Docket: A-261-23
Citation: 2026 FCA 146
|
CORAM:
|
STRATAS J.A.
MONAGHAN J.A.
GOYETTE J.A.
|
|
BETWEEN:
|
|
HIS MAJESTY THE KING
|
|
Appellant
|
|
and
|
|
THE INDEPENDENT ORDER OF FORESTERS
|
|
Respondent
|
REASONS FOR JUDGMENT
MONAGHAN J.A. and GOYETTE J.A.
[1] The Independent Order of Foresters is a fraternal benefit society that promotes charitable, educational, social, and volunteer activities to its members. It also offers them life insurance and accident and sickness insurance (accident insurance).
[2] The Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) exempts fraternal benefit societies—and thus the Order—from paying tax on their income. But this exemption does not apply to the Order’s taxable income from its life insurance business, and this taxable income must be computed on the assumption that the Order “[has] no income or loss from any other sources”
.
[3] This appeal is about whether that assumption allows the Order to blend its life and accident insurance businesses when computing its taxable life insurance income. Unlike the Tax Court of Canada (Independent Order of Foresters v. The King, 2023 TCC 123 [TCC Decision]), we find that the assumption does not allow any blending. As a result, we find that the Order made two errors in computing its taxable income.
[4] This appeal is also about the definition of “Canadian investment fund”
, a definition that applies to a Canadian-resident insurer that carries on a life insurance business in Canada and other countries. Such an insurer’s income from carrying on an insurance business is only taxable to the extent it is income from carrying on that business in Canada. To determine that income, the insurer must determine its Canadian investment fund which seeks to distinguish its “insurance assets”
from its non-insurance assets. An asset is a non-insurance asset only if “at no time [...] in the year [it] was used or held by the insurer in the course of carrying on an insurance business”
. In our view, the Tax Court misinterpreted the definition.
[5] Applying its interpretation, the Tax Court found that certain assets that the Order did not allocate to specific operations, referred to as the “World Surplus”
, are non-insurance assets. In our view, that conclusion was based on the wrong legal test and the matter should be remitted to the Tax Court for determination under the correct test.
[6] Accordingly, we would allow the appeal.
I. How Part I of the Income Tax Act taxes insurers and how the Order computed its taxable income
[7] The relevant statutory and regulatory provisions as they read for the 2014 taxation year are reproduced in the Appendix to these reasons. Unless the Income Tax Regulations (C.R.C., c. 945) are specified, references are to the provisions of the Income Tax Act.
[8] The provisions of the Income Tax Act and the Regulations that apply to insurers are numerous and highly technical. Experts in the field may read these reasons and lament the omission of certain details or rules. This is intentional. The objective is to resolve the issues before the Court through reasons that are accessible to as many readers as possible, while focusing on the provisions relevant to those issues.
A. The rules that apply to tax insurers
[9] Part I of the Income Tax Act (sections 1 to 180) levies the ordinary income tax on taxpayers: Jinyan Li & Joanne E. Magee, Principles of Canadian Income Tax Law, 11th ed (Toronto: Thomson Reuters, 2023) at 1.3 (Taxnet Pro). Section 2 says that a taxpayer pays this ordinary tax on its “
taxable income”
, that is, its “
income”
computed in accordance with the rules set out in Division B (sections 3 to 108), minus any deductions and plus any additions provided for in Division C (sections 110 to 114).
[10] Insurers provide financial protection against losses that policy holders may incur from specific events. To do so, insurers charge a fee—called a premium. To have enough money to pay claims in the event of a loss, insurers do two things: 1) they set up reserves, that is, they show a liability in their financial statements that represents funds set aside to cover possible future claims; and 2) they invest their money from the premiums in various financial instruments to generate investment revenue such as interest, and dividends: Massimiliano Maggioni & Giuseppe Turchetti, Fundamentals of the Insurance Business (Cham, Switzerland: Springer, 2024) at 93–95.
[11] Considering how insurers operate, one would expect Part I of the Income Tax Act to: a) require insurers to include in income the premiums and investment revenue they earn; and b) allow insurers to deduct the claims they pay as well as an amount for the reserves they set up. Part I of the Act, together with the Regulations, does just that. But the rules are complex, especially those that relate to the taxation of investment income. To make these reasons easier to understand, it is useful to consider five of the rules that apply to Canadian-resident life insurers.
(1) Rule 1: An insurer that sells life insurance is a life insurer
[12] The first rule is that an insurer carrying on a life insurance business is a life insurer for tax purposes, even if it also carries on another insurance business: definitions of “life insurer”
and “life insurance corporation”
in s. 248(1); Jason Swales & Erdem Erinc, Canadian Insurance Taxation, 4th ed (Toronto: LexisNexis, 2015) at 4, 233.
(2) Rule 2: Unless otherwise required, a life insurer computes its income like other taxpayers
[13] The second rule is that a life insurer computes its income in the same way as any other taxpayer unless section 138 says otherwise: s. 138(1)(d).
(3) Rule 3: A multinational Canadian-resident life insurer does not pay tax on foreign insurance income
[14] The third rule is that the income of a Canadian-resident life insurer that carries on an insurance business both in Canada and abroad is limited to its income from carrying on that business in Canada: s. 138(2)(a); Swales and Erinc at 22–23, 29, 97. Put simply, such a Canadian-resident life insurer—hereinafter a “multinational life insurer”
—is not taxed on income from its foreign insurance business.
(4) Rule 4: A life insurer uses a notional method to compute its Canadian investment income
(a) Overview of the method
[15] The fourth rule is that a multinational life insurer computes its investment income taxable in Canada using a notional amount of investment property that supports its Canadian insurance businesses. This notional method was developed because it is difficult to identify which of the multinational life insurer’s investment assets are connected to its Canadian insurance businesses and, therefore, are generating its Canadian investment income: Regulations Amending the Income Tax Regulations (Taxation of Insurers), S.O.R./2000-413, Can Gaz II, 134:26, 2529, Regulatory Impact Analysis Statement at 2550. The notional method serves to split a multinational life insurer’s investment income between Canada and the other countries in proportion to its insurance business in those jurisdictions: Swales & Erinc at 98.
[16] Simply put, the notional method requires a multinational life insurer to designate investment property (e.g. shares, real estate and bonds) the income from which will be taxed in Canada. The value of investment property that must be designated is equal to the Canadian reserve liabilities of its life insurance business, its accident and sickness insurance business, and its other insurance businesses. However, if the multinational life insurer’s Canadian investment fund (a term described in more detail below) exceeds its total Canadian reserve liabilities, the multinational life insurer must designate property equal to the excess in respect of one of its insurance businesses.
[17] For each taxation year, the multinational life insurer includes in its income from its insurance businesses the total income generated by the investment property it designated: s. 138(9).
[18] Those keen to learn about how the method works can read paragraphs [19] to [23] below. Others can skip to paragraph [24].
(b) How the notional method works in detail
[19] To be more specific, the notional method requires the multinational life insurer to find two numbers that together represent its “Canadian investment fund”
. These numbers are:
[20] The multinational life insurer must then compute the average of its opening and closing Canadian investment fund balances for the year—the “mean Canadian investment fund”
: s. 2412 of the Regulations.
[21] Once its mean Canadian investment fund has been determined, the multinational life insurer must identify investment property—such as shares, real property and bonds—in respect of each insurance business. For its Canadian life insurance business, it must designate investment property with a value equal to its average (“mean”
) Canadian reserve liabilities in respect of that business minus its average policy loans and Canadian outstanding premiums in respect of that business: definition of “designated insurance property”
in subsection 138(12) of the Act and paragraph 2401(2)(a) of the Regulations. The multinational life insurer must do a similar designation in respect of its accident insurance business and other insurance businesses: s. 138(12) of the Act and ss. 2401(2)(b), (c) of the Regulations.
[22] However, if the multinational insurer’s mean Canadian investment fund is greater than the value of the investment property that it has designated in respect of its insurance businesses, the insurer must designate the excess in respect of one of these businesses: s. 2401(2)(d) of the Regulations. Of note, the Income Tax Act and the Regulations do not specify the insurance business in respect of which the excess must be designated. The multinational life insurer can choose.
[23] Finally, subsection 138(9) of the Income Tax Act requires the multinational life insurer to include in its income from carrying on insurance businesses in Canada the total income (called “gross investment revenue”
) generated for the year by the investment property that it designated (referred to collectively as the “designated insurance property”
): ss. 138(2), 138(9)(a), 138(12).
(5) Rule 5: The life insurer must compute its life insurance income and income from other sources separately
[24] The fifth and last rule that governs the computation of a life insurer’s income under Part I is one that applies to all taxpayers: a life insurer must compute its income or loss from various sources as though each source were its only source of income and limit its deductions to those that are connected to that source: s. 4. So, if a life insurer carries on two insurance businesses—say life and accident—it must compute the income or loss from each business separately. Once this is done, the life insurer must add the income or losses from the two businesses together and the total amount becomes its “income”
under Part I: s. 3.
[25] It is important to know that life insurance and accident insurance operate differently. Policyholders keep their life insurance policies for a long time, sometimes for decades, before making a claim. As a result, life insurers have more opportunities to invest both the policy premiums and the reserves they hold to meet their future obligations to policyholders. By contrast, accident insurers operate on a shorter-term basis, often on year-to-year policies with claims that are paid out quickly and frequently. As a result, premiums are priced according to the year’s expected claims, and there is little time for sizeable reserves to accumulate: Maggioni & Turchetti at 93–94.
[26] The Income Tax Act and the Regulations take these differences into account. For instance, the reserve for life insurance is calculated differently from the reserve for accident insurance: ss. 138(3), 20(7)(c) of the Act and applicable Regulations; Swales & Erinc at 79–96.
