Capitol Life Insurance Co. v. The Queen, 84 DTC 6087, [1984] CTC 141 (FCTD), aff'd 86 DTC 6164, [1986] 1 CTC 388 (FCA)

Addy, J:—The plaintiff, an American Company, is appealing an assessment for income tax purposes for 1976.

The two main issues are whether during that year it was a resident of Canada or carried on business here and, if so, whether its commercial profits for the year were exempt from taxation under Article 1 of The Canada-United States Tax Convention * [1]

In order for the Convention to be applicable, there must be a finding that the Corporation’s business was a U.S. enterprise and that it either had no permanent establishment in Canada or if it did, that part of the commercial profits was not attributable to that establishment.

The Plaintiff

The plaintiff was incorporated in the state of Colorado at the turn of the century as an insurance company with powers to write all types of insurance. The Head Office has always been in Denver, Colorado.

In 1976, the plaintiff was a subsidiary of Providence Capital Corporation which in turn was a subsidiary of Gulf & Western Industries Inc. (hereinafter referred to as Gulf). the latter owned about 600 subsidiaries, approximately 240 of which were in turn owned by Associates Corporation of North America. Six of these latter companies were Canadian.

General Operations

During the first part of 1976, the plaintiff had operated a branch out of South Bend, Indiana, for the processing of credit claims. This branch operation was closed during the year. At the time, the plaintiff did business throughout the United States except for the state of New York through general agents that is, agents representing several insurance companies for the purpose of obtaining applications for insurance. Its business amounted to approximately $400,000,000 (US) and it had approximately 300 officers and other employees. All top administrative officers and employees were located in Denver. All applications for insurance policies were forwarded there and, if acceptable, the policies were issued from Denver. I have no difficulty in finding that all control and detailed admin- istration of the plaintiff's business as well as its corporate functions and investment activities had been exercised from its Denver office in 1976, except, as stated before, for the processing of certain insurance claims which during the earlier part of the year were handled from South Bend, Indiana.

For many years, the plaintiff had been writing throughout the United States individual and various types of group life and health insurance policies and, since the mid-1960s had been writing creditor’s group policies (both life and health) for finance companies, but only to those which formed part of the Gulf family of affiliated companies. In 1976, the plaintiff had creditor’s group policies in effect with some 240 US finance companies all of which were affiliated with it through Gulf.

Canadian Operations

(a) Registration and Licensing

In the late 1960s, the plaintiff was planning to expand into Canada. It engaged the services of one Wilson McLean, QC as legal representative, to advise it on the laws and the registration requirements of the various Canadian jurisdictions. Applications were made through him for registration and licensing and by 1971, licences had been obtained in all provinces except Newfoundland and Prince Edward Island. Registration was also obtained federally pursuant to the Foreign Insurance Companies Act, RSC 1970, c 1-16, (hereinafter referred to as FICA). One of the requirements of FICA (subparagraph 5(a)(ii)) was that a chief agent in Canada be named and that the latter be given a power of attorney in a form approved by the Minister of Finance. The plaintiff was also required to make deposits with the Insurance Superintendent and maintain assets in Canada. The original deposits amounted to $205,000 (Can.) for life insurance and $65,000 (Can.) for accident and health. All provincial jurisdictions had similar requirements for the obtaining and maintaining of a license.

Except for the two bank accounts, there were never any other assets of any kind in Canada. By 1976, the total amount of assets maintained in the company’s Canadian portfolio of securities for registration purposes amounted to some $400,000. This of course represented but a very small proportion of the plaintiffs total assets.

The original plans to do business in Canada by opening branch offices and by engaging active general agents here never in fact materialized. Before any such action was taken, a contrary decision was in fact reached by the Plaintiff. The Canadian registrations and licenses were, however, maintained in force.

(b) Powers of Attorney

The powers of attorney for the chief agent in Canada under FICA and for the provincial agents except for the province of Quebec were similar in form and content. They were all required statutorily and had to be executed and filed before a license would be granted. The power of attorney, also required for licensing purposes, was even more detailed and purported to grant very wide powers indeed to the statutory agent.

