Dominion of Canada General Insurance Co. v. The Queen, 84 DTC 6197, [1984] CTC 190 (FCTD), aff'd 86 DTC 6154, [1986] 1CTC (FCA)

McNair, J:—This is an appeal by the plaintiff taxpayer from its income tax assessment for the taxation years 1969, 1970, 1971 and 1972. The issue going to the root of the whole appeal is whether or not the taxpayer was required to include in the computation of its 1969 income for income tax purposes, pursuant to paragraph 85B(l)(e) and subsection 85B(7) of the Income Tax Act as they read for the 1969 taxation year, the amount of $10,454,396 which it had deducted as an unearned premium reserve in computing its 1968 income, pursuant to subsection 85B(5) of the Income Tax Act as it applied to the 1968 taxation year.

The plaintiff was incorporated on June 23, 1887 by an Act of the Parliament of Canada with legislative authority to carry on an accident insurance business. The plaintiff soon commenced carrying on such business and has been engaged therein without interruption from then until the present. This business is frequently referred to as its “other-than-life’’ insurance business. On May 27, 1924 it became federally licensed to carry on a life insurance business in which it has also been continuously engaged from then to the present time. From 1924 on the plaintiff simultaneously carried on two different insurance businesses, one having to do with life insurance and the other relating to property and casualty insurance. At one time the plaintiff was the only federally incorporated insurance company authorized to write life and other-than-life insurance risks. The plaintiffs two insurance businesses generally showed a steady and progressive growth.

During the 1953 to 1968 taxation years the plaintiff filed two separate income tax returns and was assessed by the Minister of National Revenue on the basis that it was one corporation engaged in two separate and distinct business operations, namely, its life insurance business and its other-than-life insurance business. Separate notices of assessment were issued accordingly.

In computing its 1968 income from its non-life fire and casualty business the plaintiff deducted an unearned premium reserve of $10,454,396 pursuant to section 85B(5) of the Income Tax Act and regulation 1400 of Part XIV. The plaintiff showed this deduction in its income tax return filed for that year. In its return for that year, the plaintiff reported no income with respect to its life insurance business because nothing derived therefrom had been transferred to shareholdes’ account.

During the years, the plaintiff reported annually to the federal Department of Insurance, as required by the Canadian and British Insurance Companies Act, and was granted certificates of registry. The plaintiff was listed in the “blue book’’ as a life insurer and casualty insurer.

During its 1969 to 1971 taxation years the plaintiff continued to file two separate income tax returns for its life and other-than-life insurance businesses. By letter dated October 31, 1972 the Department of National Revenue advised the plaintiff to file one corporation income tax return covering both its fire and casualty and life operations. For the 1972 taxation year, the plaintiff filed a T-2 corporation income tax return consolidating the income of both its business operations and two memo returns, one for its life insurance business and the other relating to its non-life and casualty insurance business.

In its 1969 income tax return, the plaintiff included in the computation of its income from its other-than-life insurance business the amount of $10,454,396 which it had deducted as an unearned premium reserve in computing its non-life insurance income in 1968. This amount is the total of the unearned premium amount of $8,373,019 identified as unearned premiums in the taxpayer’s 1968 balance sheet plus the 20 per cent premium reserve amount of $2,081,377, both of which were shown in schedules to the 1968 income tax return.

In its income tax return for 1969, the plaintiff used for the first time a new formula in computing the income from its life insurance business which showed an opening resrve amount of $23,390,408. This amount was required to be added under the applicable transitional rules as if it had been deducted in computing 1968 income.

The Minister assessed the plaintiff according to the income tax returns filed for the taxation years 1969 to 1972. In making such assessments, the Minister assumed that the plaintiff, in computing its 1968 income, deducted and was allowed the unearned premium reserve of $10,454,396 for its other-than-life insurance business pursuant to subsection 85B(5) of the Act and regulation 1400, and that it had included that amount in its computation of income for its 1969 taxation year. It was further assumed that the plaintiff was not precluded from claiming a deduction for such unearned premium reserve under the provisions of the said subsection 85B(5).