(6) Illustration of how a multinational life insurer computes its income
[27] To make the above easier to understand, the following highly simplified chart shows how a multinational life insurer that carries on life and accident insurance businesses computes its income. The figures used in this chart are for illustrative purposes only.
|
|
Act / Regs
|
Life Insurance Business
|
Act / Regs
|
Accident Insurance Business
|
|
|
Inclusions
|
|
1
|
9, 138(2) Act
|
Premiums from life insurance business in Canada $50
|
9, 138(2) Act
|
Premiums from accident insurance business in Canada $6
|
|
2
|
138(4)(c) Act
|
Repayment of policy loans or interest on policy loans $5
|
BLANK
|
Not applicable
|
|
3
|
138(4)(a) Act
|
Reserves deducted in preceding year $20
|
12(1)(e)
|
Reserves deducted in preceding year $1
|
|
4
|
138(2), (9) and (12) Act
|
Gross investment revenue $44 obtained as follows:
|
138(2), (9) and (12) Act
|
Gross investment revenue $1 obtained as follows:
|
|
a)
|
BLANK
|
Canadian investment fund
|
|
b)
|
2400(1)(a)(i) defn of Cdn invmt fund and 2400(1) defn of Cdn reserve liabilities Regs
|
Cdn reserve liabilities ($90 re life and $10 re accident = $100) minus policy loans and outstanding premiums re life ($15) and minus outstanding premiums re accident ($5) = $80
|
|
c)
|
2400(1)(a)(ii)(B) defn of Cdn invmt fund Regs
|
Assets other than non-insurance assets ($900 re life + $140 re accident= $1,040) minus liabilities ($300 re accident) = $740 X 50% (assume weighted Canadian liabilities represent 50% of weighted total liabilities) = $370
|
|
d)
|
Total
|
$80 + $370 = $450
|
|
e)
|
BLANK
|
Mean Canadian investment fund
|
|
f)
|
2412 Regs
|
Average (50%) of the total of the opening (assume $440) and closing ($450 above) Canadian investment fund balances = $445
|
|
g)
|
IN BLANK
|
Designation
|
|
h)
|
138(12) Act and 2401(2)(a) Regs
|
Mean Cdn reserve liabilities ($90) re life insurance minus mean policy loans and outstanding premiums ($15) = $75
|
138(12) Act and 2401(2)(b) Regs
|
Mean Cdn reserve liabilities ($10) re accident insurance minus mean outstanding premiums ($5) = $5
|
|
i)
|
138(12) Act and 2401(2)(d) Regs
|
Excess: mean Canadian investment fund ($445) minus amounts designated re life ($75) and accident ($5) = $365
|
|
j)
|
138(9) Act
|
Designated assets totaling $440 ($75 for amount designated re life + $365 for excess, designated here to life at the insurer’s choice) generated a return of 10% = $44
|
138(9) Act
|
Designated assets of $5 generated a return of 10% = $0.50
|
|
5
|
Total inclusions
|
$119
|
Total inclusions
|
$7.50
|
|
|
Deductions
|
|
6
|
9 Act
|
Operating expenses $12
|
9 Act
|
Operating expenses $3
|
|
7
|
BLANK
|
Claims paid $15
|
BLANK
|
Claims paid $5
|
|
8
|
138(3)(b) Act
|
Policy loans $3
|
BLANK
|
Not applicable
|
|
9
|
138(3)(a) Act
|
Reserve for unpaid claims $40
|
20(7)(a) Act
|
Reserve for unpaid claims $1
|
|
10
|
Total deductions
|
$70
|
Total deductions
|
$9
|
|
|
BLANK
|
Income (loss) per source
|
|
11
|
3(a), 4, 138(2) Act
|
$49
|
3(a), 4, 138(2) Act
|
($1.50)
|
|
|
BLANK
|
Multinational insurer’s income for the year
|
|
12
|
3(d), 138(2) Act
|
$49 - $1.5 = $47.50
|
(7) Illustration of how a multinational life insurer computes its taxable income
[28] Since Part I taxes the insurer on its taxable income, the multinational life insurer must add to or deduct from its income the amounts provided for in Division C (sections 110 to 114) to arrive at its taxable income. For instance, if the life insurer made a charitable gift, it would deduct the amount provided for by section 110.1 from its income. If the multinational life insurer received taxable dividends from Canadian corporations, section 112 would allow a deduction. However, subsection 138(6) says that this deduction is available only if the dividends were paid on shares that are designated insurance property. Thus, to arrive at the multinational life insurer’s taxable income, the chart in paragraph [27] requires the following adjustments:
|
12
|
3(d), 138(2) Act
|
Income of $47.50
|
|
13
|
110.1 Act
|
Deduction for charitable gift of $1
|
|
14
|
112, 138(6) Act
|
Deduction for dividends $12
|
|
15
|
2 Act
|
Taxable income of $34.50
|
B. A few words on the taxation of fraternal benefit societies
[29] The rules discussed above apply to fraternal benefit societies that are multinational life insurers. However, because fraternal benefit societies are non-profit, voluntary associations, the Income Tax Act exempts their income from all activities other than their life insurance business—for example, their accident insurance business and other fraternal activities—from tax: s. 149(1)(k); Swales & Erinc at 3–4. But income from their life insurance business remains taxable, and that taxable income must be computed on the assumption that the fraternal benefit society has “no income or loss from any other sources”
: ss. 149(3), (4).
C. How the Order computed its taxable income
[30] As mentioned, the Order is a fraternal benefit society. It belongs to its members, and it offers them community activities, personal development services, as well as life and accident insurance: TCC Decision at paras. 4–6.
[31] Although the Order is a Canadian resident, it has members in Canada, the United States, and the United Kingdom: TCC Decision at para. 4. During 2014—the taxation year in issue—the Order carried on life insurance and accident insurance businesses in both Canada and the United States: TCC Decision at para. 19. Since the accident insurance business was being wound down during that year, the premiums from the accident insurance policies sold in 2014, totaling $24,000, accounted for less than 0.1% of the Order’s premiums for that year. By contrast, premiums from the life insurance policies, totaling $40.3M, accounted for more than 99.9% of the premiums: TCC Decision at para. 19.
[32] The Order did four things in computing its 2014 taxable income that the Minister of National Revenue disagrees with.
[33] First, the Order included the assets and liabilities that it reported in its accident insurance business in computing its Canadian investment fund. As the liabilities connected with these assets ($7,265,000) exceeded their reported value ($3,966,000), the inclusion reduced the Order’s Canadian investment fund by $3,299,000 and, by the same token, the amount of designated insurance property the Order had to use to compute its gross investment revenue. For the keen reader: the Order included the accident insurance assets in element I of the formula in clause 2400(1)(a)(ii)(B) of the definition of “Canadian investment fund”
and the liabilities connected with those assets in element J of the same clause.
[34] Second, the Order designated investment property with a value of $843,728 under paragraph 2401(2)(b) of the Regulations and reported the gross investment revenue from this investment property as non-taxable income from its accident insurance business. The $843,728 represents the Order’s mean Canadian reserve liabilities in respect of that business, minus its outstanding premiums.
[35] Third, in addition to that designation, the Order designated investment property with a value equal to its net Canadian reserve liabilities in respect of its life insurance business ($516,923,660) under paragraph 2401(2)(a) of the Regulations. However, because the Order’s Canadian investment fund ($717,229,732) exceeded the total of those designations by $199,462,344, the Order was required to designate additional investment property equal to this excess under paragraph 2401(2)(d) of the Regulations. The Order designated the excess in respect of its accident insurance business and reported the gross investment revenue from this “excess”
investment property as non-taxable income from that business.
[36] Fourth, the Order excluded its World Surplus assets in computing its Canadian investment fund. This is the second issue in this appeal and is addressed below starting at paragraph [90].
II. First Issue: Does the presumption in subsection 149(4) preclude the Order from computing its taxable income the way it did?
[37] The Minister asserts that subsection 149(4) of the Income Tax Act—the provision requiring a fraternal benefit society to compute its taxable income from life insurance on the assumption that it had no income or loss from any other sources—precluded the Order from doing the first three things it did.
[38] The Tax Court disagreed with the Minister.
[39] The Tax Court found that the assumption in subsection 149(4) did not preclude the Order from reducing its Canadian investment fund by the net liabilities ($3,299,000) connected to its accident insurance assets nor from designating investment properties ($843,728) to its accident insurance business: TCC Decision at paras. 61 and 81. It also found that paragraph 2401(2)(d) of the Regulations gave the Order the discretion to designate the $199,462,344 excess to the insurance business of its choice—here, the accident insurance business—and treat that amount as non-taxable: TCC Decision at para. 87.
[40] Since the Tax Court’s findings are grounded in statutory interpretation, we must determine whether they are correct. We conclude that they are not entirely correct. Under the proper interpretation of subsection 149(4) and the relevant provisions, the Order could not reduce its Canadian investment fund by the net liabilities ($3,299,000) related to its accident insurance assets, nor could it designate the excess from its Canadian investment fund ($199,462,344) to its accident insurance business.
III. Correctly interpreted, the presumption in subsection 149(4) precluded the Order from doing two of the three things that the Minister disagreed with
[41] The modern principle of interpretation commands that the words of a statute be read “in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”
: Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27, 1998 CanLII 837 (S.C.C.) at para. 21, quoting E. A. Driedger, Construction of Statutes, 2d ed. (Toronto: Butterworths, 1983) at 87; Quebec (Commission des droits de la personne et des droits de la jeunesse) v. Directrice de la protection de la jeunesse du CISSS A, 2024 SCC 43 at para. 23; and Piekut v. Canada (National Revenue), 2025 SCC 13 at paras. 42–43. The text is often regarded as the “anchor”
or key starting point in this process, and this is often especially true in income tax cases: CISSS A at para. 24; Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601 at para. 11; Hunt v. Canada, 2026 FCA 88 at para. 13.
[42] Thus, to interpret subsection 149(4), we must look at its text, context and purpose.