I find that, notwithstanding the broad terms of these powers of attorney which were statutorily imposed as aforesaid, none of the representatives or agents including Mr McLean, who in fact was the only person who had any substantive dealings with the plaintiff, ever solicited insurance or were either expected or authorized to do any business whatsoever for it. They were in fact mailing ad- dresses or conduit pipes for the plaintiff and were authorized to accept service of legal processes on its behalf pursuant to the requirements of the licensing authorities. All reports to these authorities had to be forwarded by the plaintiff through the chief agent and all inquiries had to be addressed to the plaintiff through him. The reports themselves, including the annual return required by FICA, were all prepared in Denver and all inquiries were forwarded there for a decision as to what the reply of the agent would be. The issue to which such matters as the obtaining of licenses, the filing and execution of powers of attorney, the appointment of a chief agent and provincial counterparts, etc. relate is not whether the plaintiff could have or at one time intended to carry on business in Canada, but whether it in fact did so. In the case of Sutton Lumber and Trading Co Ltd v MNR, [1953] CTC 237; 53 DTC 1158, Locke, J, in delivering reasons unanimously concurred in by the other members of the Supreme Court of Canada stated at 1161 of the above report:

[Business actually engaged in]

The question to be decided is not as to what business or trade the company might have carried on under its memorandum, but rather what was in truth the business it did engage in. To determine this, it is necessary to examine the facts with care.

The chief agent countersigned cheques on the plaintiff's general account in Canada but only because he was required to do so by direction of the insurance superintendent. He did not have any means of verifying the amounts or the legitimacy of the payments, as all books of account were kept at the head office in Denver and the cheques were prepared there. All authorizations for the issuing of cheques therefore emanated from head office. The agent’s signing authority was restricted to one of the three bank accounts maintained here by the plaintiff which was known as the “resident or general bank account”. The cheques were issued for the acquisition of securities required to be maintained and to replenish the “claims account” which was used to pay Canadian claims in Canadian dollars and had been established pursuant to requirements of the superintendent of insurance.

The evidence indicates that the third account remained inactive and the reason for its existence is unknown. Premiums collected by the plaintiff under the group creditor’s policies, income from investments required to be maintained in Canada and proceeds from the disposition of securities in Canada were deposited in the general account.

As to deposits, they were originally sent to Denver and returned to Canada through the bank for deposit in the Canadian account. This procedure caused delays in cashing of premium cheques and a consequent loss of interest. To avoid this, Mr McLean was authorized to deposit the cheques immediately on receipt into the Canadian bank account, then to advise Denver.

All investments were administered in the United States and all decisions regarding same were made there.

(d) Canadian Records

As the Chief Agent under FICA, Mr McLean was obliged to keep at his office in Toronto copies of records required by the superintendent of insurance. These records were all prepared in Denver where all original books of entry were maintained and Mr McLean had no means at his disposal of verifying the accuracy of the documents.

(e) Canadian Insurance Sales

There were no agents or other persons in Canada who, on behalf of the plaintiff, either sought applications for insurance business of any kind, collected insurance premiums, processed or paid claims, administered the plaintiffs investments or even countersigned any claim cheques.

The plaintiff never issued in Canada nor solicited nor sold here, directly or indirectly, any individual life insurance policy. From January 1, 1969 up to and including 1976, it issued a total of five group contracts of insurance under which the lives of Canadian residents were insured. All these were applied for in the United States and were issued from Denver. There is uncontradicted evidence, which I accept, that there was no solicitation for these group policies in Canada. They were all issued to companies affiliated with the plaintiff. Three of the policies were life and health employer-employee policies insuring the employees of the companies and two of these were issued to the United States parent company of the plaintiff and the third was issued to an affiliated company.

The remaining two of the five group policies were creditor’s group insurance, both issued to Associates Acceptance Company Ltd. (hereinafter referred to as Associates), the latter being a Canadian finance company resident in Canada and carrying on business here as a loan company.

The plaintiff has established that the revenue from Canada both from an insurance and an investment standpoint represents but a very small proportion of its total revenue. There is also evidence that the Canadian operations were not kept separately from the US business. No personnel in Denver was specially charged with the Canadian operations and there were no special Canadian claim forms or procedures. — The only separation in accounting regarding premiums received, claims paid, legal fees, taxes and license fees is to be found in the accounts prepared to comply with the reporting requirements of the Canadian insurance authorities.