By notice of reassessment dated August 21, 1975 the Minister reassessed the plaintiff on the basis of consolidating its 1969 and 1970 income from its life and other-than-life insurance businesses and assessed one tax thereon. By notice of reassessment dated December 23, 1975 the Minister assessed in similar fashion for the plaintiff's 1971 and 1972 taxation years. The plaintiff filed notices of objection to these reassessments.

The unearned premium reserve of $10,454,396 was brought into the computation of the plaintiffs 1969 income for tax purposes. It was only later on the basis of professional advice that the plaintiff concluded that it should be taken out. The plaintiff now asserts that its 1969 income for tax purposes should have been computed as follows: .

*Under the transitional rules in Section 32, Chapter 44, Statutes of Canada 1968-69, this amount was required to be added to 1969 income as if it had been deducted in computing 1968 income.

** Assuming that maximum available reserve is not deducted.

The defendant admits that the plaintiff could have computed its income for 1969 in this manner if the $10,454,396 amount was included in the blank opening reserves space in the non-life column. It is undisputed that the plaintiff was, in 1969 through the taxtion years to 1972, a life insurer within the meaning ascribed by paragraph 139(l)(wb) of the Income Tax Act,

In 1968 and for some years prior thereto life insurance corporations were, by virtue of section 30 of the Income Tax Act, taxed only in respect of amounts credited to shareholders’ account or otherwise appropriated for the account of shareholders.

In 1969 extensive amendments relating to the taxation of insurance corporations were enacted by Parliament applicable to the 1969 and subsequent taxation years. The previous preferential tax treatment of life insurance corporations was removed. Generally, their “taxable income’’ was to be determined accordingly to the rules applicable to ordinary corporations.

Specifically, section 30 was repealed by the 1969 amendments. Section 68A was also repealed and replaced by a new section 68A which generally brought within its taxing ambit all insurance corporations whose “income’’ and “taxable income” were to be determined in similar manner to ordinary corporations carrying on business for profit, except as otherwise expressly provided. In the result, insurance corporations carrying on an other-than-life insurance business were to be taxed, as in the past, by applying the rules applicable to all corporations. These corporations continued to be subject to section 85B of the Act. Life insurance corporations were now to be taxed under the provisions of the new section 68A, more specifically subsections 68A(2) to (12) thereof, which established a statutory regime for income determination, inclusions and deductions. The terms “life insurance business”, “life insurance corporation” and “‘life insurer” became defined terms under the Act.

The plaintiff relies substantially on the evidence of its expert witness, Ronald C Knechtel, to support the methodology of how it should have computed income for its 1969 income tax return. Mr Knechtel was engaged by the plaintiff as a tax adviser in 1975 and was charged with the responsibility for preparing its notices of objections. The method adopted by the plaintiff of filing two returns reporting on its life and other-than-life insurance businesses did not actually affect the calculation of tax. This is confirmed by the evidence of the plaintiffs expert witness given during the course of his cross-examination (pages 255-256 of the transcript):

Q. In the years 1971 and 1972, particularly the years 1969, 1970 and 1971 the Plaintiff filed two income tax returns.

A. Yes.

Q. One vis-a-vis its life insurance business and one vis-a-vis its fire and casualty business.

In 1972, sir, it filed two memo returns and a third document which is where we have been addressing ourselves, three returns. The filing of the three returns, or the three returns, did that make any difference of how the tax was calculated in those years?

A. I would in my view, the tax calculated in that year should be based on the combined filing as I understood it.

Q. But the way they filed, instead of filing one return, they filed one return in 1975. There are two sets of calculations for the 1975 return inside that return. One indicating its life insurance business and one indicating its fire insurance business.