A. The text of subsection 149(4)
(1) The text requires a computation of income, then of taxable income, in isolation
[43] Subsection 149(4) says that “the
taxable income of [a fraternal benefit society] from carrying on a life insurance business shall be computed on the assumption that it had
no income or loss from any other sources”
(emphasis added).
[44] Read literally, subsection 149(4) instructs a fraternal benefit society to compute the items in the “Life Insurance Business”
column of the chart at paragraphs [27] and [28] all the way down to line 15—the taxable income line—as if the fraternal benefit society had no income or loss from its accident insurance business. In practical terms, subsection 149(4) requires the fraternal benefit society to ignore the elements in the “Accident Insurance Business”
column of the chart at paragraphs [27] and [28].
(2) The same is true when the text of subsection 149(4) applies to the computation of gross investment revenue under subsection 138(9) and the Regulations
[45] A review of the chart at paragraph [27], specifically lines 4a) to f), may give the impression that one cannot ignore the “Accident Insurance Business”
during the first steps of the computation of the gross investment revenue under subsection 138(9) of the Income Tax Act. However, the text of subsection 149(4) shows that this is misleading.
[46] Again, the text of subsection 149(4) requires a fraternal benefit society to compute its taxable income from its life insurance business on the assumption that it has no income or loss from any other sources. Therefore, to give effect to subsection 149(4), a fraternal benefit society must determine the amount of gross investment revenue from the designated property in respect of its life insurance business and assume that it has no gross investment revenue from its other insurance businesses. This means that if the chart at paragraph [27] concerned a multinational fraternal benefit society, lines 4a) to j) would show the following figures which are explained below:
|
|
Act / Regs
|
Life Insurance Business
|
|
4
|
138(2), (9) and (12) Act
|
Gross investment revenue $52 obtained as follows:
|
|
a)
|
BLANK
|
Canadian investment fund
|
|
b)
|
2400(1)(a)(i) defn of Cdn invmt fund and 2400(1) defn of Cdn reserve liabilities Regs
|
Cdn reserve liabilities ($90 re life) minus policy loans and outstanding premiums ($15 re life) $75
|
|
c)
|
2400(1)(a)(ii)(B) defn of Cdn invmt fund Regs
|
Assets other than non-life insurance assets ($900 re life) minus liabilities ($0 re life) = $900 X 50% (Canadian liabilities over total) = $450
|
|
d)
|
Total
|
$75 + 450 = $525
|
|
e)
|
BLANK
|
Mean Canadian investment fund
|
|
f)
|
2412 Regs
|
Average (50%) of the opening (assume $515) and closing ($525) Canadian investment fund balances = $520
|
|
g)
|
BLANK
|
Designation
|
|
h)
|
138(12) Act and 2401(2)(a) Regs
|
Mean Cdn reserve liabilities ($90) re life insurance minus mean policy loans and outstanding premiums ($15) = $75
|
|
i)
|
138(12) Act and 2401(2)(d) Regs
|
Excess: mean Canadian investment fund ($520) minus amount designated re life ($75) = $445
|
|
j)
|
138(9) Act
|
Designated assets totaling $520 ($75 for amount designated re life + $445 for excess, designated to life on the assumption that there is no income or loss from other sources) generated a return of 10% = $52
|
[47] Applying subsection 149(4) to the computation of its gross investment revenue, the fraternal benefit society must first determine the two amounts that together make up its “Canadian investment fund”
by:
-
Limiting its liabilities and reserves to those in respect of its life insurance business net of their outstanding premiums and policy loans: subparagraph (a)(i) of the definition of “Canadian investment fund”
in s. 2400(1) and elements A(a) and B of the definition of “Canadian reserve liabilities”
in s. 2400(1) of the Regulations. Thus, if the multinational life insurer was a fraternal benefit society, line 4b) of the chart at paragraph [27] would show $75 ($90 minus $15);
-
Taking the reported amount of all its assets (except those at no time used or held in its life insurance business) minus the liabilities connected to these assets and multiplying this amount by the percentage that its Canadian liabilities represent of its total liabilities: elements I, J, M and N of clause (a)(ii)(B) of the definition of “Canadian investment fund”
in s. 2400(1) of the Regulations. Accordingly, if the chart at paragraph [27] concerned a fraternal benefit society, line 4c) would show $450 ($900 X 50%). In the case at hand, this means that the Order could not include the amount of the assets that it used in its accident insurance business in the computation of its Canadian investment fund. At no time in the year were those assets used or held in the course of carrying on the Order’s life insurance business. For the same reason, the Order could not reduce its Canadian investment fund by the amount of the liabilities related to these assets.
[48] Once the fraternal benefit society has its Canadian investment fund, it must compute the average opening and closing balances of such fund—its mean Canadian investment fund: section 2412 of the Regulations. For the chart, we assume that the opening Canadian investment fund balance would be $515 with the consequence that line 4f) of the chart would be $520.
[49] The fraternal benefit society must then designate investment property with a value equal to its mean Canadian reserve liabilities in respect of its life insurance business minus its average policy loans and Canadian outstanding premiums in respect of that business: definition of “designated insurance property”
in subsection 138(12) of the Act and paragraph 2401(2)(a) of the Regulations. Consequently, line 4h) of the chart would only show $75.
[50] If the amount of the mean Canadian investment fund is greater than the value of the investment property that the fraternal benefit society has designated in respect of its Canadian life insurance business, the society must designate the excess to its life insurance business, since it must assume that it has no income or loss from other sources: subsection 149(4) and paragraph 2401(2)(d) of the Regulations. Thus, line 4i) of the chart would show $445 ($520 minus $75). Applied to the case at hand, subsection 149(4) means that the Order could not designate the excess of $199,462,344 to its accident insurance business. The excess of the Order’s mean Canadian investment fund computed in accordance with the second bullet of paragraph [47] and paragraph [48] had to be designated to the Order’s life insurance business.
[51] Finally, the fraternal benefit society must include in its income from carrying on its life insurance businesses in Canada the “gross investment revenue”
generated for the year by the investment property that it designated to its life insurance business: ss. 138(9)(a), 138(12), 149(4). So, if the chart concerned a fraternal benefit society, lines 4 and 4j) would show gross investment revenue of $52 ($520 x 10% return).
[52] Based on the foregoing, the text of subsection 149(4) reveals that in computing the gross investment revenue under subsection 138(9) from its life insurance business, a fraternal benefit society cannot reduce its Canadian investment fund by the net liabilities (in this case, $3,299,000) connected to its accident insurance assets, nor can it designate an excess from its Canadian investment fund (here, $199,462,344) to its accident insurance business. Put simply, the text of subsection 149(4) does not permit a fraternal benefit society to blend its life and accident insurance businesses when computing its taxable income from its life insurance business. Instead, subsection 149(4) requires the society to exclude items from its other insurance businesses when computing its income and taxable income from its life insurance business carried on in Canada, including its gross investment revenue from that business.
B. Context
[53] The modern principle of interpretation requires that one’s initial impression from reading the text be “tested against the inferences that may be drawn from considering other provisions of the [
Income Tax Act], its components and its overall scheme”
: Ruth Sullivan, The Construction of Statutes, 7th ed (Toronto: LexisNexis Canada, 2022) at §13.02 [1]. This is part of the contextual analysis that courts must consider when interpreting statutory provisions.
[54] Although the exact language of subsection 149(4) does not appear elsewhere in the Income Tax Act, a few provisions use similar language. These include ss. 4, 114(a), 146(10.1), 146.1(5), 147.5(8). Together, these provisions confirm that subsection 149(4) requires a fraternal benefit society to compute its taxable income from its life insurance business in isolation, excluding elements attributable to its other insurance businesses.
(1) Section 4, the provision most similar to subsection 149(4), confirms income from accident insurance cannot affect life insurance income
[55] Section 4 is the provision most similar to subsection 149(4), but the two differ in one important respect. Both provisions proceed on the assumption that there is no income or loss from any other sources. However, subsection 149(4) applies that assumption to the computation of the “
taxable income … from carrying on a life insurance business”
, whereas section 4 applies it to the computation of a taxpayer’s “
income or loss from [a source]”
(emphasis added).
[56] Accordingly, under section 4, a taxpayer computes income or loss on a source-by-source basis, but only until the income or loss from each source has been determined. Once this is done, section 3 requires the taxpayer to combine the income and losses from all sources and determine the amount, if any, by which the total income exceeds the total losses; this amount becomes “the taxpayer’s income for the year”
: ss. 3(a), (d), (e). In contrast, subsection 149(4) requires a fraternal benefit society to compute its life insurance income by source until the taxable income from its life insurance business has been determined. In other words, at no time does subsection 149(4) allow another source of insurance income—here accident insurance—to affect the amount of income and taxable income from life insurance.
(2) Other provisions lead to the same conclusion
[57] A few provisions of the Income Tax Act require that taxable income be computed as if there were no income or loss from any other source. These provisions confirm that the taxpayer must disregard other sources when computing its taxable income.
[58] The language used in section 146, the provision dealing with “registered retirement savings plans”
(RRSPs), illustrates this. An RRSP is exempt from Part I tax on its taxable income: s. 149(1)(r). However, if it carries on a business or holds a non-qualified investment, paragraph 146(4)(b) and subsection 146(10.1) say that the RRSP will pay tax on the amount that would be its taxable income “if it had no incomes or losses from sources other than”
that business or that non-qualified investment. Identical rules exist for registered education saving plans (subsection 146.1(5)) and registered pension plans (subsection 147.5(8)), and they use identical language. Just like subsection 149(4), the language of these provisions isolates the income of the plan for the purpose of determining its taxable income with the consequence that income and loss from other sources cannot affect the income nor taxable income of these plans.
[59] The same is true for the computation of the taxable income of an individual who is a resident of Canada during part of a taxation year. Paragraph 114(a) provides that this individual’s taxable income is the amount that “would be the individual’s income for the year if the individual had no income or losses, for the part of the year throughout which the individual was non-resident, other than income or losses [from Canadian sources]”
. As a result, a loss from a foreign source incurred during the part of the year in which the individual does not reside in Canada will not reduce the individual’s Canadian income nor taxable income.
