Gore Mutual Insurance Co. v. The Queen, 97 DTC 1217, [1997] 2 CTC 2530 (TCC)

Bowie T.C J .:

These appeals are from reassessments for income tax for the taxation years 1984, 1986 and 1987, and from a determination of the Appellant’s loss for the 1985 taxation year. In making the reassessments and the determination appealed from, the Minister disallowed certain deductions from income taken by the Appellant in respect of reinsurance premiums in the following amounts:

These amounts represent the difference between the reinsurance premium actually paid or accrued during the year, and the Appellant’s estimate of the premium as it would eventually be established at some later time, for each of the years under appeal. These estimates were credited by the Appellant to an account called “provision for reinsurance rate adjustments”. The Appellant bases its claim to these deductions solely upon the provisions of paragraph 20(7)(c) of the Income Tax Act (the Act) and paragraph 1400(e) of the Income Tax Regulations (the Regulations). It is the Respondent’s position that the deductions are specifically prohibited by section 18(1)(e) of the Act and do not fall within the permissive provision of paragraph 1400(e) of the Regulations,

Gore Mutual Insurance Company (hereafter Gore, or the Appellant) is a general insurance company. It writes policies, other than life insurance policies, covering a variety of risks. The bulk of its policies are for automobile, household and business risks. Like most insurance companies, it enters into contracts of reinsurance, or treaties as they are referred to in the business, with other insurers. The purpose of these treaties is to protect Gore against the possibility of a claim under one of its policies, or multiple claims in the same year, of such a magnitude as to exceed its capacity to pay without unduly impairing its capital. Under such a treaty the reinsuring company agrees to assume the risk underwritten by Gore in excess of a certain amount (the retention limit), in return for a premium calculated according to a formula specified in the treaty. The formula which is applicable to the treaties giving rise to these appeals is one which makes provision for the total premium to be established according to the claims experience arising under the treaty, within the confines of specified lower and upper limits. The formula by which the premium is to be calculated is expressed in terms of a percentage of the gross net premium income of Gore. This formula, for the first of the years under appeal, is expressed in the treaty in the following terms:

The treaties provide that the premium for each year will be paid in the following way. First, a deposit premium is to be paid in four equal quarterly installments during the year. Thereafter, at the end of each subsequent year during which claims under the treaty remain outstanding, the total premium payable under the treaty is to be calculated in accordance with the formula, and a payment is to be made, either by Gore or by the reinsuring company to the other of them, to adjust the amount paid according to the most recent computation of the total premium. At each year end this process is repeated, and an adjusting payment is computed and paid for each prior year of the treaty for which there are claims that remained outstanding during the year. In the case of fire, theft and property damage all of the year’s claims may be settled within a year or two. Personal injury claims, however, may take up to 10 years to settle, and consequently it may take that long until the cost of reinsurance relating to any one year is fully determined and paid. This type of premium is sometimes referred to as “burning cost”, and it may be seen that the final amount of the reinsurance premium will ultimately depend upon the claims experience. Between the upper and lower limits specified in the policy the relationship between claims and reinsurance premiums is direct.

The Appellant takes the position that although the final computation of its reinsurance premiums for any year, and thus its cost of reinsurance for the year, is not known until this process has been exhausted, it can and does make accurate estimates of what the amount ultimately will be, and that in computing its income for tax purposes it is entitled to deduct an amount based on those estimates as a reserve for reinsurance premiums. Those estimates, of course, are limited in both their minimum and their maximum by the minimum and maximum premiums expressed in the reinsurance treaties.

The Department of Insurance regulated insurance companies prior to 1987, when it was replaced by the Office of the Superintendent of Financial Institutions. I shall refer to them collectively as OSFI. One of the regulatory requirements imposed on insurers is that they must file very detailed financial statements with OSFI annually. Considerable evidence was directed to the contents of the statements filed by the Appellant, and to the forms which were prescribed by OSFI, and its instructions as to their completion, in an attempt to show that the amounts in question here are regarded by OSFI, and by extension the industry in general, as being included in the expression “policy reserve”. Denis Brown, C.A. also gave evidence on behalf of the Appellant to the effect that in the usage of the insurance industry the expression “policy reserve” includes reserves for reinsurance rate adjustment which are driven by claims experience as it develops over subsequent years. As will appear later, it is not necessary to decide this point; nor is it necessary to have resort to the other evidence given by Mr. Brown in support of the interpretation for which the Appellant contends.