A. Yes.

Q. In 1969 it filed two returns. Did it pay one cent tax more by filing two than if it had filed one return with the two calculations?

A. The filing per se should not affect that. The basis of calculation on the separate returns.

Q. So, the filing of two returns three returns or ten returns does not make a difference.

A. It shouldn’t.

The plaintiffs principal argument rests on the premise that the plaintiff was at all material times, and more particularly in 1968, a life insurance corporation. It follows therefore that the plaintiff, as a life insurance corporation and as a matter of law, could not deduct any amount as a reserve in computing its income for 1968. The plaintiff admits that subsection 85B(5) required an insurance corporation, other than a life insurance corporation, to deduct prescribed amounts as policy reserves but contends that the section did not apply to it in 1968 because it was a life insurance corporation. No policy reserve can be deemed to have been deducted by the plaintiff in the capacity of life insurer. Furthermore, the plaintiff says that as a life insurance corporation it was not required to compute its income for the 1968 taxation year because its taxable income was determinable only by the amounts credited or appropriated to shareholders by virtue of section 50. In the result, the plaintiff was not required to include in computing its income for 1969 the amount of $10,454,396 deducted in 1968 as an unearned premium reserve with respect to its other-than-life business.

The defendant submits in answer to this, that irrespective of whether or not the plaintiff was or was not a life insurance corporation during the taxation years prior to 1969, the statutory scope of the words found in paragraph 85B(l)(e) of the Income Tax Act interpreted in their plain, ordinary and grammatical sense within the context and statutory purpose of section 85B, reach out in the 1969 taxation year to capture the targeted amount of $10,454,396 that was factually deducted by the plaintiff as an unearned premium reserve in its computation of income for the 1968 taxation year, pursuant to the statutory scheme of section 85B and regulation 1400, as they stood in 1968. As a corollary thereto, the defendant contends that all evidence as to how the plaintiff should have reported its taxable income prior to the 1969 taxation year is irrelevant and immaterial to the determination of the plaintiffs 1969 tax and is nothing but an attempt to raise an equitable argument to support its contention as to how the 1969 provisions of the Income Tax Act should be interpreted and applied. The defendant further submits that the assessments made by the Minister based on the plaintiffs returns of income for the 1968 and prior taxation years in respect of its two insurance businesses, namely, life and non-life, are not under appeal and must now be deemed binding.

The statutory provisions with which we are chiefly concerned are set out herein.

Section 85B dealt with the subject matter of special reserves.

Subsection 85B(5), as it stood in 1968, read as follows:

(5) Paragraph (c) of subsection (1) does not apply to allow a deduction as a reserve in respect of insurance, but an insurance corporation, other than a life insurance corporation, shall, in computing its income from its insurance business for a taxation year, deduct

as policy reserves such amounts as have been prescribed for the purposes of this subsection.

[Emphasis added]

Subsection 85B(5) was amended in 1969 to read:

(5) Paragraph (c) of subsection (1) does not apply to allow a deduction as a reserve in respect of insurance, but an insurance corporation shall, in computing its income for a taxation year from an insurance business, other than a life insurance business, carried on by it, deduct as policy resrves such amounts as have been prescribed for the purposes of this subsection.

[Emphasis added]

Regulation 1400, as it stood in 1968, stated:

1400. For the purpose of subsection (5) of section 85B of the Act, the amounts prescribed are

(a) the total amount of the unearned premiums, on the 100% basis, at the end of the corporation’s taxation year, and

(b) such other amounts, if any, as are required to be shown as policy reserves at the end of the corporation’s taxation year

as computed for the purpose of financial statements required to be submitted to the Superintendent of Insurance for Canada, or if the corporation is not required to submit financial statements to the Superintendent of Insurance for Canada, the provincial authority under whose jurisdiction the corporation was incorporated.

This regulation was amended in 1969 to achieve greater brevity and clarity but without any change of import.