(3) The Income Tax Act as a whole and the presumption that unjust results are not intended support this interpretation
[60] The context of a legislative provision includes the statute as a whole: Sullivan at §13.01. In reading the Income Tax Act as a whole, one assumes that its provisions fit together to form a coherent and workable scheme: Sullivan at §13.02 [3].
[61] For this to happen here, and more particularly for subsections 149(4) and 138(9) and the related Regulations to fit together to form a coherent and workable scheme, fraternal benefit societies must compute their gross investment revenue under subsection 138(9) in accordance with subsection 149(4). This requires societies to exclude items from their other insurance businesses when performing the computation.
[62] Why? Because the notional method, as explained above, serves to split a multinational life insurer’s investment income between Canada and the other countries where it carries on insurance businesses.
[63] Subsection 138(9), the culmination of the notional method, does not serve to shield Canadian investment income from taxation. Yet, that is the result if subsection 149(4) is not applied to subsection 138(9) as the text mandates—that is, if a fraternal benefit society does not compute its taxable life insurance income in isolation and instead considers items from other insurance businesses in the computation. In the case at hand, when the Order reduced its Canadian investment fund by $3,299,000 of net liabilities connected to its accident insurance assets and designated the $199,462,344 excess to its accident insurance business, it designated fewer assets in respect of its life insurance business and, therefore, subjected less Canadian investment income to taxation.
[64] As well, the notional method does not serve to treat multinational fraternal benefit societies more favourably than fraternal benefit societies that carry on insurance businesses only in Canada. But this is the result if subsection 149(4) is not applied to subsection 138(9) as the text mandates. Let us explain.
[65] The notional method does not apply to fraternal benefit societies that carry on insurance businesses only in Canada. These societies compute their investment income from their life insurance and other insurance businesses in accordance with other provisions of the Income Tax Act, such as ss. 12(1)(j) and (k), 82(1), 90(1), 112(5) and (5.4), 142.5(2) and (3). Like other taxpayers, they compute their income on a source-by-source basis: s. 3. When investment income is computed under these provisions, and in accordance with subsection 149(4), there is no opportunity to blend elements from various insurance businesses. Had the Order carried on its life and accident insurance businesses only in Canada, it is inconceivable that it could have treated the investment income from $199 million in assets as income from its accident insurance business. That business was winding down and its Canadian reserve liabilities for that business were less than $1 million. Notably, the Order reported $5,011,000 in 2013, and $3,966,000 in 2014, as assets in respect of its accident insurance business: TCC Decision at para. 20.
[66] When interpreting a legislative provision, we must consider the presumption that Parliament does not intend unjust, inequitable or absurd results: Ontario v. Canadian Pacific Ltd., [1995] 2 S.C.R. 1031, 1995 CanLII 112 (S.C.C.) at para. 65; Gitxaala Nation v. Canada, 2016 FCA 187 at para. 162. The interpretation of subsection 149(4) that avoids those results requires a fraternal benefit society to exclude items from its other insurance businesses when computing its gross investment revenue under subsection 138(9).
(4) The external context also supports the conclusion that income from accident insurance cannot affect life insurance income
[67] Finally, the external context of a provision includes the setting in which the legislation was intended to operate and in fact operates. To use the words of Ruth Sullivan, “[t]he key assumption here is that legislation is not an academic exercise. It is a response to circumstances in the real world”
: Sullivan at § 1.05 [4]. We must consider “how the statutory scheme operates on the ground”
: West Fraser Mills Ltd. v. British Columbia (Workers’ Compensation Appeal Tribunal), 2018 SCC 22 at para. 41.
[68] Here, subsections 149(4) and 138(9) apply to multinational fraternal benefit societies that carry on a life insurance and another insurance business. As previously noted, life insurers have more opportunities to invest both accumulated policy premiums and the reserves that they hold to meet their future obligations to policyholders. Therefore, it stands to reason that they generate more investment income than accident insurers, which operate on a short-term basis. An interpretation of subsections 149(4) and 138(9) that reads out a fraternal benefit society’s obligation to compute its taxable income from life insurance in isolation, excluding elements attributable to its other insurance businesses, would disregard how these provisions operate on the ground. Put differently, by reducing its Canadian investment fund by the liabilities related to its accident insurance assets and by designating its excess Canadian investment fund in respect of its accident insurance business, the Order sheltered from taxation gross investment revenue that supported its taxable life insurance business. This cannot be permitted.
C. Purpose
[69] Until 1969, fraternal benefit societies were exempt from tax. The purpose of subsections 149(3) and 149(4) was to make the income from their life insurance business taxable: Canada, Royal Commission on Taxation, Report of the Royal Commission on Taxation, vol. 4 (Ottawa: Queen’s Printer, 1966) at 432; House of Commons Debates, 28-1, vol. 2 (22 October 1968) at 1686 (Hon Edgar Benson). However, the taxable income from their other activities, such as accident insurance and fraternal benevolent services, was to remain exempt from tax: s. 62(1)(h) of the Income Tax Act, R.S.C. 1952, c. 148, as amended by S.C. 1968-69, c. 44, now s. 149(1)(k). This new regime was premised on the fact that fraternal benefit societies would divide their activities into their separate functions so that the appropriate tax treatment could be applied to each: Report of the Royal Commission on Taxation, vol. 4 at 129–130.
[70] The only interpretation that gives effect to that purpose is the one outlined above. It requires a fraternal benefit society to compute the taxable income from its life insurance business in isolation and, in so doing, ignore items from its other insurance businesses.
D. Conclusion
[71] The correct interpretation of subsection 149(4) leads to the conclusion that the Order did two things that it could not do: 1) it could not include the assets that it reported as used or held in its accident business in the computation of its Canadian investment fund and reduce that fund by the net liabilities of $3,299,000 related to those assets; and 2) it could not designate the excess of $199,462,344 in respect of its accident insurance business.
[72] However, the fact that subsection 149(4) requires a fraternal benefit society to compute, in isolation, its taxable income from its life insurance business, including the gross investment revenue from that business, does not mean that no other sources of income exist. It means only that those other sources do not affect the computation of taxable income from the life insurance business. Here, subsection 149(4) does not prevent the Order from designating $843,728 under paragraph 2401(2)(b) of the Regulations. That amount represents its net mean Canadian reserve liabilities in respect of its accident insurance business. But, given the effect of subsection 149(4), that designation is of no consequence because any income from the designated insurance property in respect of the accident insurance business is exempt from tax.
IV. Flaws in the Tax Court’s Interpretation
[73] The Tax Court concluded that the Order was entitled to designate $843,728 to its accident insurance business under paragraph 2401(2)(b) of the Regulations. Because we agree with that conclusion, albeit for different reasons, we need not comment on that aspect of the Tax Court’s reasoning.
[74] However, the Tax Court’s other two conclusions merit comment.
A. The flaws in the Tax Court’s conclusion that the Order could reduce its Canadian investment fund by the liabilities related to its accident business assets
[75] As mentioned, the Tax Court concluded that the assumption in subsection 149(4) did not preclude the Order from reducing its Canadian investment fund by the net liabilities ($3,299,000) related to its accident insurance assets. To be specific, the Tax Court concluded that subsection 149(4) does “not affect the determination of the [Order’s Canadian investment fund]”
: TCC Decision at paras. 48, 61.
[76] In our view, while the Tax Court rightly noted that subsections 149(3) and 149(4) and their predecessors always referred to “taxable income”
(TCC Decision at paras. 53–60), it made the following errors in its analysis of the text and context of subsection 149(4).
[77] First, the Tax Court said that, because subsection 149(4) is a computation rule—it tells fraternal benefit societies to compute their taxable income from life insurance as if there were no income or loss from other sources—it could not apply to the definition of “Canadian investment fund”
because that definition is based on assets and liabilities: TCC Decision at paras. 40–42. This overlooks the fact that the Canadian investment fund is one of the elements required to determine gross investment revenue under subsection 138(9). Instead, the real issue is whether subsection 149(4), a computation rule specific to fraternal benefit societies, applies to subsection 138(9), another computation rule specific to multinational life insurers.
[78] Second, although the Tax Court acknowledged that the Canadian investment fund is relevant to determining the gross investment revenue of multinational life insurers, it held that subsection 149(4) could not apply to subsection 138(9) because subsection 149(4) applies to the computation of taxable income, whereas the rules in section 138—specifically subsections 138(1), (2), and (9)—apply to the computation of income: TCC Decision at para. 47.
[79] We disagree.
[80] We note that section 138 does not apply solely to the computation of income. It also contains a rule regarding the computation of taxable income: subsection 138(6).
[81] More importantly, the Tax Court’s conclusion overlooks the fact that subsections 149(3) and (4) are exceptions to the rule in paragraph 149(1)(k) which provides that “[n]o tax is payable under [Part I] on the
taxable income”
of fraternal benefit societies (emphasis added). Consistent with that, subsection 149(3) says that the rule in paragraph 149(1)(k) does not apply to the taxable income of a fraternal benefit society from its life insurance business and subsection 149(4) mandates the assumption in computing this taxable income. This is also consistent with the provisions of the Income Tax Act dealing with RRSPs and similar plans, discussed in paragraphs [58] and [59] above. These provisions concern exemptions from Part I tax on the taxable income of RRSPs and other plans and, therefore, provide rules for computing taxable income.
[82] But the fact that subsection 149(4) refers to “taxable income”
does not mean that the fraternal benefit society need not first compute its “income”
.
[83] The Tax Court thought otherwise. It said that the reference to “taxable income”
in subsection 149(4) means that the provision applies only after the fraternal benefit society has determined its “income”
in accordance with the rules in Division B (sections 3 to 108) and is computing its “taxable income”
under Division C (sections 110 to 114): TCC Decision at para. 44. The Tax Court identified only one provision of Division C to which subsection 149(4) would apply: section 111. The Tax Court said that subsection 149(4) would apply to section 111 and prevent a fraternal benefit society from deducting losses from other businesses in computing its taxable income from its life insurance: TCC Decision at para. 45.