(f) Creditor's Group Policy GR67-205

The first of these two creditor insurance policies, known as GR67-205, was issued in November 1970. It applied to loans made by Associates which were not secured by a real estate mortgage, and was issued at the option of the borrower who would be charged an extra fee by Associates for this coverage. The policy was applied for in the United States by the president of Associates who actually resided in Indiana and was drafted in accordance with US (Colorado) legal requirements. All amendments and riders were signed and issued in Denver. On examining the policy, one finds that on its face, it purports to be a contract entered into between the plaintiff as insurer and Associates as the insured company under which the plaintiff agrees to pay to Associates in the event of the death or disability of a borrower, who is eligible under the terms of the policy and whose name has been reported by Associates, an amount equal to the moneys remaining due under the loan at the time of death or, in the case of disability, the amount of instalments payable from time to time under the terms of the loan for the duration of the disability. The insurance on any loan becomes effective immediately upon the name of the borrower being reported by Associates to the plaintiff. The moneys paid to Associates are to be applied by Associates against moneys owed to it by the borrower. All premiums are payable by Associates. The latter was, on the instructions of the federal insurance superintendent, supplied with blank individual certificates executed by the plaintiff in order that each borrower who elected to have his loan covered would be aware of the terms of the coverage. The insurance took effect, however, independently of the issuance of the certificate.

There is uncontradicted evidence to the effect that the reference in the certificates to an address in Don Mills, Ontario, being that of the Canadian head office was inserted as a requirement of the federal insurance superintendent and that it never was in fact used as a head office. No insurance business ever originated from there or was transacted there. It was in fact the address of the chief agent of another company.

There were amendments and riders issued concerning this policy from the time of its issue in 1970 until 1976, but all of these were made and agreed upon between the plaintiff and Associates and the borrowers were never consulted. Similarly, all questions of designation of beneficiaries, of payment of premiums and of claims under the policy, were settled exclusively between these two parties and the borrowers were never consulted in these matters. The borrowers had no power to designate beneficiaries.

(g) Creditor's Group Policy GR67-269

Except as hereinafter mentioned, the second group policy, namely GR67-269, was issued and administered in the same manner as GR67-205 and it fulfilled the same purpose and was subject to the same conditions as to premiums and payments of benefits. The relevant differences were: no provision was made for Associates to be reimbursed its costs of the premiums by a borrower, the cost of same being included in the general costs of administering the loan and, therefore, the borrower did not have a right of electing whether insurance would be issued or not: the insurance coverage was automatic for the borrower as well as for the lender. It applied to all loans which were secured by real estate mortgages.

Policy GR67-269 covered the total amount of loans outstanding each month. They were reported monthly and the premium was based on the total amount owing each month. In the case of Policy GR67-205, however, Associates only made each premium payment at the time that an individual debt was reported, notwithstanding that the debt would be amortized over a considerable period or might be prepaid.

(h) Agency Factors

In 1970, an agreement between the plaintiff and Associates was signed pursuant to which retroactive adjustments of premiums were provided for, the adjustments being based on past experience regarding claims. This was termed a premium adjustment agreement. An addendum entitled “Addendum No 1” came into effect in July 1976. Considerable argument was advanced by counsel for the defendant based on the fact that the addendum referred to “a premium collection fee” in lieu of the former provision for retroactive premium adjustment. There was also a provision in addendum No 1 regarding administrative expenses. The defendant argued that this clearly indicated that at least from that time, Associates was really an agent collecting, on behalf of the plaintiff, insurance premiums in Canada from Canadian borrowers who were in fact the insured and was being paid a commission for such collection.

There was, however, evidence to the effect that the change in the wording was inserted at the insistence of the federal insurance superintendent and that, as between the plaintiff and Associates, addendum No 1 continued to be adminis tered, interpreted and applied by the parties in the same manner and with the same effect as the original premium adjustment agreement. I accept this evidence.

There was no other extrinsic evidence which might indicate an agency relationship between the plaintiff and Associates. On the contrary, all the evidence pointed to the opposite conclusion. Disputes between the borrowers and Associates regarding such matters as cancellation of payment under a loan contract, the provisions of the policy, terms of coverage, etc. were dealt with by Associates. It was only on a few rather rare occasions where a borrower would contact the plaintiff directly, that the latter would furnish the information to that person. No administrative or bookkeeping services were performed by Associates for the plaintiff.