The statutory scheme of section 85B as it read both in 1968 and 1969 contained a specific statutory direction in paragraph 85B(1)(e) thereof. There was a slight amendment in 1969 to add an additional paragraph reference “(da)” which did not in any way affect its application to the matter in issue. Paragraph 85B(l)(e) states:

(e) there shall be included the amounts deducted under paragraphs (c), (d) and (da) in computing the income of the taxpayer for the immediately preceding year.

Subsection 85B(7) is the interpretation section which, both in 1968 and 1969, stated:

7. For the purposes of paragraph (e) of subsection (1), an amount determined under subsection (3) or an amount deducted under subsection (5) or (6) shall be deemed to have been deducted under paragraph (c) of subsection (1).

Section 46 of the Income Tax Act sets out the rules regarding assessments and reads for the most part as follows:

46. (1) The Minister shall, with all due despatch, examine each return of income and assess the tax for the taxation year and the interest and penalties, if any, payable.

(2) After examination of a return, the Minister shall send a notice of assessment to the person by whom the return was filed.

(3) Liability for tax under this Part is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made.

(4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing return

(i) has made any misrepresentation or committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within 4 years from the day referred to in subparagraph (ii) of paragraph (a), in any other case,

re-asses or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require.

(5) . ..

(6) The Minister is not bound by a return or information supplied by or on behalf of a taxpayer and, in making an assessment, may, notwithstanding a return or information so supplied or if no return has been filed, assess the tax payable under this Part.

(7) An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a re-assessment, be deemed to be valid and binding notwithstanding

any error, defect or omission therein or in any proceeding under this Act relating thereto.

[Italics added]

An assessment is administrative process within the exclusive function of the Minister culminating in the ascertainment and fixation of tax liability in accordance with the requirements of the statute. The Minister is not necessarily bound by the taxpayer’s return but he may quite properly accept it as correct and fix the tax liability accordingly. The assessment and the notice of assessment are different things; the one is an operation, the other a piece of paper. But the two are inextricably bound together and the assessment itself cannot be regarded as complete until the notice of assessment has been effectively given. [1]

Thurlow, J., neatly summarizes the assessment procedure in Scott v MNR, op cit. at 1277:

. . . These provisions prescribe the procedure by which the amount of the taxation imposed by the statute on each taxpayer is to be ascertained and settled. In the first instance, the taxpayer is required to furnish the relevant information and to estimate the tax. The Minister is then charged with the duty of examining the taxpayer’s return of income and of assessing the tax. In so doing he obviously may agree or disagree with the taxpayer’s estimate of the tax, but whether he agrees or not, he is required to send the taxpayer notice of assessment. The taxpayer then has the right to object to the assessment and subsequently to appeal therefrom.

[Italics added]

The liability to pay tax must be distinguished from the mechanical operation of assessment in the determination or calculation of tax liability. Assessment is the procedural means for achieving the tax result. The question of tax liability or not in any taxation year is dependent upon the law as it applied in that year. [2] Liability for tax is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made (subsection 46(3)). If a taxpayer wants to object to the validity of an assessment in determining his tax liability then he must take the appropriate appeal steps within the prescribed time periods. Failing that, an assessment is deemed valid and binding.

Plaintiff's counsel cites British Pacific Life Insurance Co. v MNR, [1968] CTC 68; 68 DTC 5067, to support the proposition that the plaintiff was a life insurance corporation in 1968. The case was decided before the 1969 amendments so the word “life insurance corporation’’ was an undefined term. British Pacific Life Insurance Co. held that the company was legally a life insurance corporation and as such was liable for tax only on its taxable income within the meaning of section 30. One of the conducive grounds for the decision seems to have been that the company was at all material times engaged in the life insurance business to a very substantial degree. The evidence in the plaintiffs case establishes that the volume of revenue from its other-than-life business was much greater than its life business. The British Pacific case was decided on its particular facts and, in my view, does not strictly apply to the case at bar. I am not at all certain that I would have reached the same result. For instance, I would have found it difficult to escape the fact that the plaintiff in 1968 and the prior years was anything other than what it legitimately professed to be, that is, an insurance corporation in the broad and unrestricted sense of one carrying on simultaneously a life insurance business and an other-than-life insurance business.