[84] There can be no dispute subsection 149(4) applies to section 111. The problem is that section 111 does not concern the deductibility of losses from other businesses. It contains the carryover rules, rules under which a loss sustained in one year may be carried backward or forward to another year for the purpose of computing the taxable income of that other year. As discussed at paragraph [24] above, section 3 allows a taxpayer to deduct the loss from one business against the income from another business in computing its income. The Tax Court’s interpretation—limiting the application of subsection 149(4) to Division C (sections 110 to 114)—would permit a current year loss in another business to be deducted from the life insurance business income. That cannot be the case.
[85] Finally, to support its conclusion that subsection 149(4) applies only after the fraternal benefit society has determined its “income”
and is computing its “taxable income”
, the Tax Court compared subsection 149(4) with subsection 149(5): TCC Decision at paras. 49–52.
[86] Subsection 149(5) imposes tax on certain income and capital gains of non-profit organizations—such as a golf club—which are exempt from tax under paragraph 149(1)(l) when the main purpose of that club is to provide dining, recreational, or sporting facilities for its members. To this end, subsection 149(5) deems the club’s property to be held in a trust and sets out rules applicable to the deemed trust. One of these rules is at paragraph 149(5)(e). It states that the “
income and taxable income of the trust for each taxation year shall be computed on the assumption that it had no incomes or losses other than [incomes and losses from property and certain capital gains and losses]”
(emphasis added). For the Tax Court, the reference to both “income and taxable income”
demonstrates that the reference to “taxable income”
in subsection 149(4) limits the application of that provision to the computation of taxable income, that is, to the five sections in Division C (sections 110 to 114).
[87] However, paragraph 149(5)(e) must refer to “income”
because it modifies “income”
. More specifically, paragraph 149(5)(e) tells the deemed trust that instead of computing its “income”
in accordance with the rules set out in Division B (sections 3 to 108), it shall include in its income only “incomes or losses from property”
and certain capital gains and losses because that income—no matter how closely connected to the operation of the dining, recreational, or sporting facilities—does not qualify for the tax exemption. In other words, that income must be treated as a separate source of income notwithstanding that, absent paragraph 149(5)(e), it might be considered part of the club “business”
source. By contrast, subsection 149(4) does not modify “income”
and, therefore, does not need to refer to “income”
.
B. The flaws in the Tax Court’s conclusion that the Order had discretion
[88] The Tax Court concluded that paragraph 2401(2)(d) of the Regulations gave the Order discretion to designate the $199,462,344 excess in its Canadian investment fund to the insurance business of its choice—here, the accident insurance business. This conclusion was premised on its view that subsection 149(4) applies only after the fraternal benefit society has determined its “income”
in accordance with the rules in Division B (sections 3 to 108) and is computing its “taxable income”
under Division C (sections 110 to 114): TCC Decision at paras. 80, 89, 95. Therefore, for the Tax Court, subsection 149(4) could not apply to the designation process used to determine the fraternal benefit society’s gross investment revenue under subsection 138(9): TCC Decision at paras. 80, 89, 95.
[89] We agree that paragraph 2401(2)(d) of the Regulations allows a multinational life insurer to designate its Canadian investment fund excess to the insurance business of its choice: see paragraph [22] above. However, for the reasons discussed above, no such discretion is available to a fraternal benefit society that must compute the taxable income from its life insurance business in accordance with the assumption in subsection 149(4) that it has “no income or loss from any other source.”
V. Second Issue: What is the proper interpretation of element I of the definition of Canadian investment fund?
A. What is the issue?
(1) A short recap and introduction
[90] As explained above, a life insurer has a long investment horizon and may hold significant investment property worldwide to support its life insurance obligations. Canada does not tax a multinational life insurer on its worldwide income. Instead, a notional method allocates the insurer’s income from its insurance businesses between Canada and other countries. Canada then taxes only the income attributable to the insurer’s insurance businesses carried on in Canada.
[91] The notional method requires a Canadian-resident multinational life insurer to determine the amount of its Canadian investment fund. The insurer must then designate investment property equal to that amount (the designated insurance property). The gross investment revenue earned from that property—and only from that property—is included in the insurer’s income from carrying on its insurance businesses in Canada: s. 138(9) of the Act and s. 2401(2) of the Regulations.
[92] Thus, the Canadian investment fund acts as the measure of the amount of assets (investment property) comprising the multinational life insurer’s Canadian insurance business. Therefore, it is appropriate to treat income from assets equal to that amount as the income from carrying on its insurance businesses in Canada that is taxable in Canada.
[93] Recall that the Canadian investment fund is comprised of two numbers. The first is the insurer’s net Canadian reserve liabilities. That first number is not in dispute in this appeal.
[94] The second number is based on the amounts reported as the insurer’s assets and liabilities and certain other amounts not relevant to this appeal. Only one component of the second number—element I from clause 2400(1)(a)(ii)(B) of the definition of “Canadian investment fund”
—is relevant to the second issue in this appeal:
I is the total of all amounts each of which is the amount of an item reported as an asset of the insurer as at the end of the year (other than an item that at no time in the year was used or held by the insurer in the course of carrying on an insurance business)
[95] The “amount of an item reported as an asset”
is the amount reported, or that would be reported, in the insurer’s non-consolidated year-end balance sheet accepted by the Superintendent of Financial Institutions: s. 2400(3) of the Regulations: TCC Decision at para. 179. This balance sheet is referred to below as the “non-consolidated balance sheet”
.
[96] The Tax Court concluded that only assets that appear (or are included in an item that appears) on the non-consolidated balance sheet are relevant to element I: TCC Decision at para. 194. This aspect of the Tax Court’s decision is not disputed in this appeal.
(2) The Minister included the World Surplus on the Order’s non-consolidated balance sheet in the Order’s Canadian investment fund computation
[97] The Order’s non-consolidated balance sheet filed with the Superintendent of Financial Institutions included an amount for surplus, one component of which was “World Surplus”
. World Surplus refers to the portion of the Order’s total surplus (the excess of assets over liabilities) that the Order did not allocate to any specific operation: TCC Decision at para. 123.
[98] The Order maintains that the World Surplus assets are excluded from its Canadian investment fund under the parenthetical phrase in element I, namely, “an item that at no time in the year was used or held by the insurer in the course of carrying on an insurance business”
(the “exclusion”
). In other words, the Order says that the World Surplus assets are non-insurance assets, as we use that term (see paragraph [4] above). The Minister, however, assessed the Order on the basis that none of the World Surplus assets fell within the exclusion. The Minister took the position that those assets had to be included in the Order’s Canadian investment fund because they appeared on the Order’s non-consolidated balance sheet. The Minister assumed that those assets were used or held in the course of carrying on the Order’s life insurance business: TCC Decision at para. 178. This dispute between the parties gives rise to the second issue.
(3) The Tax Court’s approach to the dispute
[99] The Tax Court approached the interpretation of element I as if it required a determination of whether the assets are used or held in the course of carrying on an insurance business: TCC Decision at paras. 97, 185, 189, 191, 202, 206, 209.
[100] After reviewing the jurisprudence, the Tax Court concluded that the “employed and risked”
standard is “applicable to determine whether an insurer’s investment assets are used or held in carrying on an insurance business”
: TCC Decision at para. 147. Then it summarized the governing principles as follows (at para. 148):
1. Whether an item is “used or held by the insurer in the course of carrying on an insurance business” is a question of fact, once the legal standard is defined. (Munich Re, Marsh & McLennan, Liverpool and London)
2. The legal test for whether an item is “used or held by the insurer in the course of carrying on an insurance business” is whether the investment assets are “necessary” for the insurance business, “employed and risked in the business” in the sense of being “linked to some definite obligation or liability of the business” or “integral to the continued operation of the business”. (ACTRA, majority, citing Ensite and Marsh & McLennan) Determining this would involve actuarial calculations and expert testimony at trial. Insurers often maintain excess reserves and it will be a matter of expert opinion as to when surplus assets are not necessary or integral to the continued operation of the business.
3. The test is objective. (ACTRA, majority)
4. While an insurer must engage in investment activities as an essential aspect of its insurance business, it is possible for an insurer to have investments that are not “part of” its insurance business. (Munich Re)
5. In determining, whether as a matter of fact, an investment asset is used or held by an insurer in the course of carrying on an insurance business, it is appropriate to consider: whether the assets are held as part of an insurance fund/account or held separately, whether the insurer’s filings with the regulator (e.g. OSFI) indicate income on the investments as income from the insurance business; whether actuarial calculations indicate the investment assets are necessary to satisfy future liabilities to policyholders. (ACTRA, majority, Lutheran Life)
6. It may be appropriate to draw an inference, where investments are within an insurance fund/account (or outside) that the assets are necessary (or not) for the relevant insurance business, which can be met with objective evidence to the contrary. (ACTRA, majority)
[101] The Tax Court then turned to determining what assets were necessary for the Order to carry on its insurance business. Having regard to actuarial and other evidence, it concluded that the Order’s available capital in its insurance businesses exceeded its required capital by more than the World Surplus assets in issue: TCC Decision at paras. 172, 221. As a result, it concluded that none of the World Surplus assets would be included in the Canadian investment fund unless “as a matter of fact”
they were “used or held in the course of carrying on [the Order’s] insurance business”
: TCC Decision at paras. 177, 221.
(4) The Minister submits that the Tax Court made an interpretive error
[102] The Minister submits that the Tax Court erred. The Minister says that while initially describing its task as identifying the test for determining when assets are not used or held in the course of carrying on an insurance business—mimicking the language of the exclusion—the Tax Court instead identified a test for determining when assets are used or held in the course of carrying on an insurance business.