The evidence considered so far would seem to indicate that the relationship between the plaintiff and Associates would be that of insurer and insured and not that of insurer and agent. There remains the question whether on a legal interpretation of the policy itself, the borrowers would be considered the insured (as to which, see heading “Who are the insured?” infra).

(i) Control and Management

The plaintiff has fully established to my satisfaction the following facts:

Both high level and immediate detailed control and management of the business as well as all corporate meetings took place without exception exclusively in the United States. Mr McLean, the chief agent in Canada, merely fulfilled the position in order to comply with the requirements of the superintendent of insurance. He exercised no true executive, administrative or insurance agency authority whatsoever nor did he carry on any business on behalf of the plaintiff. Whatever services he did render were strictly legal in nature with the exception of countersigning cheques on the general account, depositing the payments received on the premiums, allowing the location of his law firm to be available as the official mailing address for the purpose of the Canadian insurance authorities, maintaining there a copy of the final books of entry and reports regarding the five insurance policies in issue for the purposes of such authorities, holding himself available for the service of all legal processes on the plaintiff and receiving and forwarding whatever communications might be addressed to the plaintiff by the superintendent of insurance and forwarding the replies thereto received from Denver. None of these functions, except perhaps the deposit of moneys in the local account, would have been fulfilled had they not been required by the superintendent of insurance. All services were billed as legal services payable to the legal partnership of which Mr McLean was a member. No capital was raised in Canada by the plaintiff.

Issues

Leaving aside for the moment the question of taxation of capital gains, the plaintiff would not be taxable if, during the year in question, it was not a resident of Canada and was not carrying on business here. If it was carrying on business here, it would still not be taxable (by reason of the Canada-US Tax Convention Act) if it was a US enterprise without a permanent establishment in Canada or if no part of its profits could be allocated to any such permanent establishment in Canada. In so far as liability for capital gains is concerned, it would be sufficient for the plaintiff to establish that it was a US enterprise without a permanent establishment here.

The parties are in agreement in their pleadings that the plaintiff was a resident of the United States. The first issue is whether or not it was also a resident of Canada.

Legal Concept of Residency

Residency in Canada for taxation purposes, in the case of a corporation, depends on whether “it really keeps house and does business” here. The test since applied in several Canadian decisions was established in De Beers Consolidated Mines Ltd v Howe, [1906] AC 455, at 458:

. . . In applying the conception of residence to a company, we ought, I think, to proceed as nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business. An individual may be of foreign nationality, and yet reside in the United Kingdom. So may a company. Otherwise it might have its chief seat of management and its centre of trading in England under the protection of English law, and yet escape the appropriate taxation by the simple expedient of being registered abroad and distributing its dividends abroad . . .

As argued by counsel for the plaintiff, the cases of Tara Exploration and Development Co Ltd v MNR, [1970] CTC 557; 70 DTC 6370, affirmed by the Supreme Court of Canada [1972] CTC 328; 72 DTC 6288, and The King v British Columbia Electric Railway Company, Limited, [1945] Ex CR 82; [1945] CTC 162; 2 DTC 824, affirmed by the Judicial Committee of the Privy Council [1946]AC 527; [1946] CTC 224: 2 DTC 839, are quite relevant in regard to the principles to be applied in determining whether a corporation is resident in a country. Jack- ett, P, as he then was, stated at 6373 of the above mentioned report of the Tara case:

With reference to section 2(1), I find as a fact that, during the taxation years in question,