Counsel for the plaintiff also relied on the cases of New St James Limited v MNR, [1966] Ex CR 977; [1966] CTC 305; 66 DTC 5241; The Queen v Moulds, [1978] 2 FC 528; [1978] CTC 146; 78 DTC 6068; and Emco Limited v MNR, [1969] 1 Ex CR 241; [1968] CTC 457; 68 DTC 5310. New St James and Moulds involved reassessments turning on the proper calculation of capital expenditure and capital cost allowance respectively and do not on their particular facts lend any assistance to the plaintiff. Emco Limited v MNR also involved capital cost allowance calculations and might, at first glance, seem somewhat closer on point. The case held that the taxpayer was entitled to take a proper capital cost allowance calculation to correct a prior mistaken calculation in repect thereof and that this did not constitute the reopening by means of a journal entry of an assessment for which the period of appeal had expired. It was found as a fact in Emco that there had been no allocation in the tax returns, which clearly distinguishes it from the case at bar. The rationale of the decision is contained in the following passage from the judgment of Noël, J at 5314 of DTC:

In my view, it cannot be said that when the appellant deducted the amounts it did in 1956 and 1957, it made an allocation. It merely did not take the full amount of depreciation or cost allowance it was entitled to take under the Act and its regulations and this, it appears clearly, was done out of ignorance or a failure to appreciate the nature of the law. There was, however, no allocation made in its tax returns. The appellant in those years merely took less capital cost allowance, as it was under the Act entitled to take, and it was perfectly free to take, in 1960, a capital cost allowance to the extent allowed by the regulations at the undepreciated capital cost it was entitled to in that year. The only matter it had to determine in 1960 was what was the undepreciated capital in that year on which it was entitled to calculate the capital cost allowance it had a right to deduct. The appeallant realized in 1960 that it had a greater amount of undepreciated capital cost on which it was entitled to calculate its capital cost than it had after erroneously deducting the amounts it did deduct in 1956 and 1957 and, therefore, added them back to the pol of its assets.

As stated, the plaintiff showed the unearned premium deduction of $10,454,396 in its 1968 return. There was no allocation. The novel method of filing two income tax returns instead of one reporting on two sources of income did not affect the calculation of tax. The Minister assessed accordingly.

The question of the binding nature and effect of an assessment came before the Exchequer Court in Subsidiaries Holding Co Ltd v The Queen, [1956] Ex CR 443; [1956] CTC 240; 56 DTC 1141. Here the suppliant taxpayer sought by petition of right a refund of taxes which it had overpaid in its 1951 taxation year from its failure to deduct a foreign tax credit which it could have claimed under the provisions of the Act as it read at the time. The taxpayer had failed to discover the oversight until after the time limit for serving a notice of objection on the Minister had expired. The Crown admitted that if the taxpayer had objected to the Minister’s assessment in time it would have been entitled to the foreign tax credit in question and therefore would have been entitled to the refund of tax claimed. The Crown took the position that, there having been no objection, the Minister’s assessment was valid and binding an that there had been no overpayment within the meaning of the applicable statutory provision. The Court dismissed the taxpayer’s petition on the ground it could not now recover the tax overpayment because of its failure to object to and appeal from the Minister’s assessment within the time limits provided.

