemplate that the predecessor corporations must be extinguished and when use is made of the word “merger” the word is not used in a technical sense that there must be a termination of the corporate existence of the predecessor corporations. The paramount factor is that a new entity must emerge.
For the foregoing reasons I conclude that there has been an amalgamation of Manufacturer’s, Firemen’s and Blackstone into the plaintiff, a new corporation, from which it follows that the Minister was right in assessing the plaintiff as he dd.
lt would appear to me that if there was no amalgamation that would not assist the plaintiff, because it was not the plaintiff which sustained the business losses in a business carried on by it, but rather the losses sought to be deducted by the plaintiff were those sustained by Manufacturer’s and Blackstone which are continued in existence.
For the reasons previously expressd I am of the view that the effect of the Rhode Island statute is to create the plaintiff as a new corporation and it is accordingly a person different from its predecessor corporations. There would appear to be no impediment to the Minister assessing the predecessor corporations because those corporations have not disappeared.
I do not interpret section 2 of the Rhode Island statute where it states that the age of the plaintiff shall be the age of the oldest constituent corporation as meaning that the plaintiff has had a retroactive existence since that date but as previously indicated I interpret that language merely as providing that the plaintiff's age is deemed to be that which would otherwise not be. Under the Rhode Island statute there are four corporate entities, those of Manufacturer’s, Firemen’s and Blackstone which are continued and that of the plaintiff which is created. That being so I find it difficult to follow how business losses sustained by two of those entities can become the business losses of a different corporate entity, in this instance the plaintiff. It is true that the plaintiff assumed the liabilities of the three constituent corporations but liabilities differ from and are not business losses.
The appeals are, therefore, dismissed with costs.