“the central management and control” of the appellant was in Ireland and was not in Canada. The general manager and other active officers of the company were resident in Ireland and had their offices there. The directors and corporate officers of the company lived there or in Northern Ireland. Ireland was the seat of the actual management and control and I cannot distinguish the case in principle from the decision in The King v. British Columbia Electric Railway Company Limited, (1945) Ex. CR 82, per Thorson, P at pages 85 et seq. [2 DTC 692], that the defendant there was resident in Canada, which decision is reinforced by the views expressed in the Judicial Committee in the same case, (1946) A.C. 527, per Viscount Simon, at pages 537-38 [2 DTC 839]. It is true that the appellant in this case had some business affairs in Canada, and, to that extent, the facts in this case differ from the facts in the British Columbia Electric. The material fact is, however, the same, in my view. Notwithstanding that, in consequence of its Ontario incorporation, it had a “head office” in Toronto together with corporate books, etc., and held certain corporate meetings there, notwithstanding that, through an arrangement with an associated company, it received and made payments in Canada and had a bank account in Canada, notwithstanding that its directors and officers came to Canada on occasion on the business of the appellant and of other companies in which they were interested, notwithstanding that it raised its capital in Canada and used the services of a Canadian solicitor and Canadian auditors, and notwithstanding that it embarked on certain business adventures in Canada, the evidence in my view establishes that the “central management and control” of the appellant was in Ireland and was neither in Canada nor divided between Canada and Ireland.

[Emphasis added by me.]

The learned judge, in a footnote on the same page, stated:

“. . . In particular, I have accepted as sound the opinion that “a finding that a company is a resident of more than one country ought not to be made unless the control of the general affairs of the company is not centred in one country but is divided or distributed among two or more countries.”

Finding as to Canadian Residency

In applying the legal principles enumerated in these cases and considering the factual situation, it seems obvious that at no time during 1976 could the plaintiff be considered as having been a resident of Canada and it therefore could not be taxable as a resident pursuant to subsection 2(1) of the Income Tax Act.

Effect of Paragraph 253(b)

However, section 2 of the Act also contains the following provision which is relevant to the facts of this case:

2(3) Where a person who is not taxable under subsection (1) for a taxation year

(b) carried on a business in Canada, or

at any time in the year or a previous year, an income tax shall be paid as hereinafter required upon his taxable income earned in Canada for the year determined in accordance with Division D.

Therefore, the next issue to be determined is whether, at any time during 1976 or previously, the plaintiff carried on business in Canada.

Although “carrying on business in Canada” is not defined in the Act, paragraph 253(b) contains the following provision:

253. Where, in a taxation year, a non-resident person

(b) solicited orders or offered anything for sale in Canada through an agent or servant whether the contract or transaction was to be completed inside or outside Canada or partly in and partly outside Canada,

he shall be deemed, for the purposes of this Act, to have been carrying on business in Canada in the year.

Altogether apart from the question of whether insurance, being essentially a contract entered into between an insurer or underwriter and an insured, is at law a thing capable of being sold as contemplated in paragraph 253(b) above or whether that provision is restricted to contracts and orders for the sale of property (and I make no finding on this issue), I find no difficulty in concluding, on the basis of my previously mentioned findings, that the plaintiff has established that it never solicited in Canada or offered for sale in Canada through any agent or servant any policy of insurance. Even if Associates were to be considered an agent of the plaintiff, and I shall deal with this specific issue later, the plaintiff never used it to solicit orders or offer insurance for sale.

Issue re Carrying on Business

As paragraph 253(b) does not apply to the facts of this case, the issue now turns on whether, according to the ordinary accepted meaning of the expression, the plaintiff otherwise carried on business in Canada.

(a) The Law

Since the decision of Grainger and Son v Gough, [1896] 3 TC 462, the classic distinction drawn by the courts has always been between carrying on business with and carrying on business within a country. The distinction is so legally and commercially sound that no comment is required except to state that its application in each case must necessarily turn on the particular facts of that case to be determined from a variety of circumstances.

It is interesting to note from a factual standpoint that in the Grainger case, orders on behalf of a French wine firm for the sale of its wines were obtained in Britain by agents residing there and listed as such in the local telephone directory. They, from time to time, also collected moneys in Britain and deposited some in a bank account in London on behalf of their principals. Yet, because they had no authority to contractually bind the French wine merchants and because the actual contracts for the sale of the wine were not entered into in England, it was held that the French wine merchants were not carrying on business there. In the case of Gurd’s Products Co Ltd and Grandson Holdings Inc v the Queen, [1981] CTC 195; 81 DTC 5153, (presently under appeal), I stated that there is really no crucial or definitive test as to what constitutes carrying on business. This view has been expressed in many reported decisions, among others, Firestone Tyre & Rubber Co Ltd v Lewellin et al, [1957] 37 TC 111 at 142; FL Smidth & Co v Greenwood, 8 TC 193 at 203; Crookston Bros v Furtado, 5 TC 602 at 628; Cutlers Guild Limited v the Queen, [1981] CTC 115; 81 DTC 5093.