[103] The Minister says element I presumes all assets on the non-consolidated balance sheet are included in the Canadian investment fund without regard to how the assets are held or used. As a second step, an asset may be excluded, but only if the insurer establishes that at no time in the year was the asset used or held in the course of carrying on an insurance business.
[104] However, the Tax Court’s approach was the opposite. Rather than undertaking a statutory interpretation analysis, the Tax Court relied on inapplicable jurisprudence and concluded that all the World Surplus assets should initially be excluded. It then asked whether, as a factual matter, the Order used or held any of the excluded World Surplus in the course of carrying on an insurance business. The Minister says that by framing the test as it did, the Tax Court effectively read out the presumption.
B. The proper interpretation of element I
[105] The interpretation of element I is a question of law reviewed on a correctness standard. The following paragraphs undertake a statutory interpretation analysis of subsection 2400(1) of the Regulations, specifically of element I in the definition of Canadian investment fund, with reference to its text, context and purpose.
(1) The text supports a two-step approach: the text supports the inclusion of all assets that an insurer reports unless they are specifically excluded
[106] As mentioned above, a statute’s text has been described as the anchor of the interpretive exercise because it “specifies, among other things, the means chosen by the legislature to achieve its purposes”
: CISSS A at para. 24. The ordinary meaning of the text is “the natural meaning which appears when the provision is simply read through as a whole”
: Canadian Pacific Air Lines Ltd. v. Canadian Air Line Pilots Assn., [1993] 3 S.C.R. 724, 1993 CanLII 31 (S.C.C.) at 735.
[107] Taking that approach to element I, the text outside the parentheses states that every asset reported on the multinational life insurer’s non-consolidated balance sheet must be included in the insurer’s Canadian investment fund. The text does not require that the assets be used or held in the course of carrying on an insurance business. The only question is whether the asset appears on the non-consolidated balance sheet. If it does, it is caught by the language outside the parentheses. In other words, the text starts with a presumption: every asset on the non-consolidated balance sheet is included in the Canadian investment fund.
[108] Turning to the text of the exclusion, it permits an asset to be excluded only when the insurer did not at any time in the year use or hold that asset in the course of carrying on an insurance business. That is a “non-insurance asset”
referred to at paragraph [4] above.
[109] Three aspects of the text of the exclusion are noteworthy.
[110] First, it requires proof of a negative—that the asset was not used or held in the course of carrying on an insurance business.
[111] Second, there is an exclusivity requirement. An asset cannot be excluded unless the insurer establishes it was at no time during the year—however briefly—used or held in the course of carrying on an insurance business. In other words, it must be exclusively used and held otherwise than in the course of carrying on an insurance business.
[112] Third, the property cannot have been used or held in the course of carrying on an insurance business. The concepts of holding property and using property are distinct: Munich Reinsurance Co. v. Canada, 2001 FCA 365 at para. 28. Where different words are used, there is a presumption different meanings are intended: Sullivan at §8.04. One meaning of hold is “to have possession or ownership of or have at one’s disposal”
: Merriam-Webster Unabridged Dictionary, online: Merriam-Webster https://www.merriam-webster.com, sub verbo “hold”
. Although one may simultaneously hold and use an asset, one may also hold an asset without using it.
[113] The text leads to the following interpretation: every asset reported on the insurer’s non-consolidated balance sheet is presumptively included by element I. Only if the evidence establishes that an asset was neither used nor held in the course of carrying on an insurance business at any time in the year is that presumption rebutted.
(2) The context does not suggest a different interpretation
(a) The Canadian investment fund definition
[114] Because element I forms part of the definition of “Canadian investment fund”
, the definition as a whole forms part of its immediate context and must be considered when determining the meaning of element I. The first observation about the definition is that, despite the term “investment fund”
, a Canadian investment fund is not a group of particular assets. It is a number based on the assets and liabilities included on the non-consolidated balance sheet. Element I concerns only the assets and necessarily increases the Canadian investment fund.
[115] On the other hand, liabilities on the non-consolidated balance sheet reduce the Canadian investment fund. Element J addresses this and parallels element I:
J is the total of all amounts each of which is the amount of an item reported as a liability of the insurer (other than a liability that was at any time in the year connected with an asset that was not used or held by the insurer in the course of carrying on an insurance business at any time in the year) as at the end of the year in respect of an insurance business carried on by the insurer in the year
[116] Element J exhibits significant similarities to element I.
[117] First, it is presumptively inclusionary: all liabilities an insurer reports on its non-consolidated balance sheet in respect of an insurance business it carried on in the year are presumptively deducted in determining the insurer’s Canadian investment fund.
[118] Second, as with element I, there is a parenthetical exception. A liability cannot be deducted if, at any time in the year, it was connected with “an asset that was not used or held by the insurer in the course of carrying on an insurance business at any time in the year”
. This phrase obviously refers to property within the exclusion in element I—the non-insurance property.
[119] Thus, like element I, element J has an exclusivity requirement: a liability cannot be deducted unless it was not at any time in the year—however briefly—connected with a non-insurance property and was reported in the non-consolidated balance sheet in respect of an insurance business the insurer carried on in the year. Put another way, a liability reduces the insurer’s Canadian investment fund only if it was exclusively related to an insurance business throughout the year. As a result, an insurer cannot increase its deductible liabilities by recategorizing liabilities connected to non-insurance property early in the year as liabilities in respect of its insurance business before year end.
[120] As drafted, element I divides the assets reported on the insurer’s non-consolidated balance sheet into two mutually exclusive categories or buckets: (i) property that was at no time during the year used or held in the course of carrying on an insurance business (“non-insurance property”
); and (ii) the other property.
[121] Similarly, element J categorizes the insurer’s liabilities reported on the non-consolidated balance sheet into two buckets: (i) liabilities that, while appearing on the non-consolidated balance sheet as being in respect of an insurance business, were at any time in the year connected with a non-insurance property; and (ii) all other liabilities reported in respect of an insurance business.
[122] Restricting the exclusion of an asset through element I and the liabilities that are deducted through element J have one effect: maximizing the Canadian investment fund number while recognizing that non-insurance property (and liabilities at any time connected to that property) should not be taken into account in computing the insurer’s income from carrying on an insurance business.
(b) The historical context
[123] Unlike the definition of Canadian investment fund relevant to this appeal, the prior definition of that term did not start with the assets reported in the insurer’s non-consolidated balance sheet. Instead, it was based on the “valuation”
, generally at cost, of particular properties of the insurer: investment property (as defined), money and deposits with a corporation authorized to accept deposits or to carry on services as a trustee for the public: definitions of “Canadian investment fund”
, “valuation”
and “investment property”
in s. 2405(1) of the Regulations before the amendments effected by SOR/2000-413. The former approach to the Canadian investment fund was additive. Starting from nil, investment property of a defined class was added to determine the property used by the insurer in the course of carrying on an insurance business in Canada—then a defined term. The focus was on specified assets rather than amounts reported on the insurer’s non-consolidated balance sheet.
[124] In contrast, the approach taken to the Canadian investment fund definition relevant to this appeal is not to build up to a number by focusing on a defined class of property. Rather, it begins with all assets reported on the non-consolidated balance sheet and then excludes only those assets that satisfy the conditions of the exclusion.
[125] Consistent with the changed approach, the expression “property used by [the insurer] in the year in, or held by it in the course of”
carrying on an insurance business in Canada was repealed.
(c) When Parliament means “property used or held in the course of carrying on an insurance business”
it says so
[126] When Parliament intends to refer to “property used or held in the course of carrying on an insurance business”
, it uses that language. That language is used in paragraphs 138(2)(b) and (d) and subsection 138(4.4) of the Act and in the definition of “Canadian business property”
in subsection 2400(1) of the Regulations. But it is not used in element I of the Canadian investment fund definition. Having decided to use different language in the context of provisions that apply to insurers, Parliament’s intention must be understood to convey a different meaning.
[127] This brings us to the reasons for the change in approach—the purpose.
(3) The two-step interpretation described above fulfils the purpose of the amended definition of “Canadian investment fund”
[128] A corollary to Parliament’s decision to forego tax on a multinational life insurer’s worldwide income from its insurance businesses is the need to ensure that the correct portion of the insurer’s assets are captured before a portion is allocated to Canada. This has always been the objective of the notional method: Regulatory Impact Analysis Statement at 2550–51.
[129] The “Canadian investment fund”
definition at issue in this appeal was introduced in 2000, applicable to the 1999 and subsequent taxation years: s.10(3) of the Regulations Amending the Income Tax Regulations (Taxation of Insurers). The Regulatory Impact Analysis Statement explained that although the amendments to the Regulations did “not alter the basic structure of the [notional method]”
, the changes were “designed to ensure that the quantum of the Canadian investment fund…reflects the amount of capital, liabilities and cash flow of the insurer applicable to the Canadian business”
and “that the income of the insurer…more closely reflects the income generated by the Canadian insurance businesses”
: Regulatory Impact Analysis Statement at 2551. In other words, Parliament was concerned that the prior version of the definition was not capturing enough assets and income.
[130] If an insurer could, as the Tax Court held, exclude assets solely because they are not “employed and risked”
in its insurance business (TCC Decision at para. 148, citing The Queen v. Marsh & McLennan, Limited, [1984] 1 FC 609, 1983 CanLII 4982 (A.D.) and Ensite Ltd. v. R., [1986] 2 S.C.R. 509, 1986 CanLII 41 (S.C.C.)) or are not “necessary”
for its insurance business (TCC Decision at para. 148, citing ACTRA Fraternal Benefit Society v. Canada, 147 D.L.R. (4th) 247, 1997 CanLII 4971 (Fed. A.D.)), the insurer’s Canadian investment fund could understate the assets that support the insurance business. The insurer’s designated property would be correspondingly reduced, resulting in the insurer having less income from its Canadian insurance businesses.
