CORAM: DÉCARY J.A.
HER MAJESTY THE QUEEN
- and -
THE MARITIME LIFE ASSURANCE COMPANY
REASONS FOR JUDGMENT
The issue in this case is whether subsection 165(1) of the Excise Tax Act, R.S. 1985, c. E-15, as amended, requires The Maritime Life Assurance Company to pay goods and services tax (GST) on amounts called "investment administration fees" paid in 1991, 1992 and 1993 out of certain segregated funds created and owned by Maritime Life. The Crown is appealing a decision of a judge of the Tax Court of Canada who found that no GST was payable: 99 G.T.C. 3055,  G.S.T.C. 1,  T.C.J. No. 1 (QL).
The facts are well stated in the decision of the Tax Court Judge, and so for present purposes I need only summarize. Maritime Life issues insurance policies of various kinds, including a number of deferred annuity contracts that met the definition of "insurance policy" in subsection 123(1) of the Excise Tax Act. The Tax Court Judge treated the "Capital Accumulator Plan" policy as typical of the policies that are the subject of this appeal, and I will do the same.
A holder of a Capital Accumulator Plan policy would pay periodic premiums to Maritime Life as consideration for the right to receive, on a specified future date, a payment of money or an annuity of equivalent value. The amount of the payment was not fixed at the outset, but would be determined by the financial return obtained by the investment of the premiums in one or more segregated funds established and owned by Maritime Life.
Each of the segregated funds represented a different potential investment return and corresponding risk. For example, the Growth Fund was invested primarily in Canadian equities chosen for their growth potential, while the Bond Fund was invested in bonds issued by Canadian corporations and the Balanced Fund was invested in both equities and bonds. The Money Market Fund was invested in short term money market instruments. The Property Investment Fund was invested in mortgage loans.
The term "segregated fund" refers to a portfolio of investments held by a custodian, in this case Bank of Nova Scotia, for investment in accordance with guidelines imposed by Maritime Life. Except in the case of the Money Market Fund, the investment of the assets of the funds was entrusted to third party investment managers who were paid a fee for their services out of the assets of the fund. GST was payable and paid on those fees. Employees of Maritime Life managed the Money Market Fund and monitored the performance of the third party investment managers.
The tie between the premiums invested in the segregated funds and the amount of the benefit payable on maturity of the policy was a valuation formula, which worked as follows. The premiums that a policy holder elected to have assigned to a particular fund, together with certain additional amounts called "bonuses" that Maritime Life would credit to the fund if the policy remained outstanding for a stipulated period of time, would represent a number of "units" in the fund attributable to that policy. The value of those units on the maturity date of the policy, as determined below, represented the maximum cash benefit payable at maturity.
The value of all of the investments in the fund was determined on a weekly basis. Each valuation would take into account any changes from the prior valuation date in terms of income or gains derived and losses sustained on the fund's investments, as well as premiums and bonuses paid into the fund and benefits paid out of the fund. The value of the fund's investments would be divided by the number of units in the fund on that date. Then, from the value of the units attributed to a particular policy, there would be deducted the "investment administration fee" for that policy. The result would be the cash value for that policy as of that date.
A policy holder who died before the maturity date of the policy would be entitled to a death benefit equal to the greater of the unit value (net of the investment administration fee) and 75% of the premiums paid. This was an important insurance aspect of the deferred annuity contract and protected the policy holders to a certain extent from declines in the value of fund investments. In addition, in certain cases Maritime Life guaranteed a minimum rate of return on the premiums invested in the funds.
Generally, the investment administration fee for a policy was stipulated when the policy was issued, either as a fixed amount per year or a percentage of the unit value attributable to the policy, subject in some cases to a maximum. The amount of the investment administration fee in any particular case was governed by market forces.
The policy holder's election of a particular fund or combination of funds was sometimes referred to as a "participation". However, the policy holders did not acquire a propriety interest in the funds or the investments in the funds. The investments were owned by Maritime Life alone. A policy holder had only a contract containing the commitment of Maritime Life to pay a stipulated amount upon the maturity date or the death of the policy holder.
Regulatory authorities required the assets of the funds to be kept separate from the other assets of Maritime Life. To comply with that requirement, and perhaps also as a matter of good management, Maritime Life established and maintained the segregated funds that backed its obligations under the deferred annuity contracts. But it could not have permitted all of its premiums to remain invested in the funds. It had to be free to use part of the money to pay its operating costs, such as sales commissions and the cost of bonuses and guaranteed payments, and also to return a profit to its own investors.