I agree with the argument that one must not consider in isolation the activities carried on in this country by the plaintiff but one must consider them in the light of the whole of its business activities and its general operations.

The concept of what constitutes engaging in the business of insurance in Canada is much broader under Canadian insurance legislation than under the laws governing income tax liability. For instance, any act or acts of inducement to enter into a contract of insurance or any acts relating to the performance of the contract, are deemed to constitute “engaging in the business of insurance in Canada”, this broader concept has also been adopted in provincial insurance statutes, no doubt with the commendable object of affording the widest and most comprehensive type of protection to the citizen from any inducement to part with his money in exchange for intangible promises of protection against future calamities. As an example, under subsection 20(3) of The Insurance Act RSO 1970, c 224, an insured is deemed to be carrying on business there and section 21 requires such a person to be licenced in Ontario, if the insured within the province “. . . distributes or publishes or causes to be distributed or published any proposal, circular, card, advertisement, printed form or like document, . . . or causes to be made any written or oral solicitation for insurance, . . . or delivers any policy of insurance or interim receipt . . .” [emphasis added by me]. None of these actions taken by themselves would, by any stretch of the imagination, constitute carrying on business in Canada for income tax purposes.

(b) The Facts

With the exception of the matters hereinafter mentioned, all of the findings previously mentioned would tend to directly negate any suggestion that up to and including 1976, the plaintiff might have been carrying on business in Canada in the accepted sense of the word.

The matters which might possibly suggest that the plaintiff might have been carrying on business in Canada include the following on which I have already commented:

1. the authority, duties and responsibility of McLean, the chief agent, and of his provincial counterparts;

2. the federal and provincial registrations and licensing;

3. the powers of attorney deposited with the federal and provincial departments of insurance;

4, the two operating Canadian bank accounts;

5. the method of making bank deposits;

6. the fact that an address in Don Mills was listed as the Canadian head office of the plaintiff;

7. the moneys on deposit in Canada pursuant to a special trust agreement with the Royal Trust;

8. the effect, use and purpose of addendum No 1, the premium adjustment agreement, purporting to provide for a premium collection fee.

I find that each and every one of the above offices, powers, activities, duties and documents results from compulsory requirements of the federal superintendent of insurance and of his provincial counterparts and I am satisfied that were it not for such requirements, none of these would have existed or taken place or would have been required from a business standpoint, with the exception of the maintenance of Canadian banking facilities to expedite the transfer of funds.

In view of the importance which counsel for the defendant appeared to attach to the fact that registrations were obtained and maintained both federally and provincially, further comment on that issue would seem to be warranted.

As previously stated, it has been established that registrations were originally obtained because the plaintiff at that time intended to engage in the business of selling insurance in Canada but that this plan was subsequently abandoned. As to the maintenance of the registrations, it is of some importance that the federal superintendent of insurance and the officers of his department, because of past practice and also because of the provisions of FICA, have consistently adopted a very broad view of their jurisdiction, notwithstanding the 1942 decision of the Supreme Court of Canada to the effect that FICA was ultra vires the Parliament of Canada (Reference as to Validity of Section 16 of the Special War Revenue Act, [1942] SCR 429.

The witness McLean’s experience in dealing with various foreign insurance companies seeking registration in Canada is quite extensive. I accept his evidence to the effect that foreign insurance companies generally continue to comply with FICA because registration under that Act carries a much higher degree of recognition in the business community than mere provincial licencing and also, because certain provincial jurisdictions require and rely on such registration, thus avoiding duplication of many matters including deposits to guarantee fulfillment of obligations and, finally, because it makes good sense from a business standpoint and promotes goodwill.

Because of the minimal amount of business activities within this jurisdiction which is required in order to constitute carrying on business here pursuant to insurance legislation, I cannot accept the argument of counsel for the defendant to the effect that either registration under the various insurance statutes in Canada or compliance with their provisions or with the requirements of the insurance supervisory authorities or all of these matters taken together would in any way be conclusively probative of the issue of whether the insurer carries on business in Canada, when considered in the context of potential liability for income tax, especially where, as in the case at bar, it has been established to my satisfaction that none or very few of these actions would have been taken by the plaintiff had it not been legally obliged to do so. They were not business motivated.