[131] This point may be illustrated by considering a multinational life insurer that only carries on a life insurance business, holds more assets than needed from an actuarial, regulatory or internal capital policy standpoint, and keeps those “excess”
assets in a separate investment account. Applying the Tax Court’s test, the excess assets would be neither “employed and risked”
nor “necessary”
for its life insurance business. As a result, notwithstanding that life insurance is the insurer’s only business, under the Tax Court’s interpretation those assets would be assets not used or held in the course of carrying on the life insurance business with the result that none of the income from those assets would be part of the insurer’s income from carrying on its life insurance business. But the fact that assets are not necessary or employed and risked in the insurance business does not mean they are not assets of that insurance business that an insurer must take into account when computing income of its insurance business allocable to Canada.
[132] At the same time, a multinational life insurer may carry on a non-insurance business. But subsection 138(9) and the related Regulations only apply to its insurance businesses. Therefore, the income from a non-insurance business is generally computed and taxed as it would be for any other Canadian resident taxpayer (i.e., the worldwide income from such business is taxable in Canada). The notional method recognizes this. Specifically, the exclusion’s purpose is to remove from the notional method assets on the non-consolidated balance sheet that were at no time used or held in the course of carrying on an insurance business—or put another way, were used or held in the course of carrying on a non-insurance business. The income from another non-insurance business is computed as it is for any other taxpayer. Accordingly, the multinational life insurer’s income from the property used or held in a non-insurance business will be taxed in Canada.
(4) The jurisprudence relied on by the Tax Court is distinguishable and not determinative
[133] The jurisprudence the Tax Court relied on can be broadly divided into two categories: (i) jurisprudence interpreting “property used or held in the course of carrying on a business”
and (ii) jurisprudence in which the statutory provision at issue did not have similar language to the exclusion. None concerned the notional method nor the interpretation of the Canadian investment fund definition and, in particular, element I.
(a) Jurisprudence interpreting “property used or held in the course of carrying on a business”
[134] Both Marsh & McLennan and Ensite concerned Canadian resident corporations liable for Canadian income tax on their worldwide income. The only issue was the character of the income on certain deposits as income from property or income from business.
[135] Under the relevant provision, income from a property was investment income unless the property was “used or held by the corporation in the year in the course of carrying on a business”
. In the latter case, the income was income from business.
[136] Marsh & McLennan concerned an insurance broker that received premiums from purchasers of insurance policies up to 60 days before it was required to remit the premiums to the insurer. In the interim, the broker deposited the premiums and earned interest.
[137] Ensite concerned a manufacturing company that deposited US dollars in the Philippines as part of a financing arrangement for a plant located there. Philippines law required foreign currency be brought into the country.
[138] In both cases, the deposits were found to be property used or held in the course of carrying on a business, so the interest income was business income, not investment income.
[139] In Marsh & McLennan, Justice LeDain of this Court described the test for determining whether property was used or held in the course of carrying on a business as follows (at 621):
Was the fund employed and risked in the business? In my opinion it was, because an amount equivalent to this notional fund was committed to the carrying on of the business in order to meet the [broker’s] obligations to the insurers.
[140] In Ensite, the Supreme Court adopted Justice LeDain’s test because it “emphasizes that the holding or using of the property must be linked to some definite obligation or liability of the business”
: Ensite at 518. But the Supreme Court also said that the substance of the test accorded with the statutory framework in which it was used. The legislative intention was “to catch income from property that is employed or risked”
in the business “to such an extent that the income from it could be characterized as active business income”
: Ensite at 519.
[141] Understood in the context in which they arose, these two decisions are distinguishable. To start, the text at issue asked whether property was used or held, whereas the exclusion asks whether property was not used or held, in the course of carrying on a business. Although both questions categorize property based on use or holding, they approach the task from different perspectives and with a different emphasis.
[142] Moreover, as used in the provisions at issue in Ensite and Marsh & McLennan, the phrase was not coupled with a presumption. However, perhaps most importantly, in those provisions the phrase served a different purpose—to expand the scope of income from business to include income from property used or held in the course of carrying on a business. In contrast, the scope of the presumption in element I is all-inclusive from the start—any assets on the non-consolidated balance sheet are included. Expanding that scope is unnecessary. The exclusion’s purpose is to narrow it, albeit subject to strict conditions.
[143] This distinction in purpose was recognized by this Court in Munich Reinsurance, a case concerning a non-resident insurer that carried on business in Canada. There, the insurer overpaid its Canadian tax instalments and contended the interest it earned on the overpayments was not “from property used or held by it in the course of”
carrying on its insurance business in Canada, and so not taxable in Canada. Under the provisions relevant at that time, the question was whether the right to a tax refund was within the ordinary meaning of that phrase. If it was not such property, the interest would not be taxable in Canada.
[144] The Minister argued that “income earning property of an insurer is always property used by the insurer in, or held in the course of, carrying on its insurance business”
: Munich Reinsurance at para. 32. This Court was not prepared to accept “such a categorical principle”
, accepting the possibility that an insurer may have investments that are not part of its insurance business: Munich Reinsurance at para. 32. However, there was no factual basis for concluding that the right to tax refunds did not arise as part of the non-resident’s insurance business. The insurer’s “asset management decisions made…to comply with its tax obligations in the most advantageous way were decisions as to the use of the assets of its insurance business, and in that sense were decisions made in the course of its business”
, such that “the right …to be paid its tax overpayments was a right acquired in the course of carrying on its business”
and “was property
held in the course of carrying on that business”
: Munich Reinsurance at para. 33.
[145] In coming to this conclusion, this Court distinguished Ensite, describing it as dealing with a manufacturer that “was trying to establish that its investment activities were not part of its manufacturing business, while the Crown was attempting to tie the two activities together”
: Munich Reinsurance at para. 31. In contrast, Munich Reinsurance was an insurer arguing that overpaying tax instalments was not a business activity at all, not that it was an investment or a separate business: Munich Reinsurance at para. 31.
[146] Munich Reinsurance concerns the taxation of insurers who carry on business in Canada and elsewhere and thus, at first glance, appears particularly relevant. However, as in Marsh & McLennan and Ensite, the text at issue asked whether the property was used or held in the course of carrying on an insurance business, not whether it was not so used or held.
[147] These cases do not establish the test for determining what assets are included in an insurer’s Canadian investment fund by virtue of element I.
(b) Other Jurisprudence
[148] Lutheran Life Insurance Society of Canada v. Canada, 47 F.T.R. 25, 1991 CanLII 13960 (T.D.) and ACTRA each concerned a fraternal benefit society that carried on a life insurance business. In each case, the issue was how much of its income was from that business, and so ineligible for the tax exemption in paragraph 149(1)(k). Significantly, because the two fraternal benefit societies carried on business only in Canada, the rules relevant to multinational life insurers were not engaged, and the phrase “property used or held in the course of an insurance business”
was not relevant.
[149] In Lutheran Life, the fraternal benefit society provided life insurance, accident insurance, and fraternal benefits to its members, but maintained a single investment fund. The financial statements filed with the regulator and with its tax returns made no distinction between its investment income from its fraternal assets and from its life insurance business. The issue was what portion of the investment income earned on the investment fund was properly attributed to its life insurance business.
[150] The society’s external tax advisor considered the society’s obligation to identify the investment income attributable to the life insurance business as analogous to that of a multinational life insurer attempting to determine its income attributable to its Canadian life insurance business: Lutheran Life at 293. Accordingly, the fraternal benefit society notionally applied that method and allocated some assets in the investment fund to its fraternal activities.
[151] The Minister considered all the investment income to be from the life insurance business and, thus, taxable. The Federal Court did not accept that the society could exclude the income from a notional portion of the assets in the fund “identified only by applying a formula under regulations admittedly not applicable to the Society”
: Lutheran Life at 297.
[152] The fraternal benefit society did not meet its burden to establish that any of its investment income was not income from its life insurance business and so the Minister’s assessments were affirmed: Lutheran Life at 297.
[153] In ACTRA, the issue was the same, but the fraternal benefit society maintained three separate funds: the life fund (directed at providing life insurance benefits to members), a second fund providing for accident and sickness insurance, and a third “fraternal”
fund. In filing its tax returns, the fraternal benefit society reported a very small fraction (for example, less than 2.5% in 1985) of the investment income earned on the life fund as income from carrying on the life insurance business. At the same time, the society filed financial statements with the regulator reflecting all the income from its life fund investments.
[154] With the assistance of external advisors, the fraternal benefit society determined it had underreported the income attributable to the life insurance business but also had more assets in the life fund than that business required. Accordingly, it transferred $2.6 million out of the life fund and approached the Minister to arrange to pay tax on what it considered the prior years’ underreported income, an amount less than all the income earned on the life fund. Although initially accepting that the life fund assets “did not accurately or reasonably represent those related to the life insurance business,”
the Minister ultimately sought to treat all the income earned on the life fund as income from the society’s life insurance business: ACTRA at para. 8.
[155] Before the Tax Court, the fraternal benefit society relied on Ensite and submitted that where “assets in the life fund exceed what is necessary for purposes of the life insurance business, only the investment income earned on the necessary amounts should be treated as taxable income”
: ACTRA at para. 1. The Tax Court disagreed, concluding that the assets necessary for the life insurance business were those in the life fund at any one time, particularly given the terms of the Canadian and British Insurance Companies Act, R.S.C. 1970, c. I-15 (Insurance Act), which the Tax Court viewed as having “the legal effect of ‘locking in’ all the assets held in the life fund”
: ACTRA at para. 13.
[156] This Court allowed the society’s appeal; it did not agree with the Tax Court about the effect of the Insurance Act. That said, this Court agreed that two elements—maintaining the assets in the life fund and reporting all investment income from those assets to the regulator as related to that fund—supported an inference that those assets were necessary for the life insurance business: ACTRA at paras. 21, 30. However, significantly, the Minister did not advance that argument, relying solely on the argument that the business decision not to remove the surplus assets from the life fund was determinative. This Court did not accept that proposition: ACTRA at paras. 20–22.