The division of the premiums between Maritime Life's general assets and the segregated funds could have been achieved in a number of ways. Maritime Life chose a device it referred to as the investment administration fee. The amount designated the investment administration fee, determined in accordance with the terms of the policy to which it related, was simply removed from the segregated fund in which the premiums payable for that policy had been invested, reducing the investment base for the fund by that amount. That disbursement was matched, as described above, by a reduction in the valuation of the segregated fund investments attributable to that policy.
The investment administration fee was not a fee in the usual sense of that word, that is, an amount one person pays to another as consideration for a service. What has been referred to as the "payment" of an "investment administration fee" was simply a transfer of money between accounts owned by Maritime Life. This was not a payment of money by a person that required services or had the legal capacity to pay a fee. Put simply, the "investment administration fees" were simply the portion of Maritime Life's premium revenues that were not retained in the segregated funds.
With this understanding of the facts, it is necessary to consider whether, as the Crown claims, Maritime Life is liable to pay GST on its investment administration fees for 1991, 1992 and 1993 pursuant to subsection 165(1) of the Excise Tax Act, which reads as follows:
165(1) Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply.
165. (1) Sous réserve des autres dispositions de la présente partie, l'acquéreur d'une fourniture taxable effectuée au Canada est tenu de payer à Sa Majesté du chef du Canada une taxe calculée au taux de 7_% sur la valeur de la contrepartie de la fourniture.
The Crown will be entitled to collect the GST it claims only if the administration investment fees are "consideration" for a "taxable supply" of which the segregated funds are the "recipient". The quoted words are all defined in the Excise Tax Act, and there was considerable argument before us as to the scope of those definitions. However, on the view I take of this case, it is not necessary to consider those definitions in any detail. It is sufficient to say that if the Crown's interpretation of section 131 of the Excise Tax Act is correct, nothing in any of the definitions will stand in the way of a conclusion that GST is payable on the investment administration fees.
Maritime Life argues that if the investment administration fees are consideration for anything, they are part of the consideration for the life insurance policies provided to the policy holders, for which the policy holders paid premiums. If that is so, then no GST is payable because the supply of an insurance policy is by definition the supply of a "financial service" which is excluded from the definition of "taxable supply". The attraction of this argument is that it recognizes the commercial truth that Maritime Life is carrying on a life insurance business, and the premiums paid by its policy holders are ultimately the sole source of its revenues and its profits.
The Tax Court Judge did not accept this argument, but he nevertheless concluded that no GST was payable. He reasoned that Maritime Life was providing two kinds of service to its policy holders, the insurance services represented by the issuance and administration of the policies, and the services represented by its management of the segregated funds. He held that as the latter services are not "financial services" as defined in the Excise Tax Act, section 139 must be applied. By virtue of section 139, where a supply of a financial service is made together with a supply that is not a financial service for a single consideration, and the value of the financial service is more than 50% of the value of both services together, the entire consideration should be treated for GST purposes as consideration for a financial service, and thus exempt. The Tax Court Judge found as a fact that the value of the financial service was more than the value of the other service. He concluded on that basis that the entire consideration must be treated as consideration for the financial service, an exempt supply, and therefore no GST was payable.
I must respectfully disagree with this analysis. The only supply Maritime Life makes to the policy holders is the provision of the policies. Maritime Life administers the policies and maintains the investments that back its obligations under the policy, but that is the work it must do to ensure that it remains in position to fulfil its policy obligations. That work should not be treated as a service that Maritime Life provides to the policy holders, any more than the work undertaken by a cleaning service to keep its cleaning equipment in good repair is a service provided to its clients.
Rejecting the two-supply analysis leaves the simple proposition that the premiums are the only consideration Maritime Life received, and as the premiums were paid for exempt supplies, no GST is payable on the premiums. It must follow, subject to the Crown's argument below with respect to the effect of section 131 of the Excise Tax Act, that no GST is payable on that part of the premium that was not retained in the segregated funds but was used by Maritime Life to cover its costs and out of which it would derive its profits. As explained above, that portion of the premium is what has been called an "investment administration fee".
The Crown does not argue that the policy holders should be liable for GST in respect of any consideration they pay to Maritime Life. Rather, the Crown argues that, for GST purposes, each segregated fund is deemed by section 131 of the Excise Tax Act to be a person with its own activities, and it necessarily follows that Maritime Life must be deemed to be providing services to that deemed person for which it must be deemed to be paying consideration in the form of the investment administration fees. Section 131 reads as follows:
131. For the purposes of this Part, a segregated fund of an insurer shall be deemed to be a trust that is a separate person from the insurer and that does not deal at arms's length with the insurer and
(a) the insurer shall be deemed to be a trustee of the trust; and
(b) the activities of the segregated fund shall be deemed to be activities of the trust and not activities of the insurer.