There are three other matters which might tend to indicate a tie or connection with Canada:

1. Associates being the insured was a Canadian company. — The mere fact that the plaintiff was doing business and entering into insurance contracts as an underwriter with a Canadian corporation does not, of course, constitute doing business in Canada. As previously stated, the contracts with Associates were undoubtedly made and entered into in the USA.

2. A brochure was at one time issued by the plaintiff for the information of the Canadian borrowers whose lives and health were insured. This brochure outlined the conditions of insurance and gave the name of the plaintiff as the insurer. Counsel for the defendant sought to establish by this fact that the plaintiff was dealing with the borrowers through Associates as its agent, was advertising its insurance in Canada and issuing coverage there to the debtors and was thus doing business in Canada. Here again, however, the brochure was issued at the insistence of the federal superintendent of insurance who also exercised direction and control over its contents. There is evidence which I accept that the plaintiff did not wish to issue it and in fact, initially sought to resist the request. The plaintiff finally, however, agreed to publish the brochure and hand it to Associates for distribution to the borrowers. Under those circumstances, one certainly cannot consider the brochure as evidence of solicitation in Canada of insurance business.

3. The third fact, namely that the debtors whose lives and health were covered by the insurance to the extent of their respective indebtedness to Associates were Canadian residents. Their dealings regarding the coverage took place in Canada. They also ultimately paid for the coverage: in the case of Policy No GR67-269, the cost of the premium was included in the overall cost of the loans and in the case of Policy No GR67-205, it was charged to the debtors as a separate item.

Who are the “Insured”?

(a) Argument of defendant

Based on the above, counsel for the defendant argued most vigorously that the two creditor group contracts entered into between the plaintiff and Associates did not in essence or at law constitute true contracts of insurance: they were really general “umbrella” insurance agreements pursuant to which the plaintiff undertook with Associates to enter into individual insurance contracts with the debtors as the money was loaned to them by Associates. It would follow that Associates was in reality acting as an agent in Canada for the plaintiff in the obtaining of insurance contracts and in the collection of premiums from individual policy holders. This would mean that the plaintiff was doing business here.

Before considering the validity of this argument, one must first of all determine what is the proper law to be applied in interpreting and determining the legal effects of those two contracts. Should it be the law of the state of Colorado or the law of Canada or, more precisely, the law of Ontario?

(b) Law of Colorado Governs

In Imperial Life Assurance Company of Canada v Colmenares, [1967] SCR 443, Mr Justice Ritchie, in delivering the reasons on behalf of the Supreme Court of Canada, laid down the test as follows at 448 of the aforesaid report:

It now appears to have been accepted by the highest Courts in England that the problem of determining the proper law of a contract is to be solved by considering the contract as a whole in light of all the circumstances which surround it and applying the law with which it appears to have the closest and most substantial connection.

This test was adopted by the Privy Council in Bony thon v. Commonwealth of Australia, [1951] AC 201, where Lord Simonds said at p. 219:

. . . the substance of the obligation must be determined by the proper law of the contract, ie, the system of law by reference to which the contract was made or that with which the transaction had its closest and most real connexion.

This approach to the problem was restated in the House of Lords in Tomkinson v First Pennsylvania Banking and Trust Co, [1961] AC 1007, per Lord Denning at p 1068 and Lord Morris of Borth-y-Gest at p 1081.

Although the location of the head office of the insurance company is not to be considered as determinative of the law to be applied to an insurance contract, where the decision to issue the policy was made there and could only have been there, the location of the head office of the underwriter is of prime importance. On this issue, Mr Justice Ritchie, in the last-mentioned case, stated at 449:

in the present case, however, in my view, the significance of the location of the head office of the appellant company is underscored by the fact that the evidence makes it quite plain that the actual decision to “go on the risk’’ was made there and could not have been made in Havana . . .

As appears from my previous findings, the decision to issue the two contracts, in the case at bar, was in fact made and could only be made at the head office of the company in Denver, Colorado.