[157] As the Tax Court in this case observed, ACTRA described the principal issue before it—“whether all of the investment income derived from assets contained within [a life fund] is to be included when computing taxable income from a fraternal society’s life insurance business”
—as one to be pursued “in terms of whether all of the assets of the life fund were ‘necessary’ to [ACTRA’s] life insurance business”
: ACTRA at paras. 1, 11. Reading the reasons in their entirety, it is clear that “necessary”
was used as shorthand for the Ensite test for determining whether assets are used or held in the course of carrying on a business: ACTRA at paras. 11, 22.
[158] Regardless, the only question in ACTRA was how much of the society’s investment income was income from its life insurance business. The same question arose in Lutheran Life. In both cases, that question had to be answered applying general principles based on the evidence. Critically, language similar to that considered in Ensite, Marsh & McLennan, and Munich Reinsurance was neither discussed nor relevant to answering that question.
(c) Conclusion on the jurisprudence
[159] Element I does not ask whether property is used or held in the course of carrying on an insurance business.
[160] Because the Tax Court approached the issue from the wrong perspective, it misapplied the jurisprudence and lost sight of the context in which the decisions arose. That said, we disagree that that jurisprudence is irrelevant. It is relevant, albeit for a different purpose: undertaking the task required by the exclusion.
[161] For example, the insurer might succeed in excluding assets by demonstrating they were at all times employed and risked in (i.e., used or held in the course of carrying on) another business (Ensite; Marsh &McLennan). On the other hand, neither holding assets in a separate fund, nor failing to report the income on those assets to the regulator as insurance income, will demonstrate that those assets are held or used in a business other than an insurance business (Lutheran Life; ACTRA). Similarly, showing assets are held for an unidentified collateral purpose will not demonstrate they are within the exclusion.
[162] In each case the determination must be based on the facts as revealed by the evidence before the Tax Court.
C. Conclusion on the proper interpretation and statutory framework
[163] From the foregoing analysis, we conclude that element I of the Canadian investment fund definition requires that the following two-step framework be applied:
-
1)First, identify all assets on the multinational insurer’s non-consolidated balance sheet at year end and provisionally include their value in the insurer’s Canadian investment fund.
-
2)Second, determine which of those assets, if any, were not used or held by the insurer at any time in the year in the course of carrying on an insurance business at any time in the year because they were used or held in another business or activity and deduct their value. The insurer will bear the onus of establishing this where the Minister assumes the assets are included in element I.
[164] Here, as discussed under the first issue, subsection 149(4) requires the Order to compute its income and taxable income from its life insurance business as if it had no other source of income or loss. Accordingly, its Canadian investment fund must be computed so that it captures only the Order’s income from its life insurance business and then allocates that income between Canada and the foreign jurisdictions in which it carried on that business.
[165] That said, the overall approach is the same: all the Order’s assets are presumptively included by virtue of element I, and an asset can be excluded only if the Order demonstrates that at no time in the year the asset was used or held in the course of carrying on its life insurance business.
D. Flaws in the Tax Court’s interpretation
[166] The Tax Court read element I as if it asked what assets were used or held in the course of carrying on the insurance business. Asking that question, it found that the assets the Order reported on its non-consolidated balance sheet as insurance assets were all that were necessary for that business. As a result, it initially excluded all World Surplus assets. It then asked whether any of the excluded assets should be included because as a factual matter, they were used or held in the course of carrying on an insurance business.
[167] But element I does not ask what assets were used or held in the course of carrying on an insurance business. First, it asks what assets are reported on the non-consolidated balance sheet and requires them to be presumptively included. Only then does the focus of the inquiry shift to whether any of those assets can be said to have not been used or held in the course of carrying on an insurance business at any time in the year, and, thus, excluded.
E. The Tax Court applied the wrong test to the World Surplus
[168] The Minister says the Tax Court’s error in interpreting element I led it to err in excluding World Surplus assets from the Order’s Canadian investment fund.
(1) The World Surplus assets that are no longer in dispute
[169] The Tax Court agreed with the Minister that some of the World Surplus assets could not be excluded either because they did not appear on the non-consolidated balance sheet or because the Order did not establish that they were not, as a matter of fact, used or held in the course of carrying on an insurance business: TCC Decision at paras. 221–224. Because the Order did not appeal those findings, they are not in dispute.
(2) The World Surplus assets that are in dispute
[170] The Tax Court concluded the Order did not use or hold the balance of the World Surplus in the course of carrying on its insurance business: $110,116,000 in 2013 and $217,025,000 in 2014. In coming to this conclusion, the Tax Court analyzed but largely rejected four uses the Crown identified as supporting its position that World Surplus assets could not be excluded:
1. A portion of the World Surplus assets moved in and out of World Surplus as needed to top up Divisional Targets: TCC Decision at paras 186–191.
2. World Surplus assets used to support the A.M. Best Credit Rating: TCC Decision at paras. 198–204.
3. World Surplus assets used to fund growth: TCC Decision at paras. 205–207.
4. World Surplus assets used to fund capital expenditures and acquisitions: TCC Decision at paras. 208–210.
[171] These are findings of mixed fact and law. We can interfere with them only if there is an extricable error of law or palpable and overriding error. Here, the Tax Court’s misinterpretation of element I led to an incorrect analysis of whether the insurer could exclude the World Surplus assets from the Canadian investment fund.
[172] Rather than looking for a justification to exclude the World Surplus assets, it excluded them because they were not necessary and then looked for a basis to include them. Related to this, the Tax Court appears to have focused on the use of assets, without considering whether they nonetheless were held in the course of carrying on the insurance business.
[173] The Tax Court found the World Surplus assets were distinct from assets allocated to specific operations: TCC Decision at paras. 182, 184. This suggests those assets were available for any business—including life insurance—but were neither employed and risked in, nor necessary to, a specific business or activity.
[174] So how should the World Surplus assets that are in dispute be analyzed?
(a) Assets moved between insurance divisions and World Surplus
[175] The Order transferred assets from World Surplus to any insurance division that fell below its divisional target but also transferred assets from the insurance divisions to World Surplus. The Tax Court only agreed that transfers of assets “
from World Surplus
to the insurance divisions to top-up divisional capital results in those assets being
used in the course of carrying on an insurance business”
: TCC Decision at para. 189 (emphasis added). It found the maximum amount transferred to the US and Canadian insurance divisions in 2013 was $17 million and in 2014 was $18 million: TCC Decision at para. 191. The analysis that led to these numbers is not clear from the record.
[176] Moreover, the Tax Court did not consider transfers from the insurance divisions to World Surplus. Yet those amounts were significant. For example, a notional aggregate transfer of $90 million in assets from the US and Canadian insurance businesses to World Surplus occurred in the first quarter of 2014 (Appeal Book at 3183, 3193). Before that transfer (and so both at the end of 2013 and the beginning of 2014), those assets would have been reported, and presumably held, as part of the Order’s insurance businesses, not World Surplus. Applying its test, the Tax Court appears to have considered those assets as not necessary and so excluded. But that is not the test. Necessary or not, the Order must establish that the World Surplus on the non-consolidated balance sheet at the end of 2013 and 2014 was not at any time in the year used or held in the course of carrying on an insurance business.
(b) The A. M. Best rating
[177] One of the Order’s guiding principles is to maintain its “Excellent”
or “A”
rating from A.M. Best which provides financial strength and credit ratings to insurance companies. On this issue, the Tax Court also applied the wrong test:
[202] As discussed above, the test for whether assets are “used or held” is not whether they are helpful to the business or “nice to have”. As the Supreme Court stated in Ensite, “risked” is not the right test. If it were, then all of the Appellant’s property would meet this standard since, ultimately, it is all available for creditors. The test is whether the assets are necessary for the business.
(Emphasis added.)
[178] Assets that are used or held in the course of another business or activity may be excluded even if they too support the A. M. Best rating. But, in the absence of a finding that the World Surplus assets are used or held in some other business, the Tax Court’s analysis does not support excluding them.
(c) World Surplus for capital expenditures and acquisitions and to fund growth
[179] The same concern arises with respect to the Tax Court’s approach to World Surplus held to fund capital expenditures and acquisitions and fund growth:
[209] The holding of World Surplus assets to fund future acquisitions even if relevant to the insurance business does not make those assets “used or held” in the course of carrying on an insurance business. Both Ensite and Bank Line [Ltd. v. Commissioners of Inland Revenue (1974), 49 T.C. 307 (Eng. Ct. of Sess.-1st Div.)] establish that reserve funds for future capital expenditures are not used or held in the course of business, even if the acquisitions directly relate to that business. The assets are not currently used and their withdrawal would not affect the continued operation of the business.
[210] Accordingly, I conclude that the potential use of World Surplus assets to fund future capital expenditures, even if in the insurance business, does not cause those assets to be used or held in the course of carrying on an insurance business.
See also para. 206 regarding World Surplus to fund growth.
[180] The question is not whether the World Surplus assets are currently used or whether their withdrawal would affect continued operation of the insurance business. It is whether there is evidence that they are not used or held in the course of carrying on the insurance business. Except perhaps to the extent dedicated to another business, reserve funds cannot be excluded on that basis alone.
[181] On the record before us, we cannot apply the correct test and decide whether the Order met its onus of establishing that any of the World Surplus on its non-consolidated balance sheet is properly excluded. As a result, the matter must be remitted to the Tax Court for re-examination and redetermination based on the correct test.
VI. Conclusion
[182] For the foregoing reasons, we would allow the appeal, with costs here and in the Tax Court. We would set aside the Tax Court’s Judgment dated August 17, 2023. We would remit the matter to the Tax Court to redetermine the matter in accordance with these reasons.
“K.A. Siobhan Monaghan”
“Nathalie Goyette”
"I agree.
David Stratas J.A."
Email this Content