131. Pour l'application de la présente partie, le fonds réservé d'un assureur est réputé être une fiducie qui est une personne distincte de l'assureur et qui a, avec celui-ci, un lien de dépendance. À cette fin_:
a) l'assureur est réputé être un fiduciaire de la fiducie;
b) les activités du fonds réservé sont réputées être celles de la fiducie et non de l'assureur.1
The Crown says that this provision creates a statutory fiction solely for purposes of the GST. That is undoubtedly so. The issue is how far this statutory fiction extends. The Crown is reading a number of consequences into section 131 that are not stated. Whether those consequences are necessarily implied by section 131 is the principal dispute in this case.
The existence of a deemed trust as a separate person with its own activities leads inexorably to consideration of subsection 267.1 of the Excise Tax Act , which deals with trusts. Subsection 267.1(5) establishes the separateness, for GST purposes, of a trust and its trustees. It reads as follows:
267.1(5). For the purposes of this Part, where a person acts as trustee of a trust,
(a) anything done by the person in the person's capacity as trustee of the trust is deemed to have been done by the trust and not by the person; and
(b) notwithstanding paragraph (a), where the person is not an officer of the trust, the person is deemed to supply a service to the trust of acting as a trustee of the trust and any amount to which the person is entitled for acting in that capacity that is included in computing, for the purposes of the Income Tax Act, the person's income or, where the person is an individual, the person's income from a business, is deemed to be consideration for that supply.
267.1(5) Les présomptions suivantes s'appliquent dans le cadre de la présente partie lorsqu'une personne agit à titre de fiduciaire d'une fiducie_:
a) tout acte qu'elle accomplit à ce titre est réputé accompli par la fiducie et non par elle;
b) malgré l'alinéa a), si elle n'est pas un cadre de la fiducie, elle est réputée fournir à celle-ci un service de fiduciaire et tout montant auquel elle a droit à ce titre et qui est inclus, pour l'application de la Loi de l'impôt sur le revenu, dans le calcul de son revenu ou, si elle est un particulier, dans le calcul de son revenu tiré d'une entreprise est réputé être un montant au titre de la contrepartie de cette fourniture.
It would seem that the combined effect of these two provisions is that if Maritime Life receives anything that might be construed as consideration for acting as trustee of the deemed trust, GST would be payable on that consideration. However, the Crown is not arguing, and could not argue, that subsection 267.1(5) has any application to the facts of this case, because the deemed trust exists only for purposes of the GST. There is no contractual or other arrangement that could possibly be construed as an arrangement by which Maritime Life is receiving consideration for acting as a trustee. Nor is there any provision of the Excise Tax Act that deems Maritime Life to have received consideration from its segregated funds that would fit within subsection 267.1(5). Certainly the deeming rule in section 131 cannot be read as extending that far.
However, the Crown argues for a different extension of the deeming rule in section 131. I summarize the steps in the Crown's analysis as follows.
First, the Crown argues that section 131 deems the segregated funds to be a separate person that has its own activities. That is so.
Second, the Crown says that the segregated funds are managed by Maritime Life. That is also correct. It is true that some third party services are provided, but the ultimate decision making power with respect to the funds rests with Maritime Life.
Third, the Crown says the investment administration fees must be treated for GST purposes as though they are consideration for management services that Maritime Life provides to the segregated funds, as a separate person, because commercial reality dictates that Maritime Life would not provide those services to another person without receiving consideration.
It is at this point that the Crown's analysis differs from mine. In my view, the fact that Maritime Life manages the segregated funds does not necessarily imply that the segregated funds must be treated as paying consideration for those management services. It is not unusual for the owner of a company, for example, to manage that company without remuneration in the form of fees. Why? Because the owner of the company provides those services in its own interest, in the expectation that its work will enhance the value of the company and result in some other form of reward to the owner of the company, perhaps in the form of dividends or an enhanced share value. Similarly, it is commercially reasonable for Maritime Life to have its own employees manage the segregated funds without a fee, because the management of those funds is a necessary component of Maritime Life's own business. It is work that Maritime Life itself must do in order to earn its own profits from issuing insurance policies.
Thus, I do not accept that there is any legal basis for reading section 131 as necessarily implying that an insurer that creates a segregated fund must be deemed to receive fees from the fund for managing the segregated fund. I see nothing in section 131 that requires or permits the Crown to treat the investment administration fees as anything other than what they are in fact, which as explained above is the portion of Maritime Life's premium revenues that is not retained in the segregated funds.
For these reasons, I conclude that no GST is payable on the investment administration fees for 1991, 1992 and 1993. I would dismiss this appeal with costs.
Karen R. Sharlow