The following passage from the judgment of Cameron, J, accurately states, in my opinion, the law on this point (Ex. CR p 452):

The submission advanced on behalf of the suppliant means tn effect that the Minister, in computing refunds of overpayment, should take into account the tax which under the Act he should have assessed against the taxpayer. In substance, therefore, if not in form, these proceedings are in the nature of an attack on the assessment inasmuch as the finding in favour of the suppliant would be equivalent to a finding that the assessment was erroneous. By subsection (6) of section 42, however, the- assessment (which includes a reassessment) is declared to be valid and binding subject only to being varied or vacated on objection or appeal, or to a re-assessment. I am quite unable to understand how an assessment could remain valid and binding and as determining the tax liability of a taxpayer if, in the proceedings other than those laid down for varying or vacating the assessment, a taxpayer has the right to establish that his tax liability is other than that fixed by the assessment. At one and the same time they cannot be both a binding and valid assessment and the right to a refund of an overpayment of tax based on the proposition that the assessment is, in fact, erroneous. To base the amount of the overpayment on anything other than the tax payable as fixed by the assessment would be to disregard entirely the validity and binding effect of the assessment.

If the submission that a claim for a refund is based in part on what the assessment should have been (rather than on the assessment) were approved, it would mean that a taxpayer in claiming a refund by a petition of right would have the right to put in issue any and all of the objections which would have been available to him had he taken advantage of the statutory right to object to and appeal from the assessment . . .

Had the 1968 version of subsection 85B(5) been cast in the same mould as its 1969 counterpart there could have been no question about the deduction of the unearned premium reserve of $10,454,396. But the plaintiff says that as a life insurance corporation it was legally precluded from deducting this reserve, although it did in fact do so. It follows that the deduction of the unearned premium reserve must be treated as non-existent. In other words, the legal wand magically erases the factual occurrence. The result is that nothing happened in 1968 which could possibly trigger in 1969 the capturing mechanism of paragraph 85B(l)(e), assuming it applies. This is an able and ingenious argument but it belies the fact of what actually occurred. Moreover, it constitutes an outright attack on the 1968 assessment by asserting how the Minister should have assessed the plaintiff in that year and thus puts in issue an objection for which the time afforded by the statute to serve notice of objection and file appeal has long since expired. In my opinion, the argument does not avail with the result that the 1968 assessment must be deemed valid and binding. Consequently, the deduction by the plaintiff in that year of the unearned premium reserve of $10,454,396 is not obliterated but remains very much a fact. The focal point is thus constricted to the issue of what legal result obtained in 1969 from the fact of the 1968 deduction. This brings to mind the old saying of Bishop Butler:

things and actions are what they are and the consequences of them will be what they will be . . .

The final question is simply this — whether the words of paragraph 85(1 )(e) of the Income Tax Act interpreted in their plain, ordinary and grammatical sense in context of the statutory scheme of section 85B reach out to bring within the tax net in 1969 the unearned premium reserve of $10,454,396 deducted in 1968.

The basic rule for the interpretation of a taxing statute is to give effect to the meaning of the words used within their proper context and in light of the statute as a whole. There are two complementary subrules. If the words taken in context are precise then they must be interpreted in their plain, ordinary and grammatical sense. If the words are imprecise so as to give rise to the possibility of two constructions then they should be interpreted in the manner which will bring about the result which conforms to the apparent scheme of the legislation, rather than in a way which will obviously defeat it. [3]

It is my opinion that the words of paragraph 85B(l)(e) of the Income Tax Act taken in proper context in light of the statutory scheme of section 85B and the other related provisions clearly require that the unearned premium reserve of $10,454,396 which the plaintiff deducted in 1968 for its other-than-life business must be included in its 1969 income from that source. I am satisfied that this was the obvious intent of Parliament, especially in the absence of any “notwithstanding” clause to nullify the interactive effect of the said paragraph. To quote Lord Halsbury in Tennant v Smith “. . . the words of the Act have reached the alleged subject of taxation”.

For the foregoing reasons, I conclude that the Minister was correct in treating the 1968 unearned premium reserve deduction as income to the plaintiff in 1969 and his reassessments must stand. Accordingly, the plaintiffs appeal is dismissed with costs.