The evidence further establishes that the applications were submitted to Denver and that they, as well as the contracts themselves, were drafted and prepared in accordance with the stipulations and requirements of the law and the statutory forms of the state of Colorado and were issued from Denver. On this subject as well, Mr Justice Ritchie had some very pertinent remarks to make. They are also to be found at 449 of the above-mentioned report:

While it is clear that all relevant circumstances surrounding the making of a contract are to be given due weight in determining the locality with which it is most closely associated, I am of opinion that in the present case the fact that both the applications and the policies were prepared in Ontario in a common, standard form which complied with the law of that Province, is to be regarded as of prepondering importance in determining the law governing the contracts.

I think it to be a reasonable inference that a person applying for insurance on a form prepared at the head office of an Ontario company would anticipate that the policies which he was to receive would be governed by the law of that Province, and I think that the form of the policies which were issued in the present case evidences the fact that the insurer intended to be governed by that law.

Having regard to the above and to my findings that claims were sent to Denver and accepted there and that payments of benefits were sent from Denver and could only be authorized from Denver, it seems abundantly clear that the governing law is that of the state of Colorado.

(c) Conclusions from Law of Colorado

Since I have concluded that, under private international law as interpreted by the courts of Ontario, the law of Colorado must be applied to the contracts, it is obviously unnecessary for me to comment on the arguments of Counsel regarding the legal consequences of applying the law of Ontario to the policies.

The plaintiff called one G P Guyton of the bar of Colorado to testify as an expert in the law of that state. The credentials of the witness in the field of commercial, insurance and taxation law are quite impressive. No expert was called by counsel for the defendant. As I stated during the trial of the action, the opinion of Mr Guyton as to the law of Colorado and as to what conclusions a court of that state would draw regarding the interpretation and the legal consequences flowing from the insurance contracts in issue, are fully supported by quotations from authors, the analysis of the American restatement and US jurisprudence. His written opinion covering a good portion of that jurisprudence was filed at trial as Exhibit P 41. The assumptions of fact which he made in that document were supported by the evidence adduced at trial.

The witness was present during the entire hearing and, in the course of his examination as a witness and also, as a result of an extensive cross-examination by counsel for the defendant, he developed and completed his written opinion.

I shall refrain from any detailed comment on the jurisprudence on which the opinion is based. I will, however, state that the weight of the jurisprudence in my view fully supports the opinion expressed by the witness.

Based on his evidence as to the law of Colorado and on my appreciation of that evidence and of the jurisprudence cited, I make the following findings:

1. that courts of the state of Colorado would also consider that the laws of that state should govern the contracts.

2. that it is Associates who is to be considered the insured and not any debtor of Associates.

3. that none of the debtors can assert any rights or claims at law against the plaintiff under the contracts of insurance: any claim which a debtor might have would have to be against Associates and the debtors would never in any manner or from any standpoint be considered as principals under the policies.

4. Associates cannot be considered as an agent of the plaintiff with regard to the policies.

I therefore conclude that the argument of counsel for the defendant to the effect that the contracts constituted mere umbrella agreements under which Associates became in effect the agents of the plaintiff must be rejected.

Finding

I find that the plaintiff has fully established to my satisfaction by positive evidence that the major parts of all its insurance business activities which in any way affected Canadian lives or Canadian interests, originally took place and were controlled in the USA and more specifically, from Denver, Colorado. There was but a minimal amount of activity in Canada in any way pertaining to the five policies which were the only ones ever in effect here and most of those activities occurred by reason of the statutory and regulatory insurance requirements of the provinces and of Canada. There was little business motivation or requirement for any of the Canadian activities, operations, appointments, authorizations or other such matters with the exception of a requirement for a Canadian bank account. I am satisfied that, in all probability, this is the only connection which the plaintiff would have maintained with Canada had it not been for the above-mentioned legal requirements.

For the above reasons, I find, by an abundance of evidence, that the plaintiff has clearly established that it does not fall within the categories of persons liable for taxation under section [2] of the Income Tax Act.

In view of this finding, I will refrain from commenting on the applicability or otherwise of the Canada-US Tax Convention Act. 1 will, however, state that I would have concluded from the evidence that the plaintiff did not have, during 1976, a permanent establishment in Canada.

Disposition of Appeal

The claim will therefore be allowed with costs and the matter will be referred back to the Minister of National Revenue for reassessment in accordance with these reasons.