I admitted Mr. Brown’s opinion evidence over the objection of counsel for the Respondent. In retrospect, much of it went beyond even a broad view of admissibility in aid of construction of the statutory language, and should not be relied upon. There was another deficiency in the evidence of Mr. Brown. He did not, in my view, provide the independent, objective assistance that courts are entitled to receive from witnesses who are permitted to give opinion evidence. My impression throughout his evidence was that he was present to engage in advocacy from the witness stand, which, of course, is not a proper role for an expert witness[1] . If it were necessary to decide the matter I would not accept his opinion as to the meaning of the expression “policy reserve”. When cross-examined on the point he could not refer to any written work or document, or any other source to support this opinion. Nor can I find anything in either the OSFI forms or the instructions that accompanied them that could lead to any conclusion as to how, if at all, reserves for reinsurance rate adjustment are viewed by either OSFI or the industry generally. Where “provision for reinsurance rate adjustment” appears on the Appellant’s balance sheets filed, it is typed on a blank line, one of several provided on the form under the heading “other liabilities”. Neither the forms nor the instructions, alone or in conjunction with the evidence of Mr. Brown, leads me to conclude that the expression “policy reserve” as it is used either in the industry or in paragraph 20(7)(c) of the Act includes a reserve for reinsurance rate readjustment.

The Appellant also led opinion evidence from Ronald R. Miller, a highly qualified actuary, as to the reasonableness of the quantum of the reserves booked by the Appellant in the years in issue and claimed as a deduction. Mr. Miller’s evidence, too, is redundant because of the view that I take to the meaning of the words of paragraph 1400(e). I should, however, record that I found Mr. Miller’s evidence to be satisfactory in every respect. Had I reached the conclusion that the Appellant is entitled to the deduction it claims, then I would have accepted Mr. Miller’s opinion that the Appellant’s estimates for the years 1984, 1985 and 1986 were reasonable ones, and that its estimate for the year 1987 was excessive by approximately $890,000.

The amounts which give rise to these appeals are indistinguishable from the amounts that were at issue before Judge Brulé of this Court in Co-Operators General Insurance Company v. M.N.R.[2] In that case the Appellant put its claim to the deduction of its provision for reinsurance rate adjustment on two alternate bases. It was argued that such a reserve was properly deductible in computing income in accordance with generally accepted accounting principles, and in the alternative that it was specifically made deductible by the provisions of paragraphs 20(7)(c) of the Act and 1400(e) of the Regulations, Both of these arguments were rejected by Judge Brulé, who concluded that the provision for reinsurance rate adjustment was a contingent account, the deduction of which was precluded by paragraph 18(1)(e) of the Act, and was not permitted by Regulation 1400(e). Counsel for the Appellant does not suggest that the present case can be distinguished from the Co- Operators case on its facts. Instead, he takes the position that the case should be decided differently today, because, since Judge Brulé’s decision in 1993, we have had the benefit of the judgment of the Supreme Court of Canada in the Notre-Dame de Bon-Secours^[3] case, which dictates a purposive approach to statutory interpretation.

It is argued, first, that the plain words of paragraph 1400(e) of the Regulations are broad enough to embrace the reserves in question, and second, that if there is ambiguity then a teleological approach to interpretation, aided by the evidence of Mr. Brown, leads to the conclusion that the reserves fall within that which the Regulations permit. This latter submission ignores that the purposive approach to the interpretation of taxing statutes dates back far beyond even the Supreme Court’s judgment in Stubart,[4] which was decided some nine years prior to the Co-Operators’ case. It has been applied consistently by both the Federal Court of Appeal and the Supreme Court of Canada for many years in judgments[5] which, of course, are binding on this Court. Judge Brulé reached his decision because the words of the Regulations do not admit of the construction which the Appellant advances, and not for lack of authority for the teleological, or purposive, approach to statutory interpretation.

I agree that the words of paragraph 1400(e) are plain and unambiguous. However, I do not agree that they permit a deduction for a reserve for reinsurance premium rate adjustments, as the Appellant argues. I agree with Judge Brulé’s conclusion that they are quite plainly intended to cover only reserves for claims arising under policies between insurers and their policy- holders. The governing principle is found in the following words of Iacobucci J. in Canada v. Antosko[6] .

...While it is true that the courts must view discrete sections of the Income Tax Act in light of the other provisions of the Act and of the purpose of the legislation, and that they must analyze a given transaction in the context of economic and commercial reality, such techniques cannot alter the result where the words of the statute are clear and plain...

The pertinent sections of the Act and the Regulations read as follows during the years under appeal.

12(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(a) any amount received by the taxpayer in the year in the course of a business

(i) that is on account of services not rendered or goods not delivered before the end of the year or that, for any other reason, may be regarded as not having been earned in the year or a previous year, or

(11) under an arrangement or understanding that it is repayable in whole or in part on the return or resale to the taxpayer of articles in or by means of which goods were delivered to a customer;

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an Outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

(e) an amount transferred or credited to a reserve, contingent account or sinking fund except as expressly permitted by this Part;

20(7) Paragraph (l)(m) does not apply to allow a deduction

(c) as a reserve in respect of insurance, except that an insurance corporation may, in computing its income for a taxation year from an insurance business, other than a life insurance business, carrried on by it, deduct as policy reserves such amounts as are prescribed for the purposes of this paragraph.

1400 For the purposes of paragraph 20(7)(c) of the Act, an insurance corporation in computing its income for a taxation year may deduct, in respect of...

(e) a policy where an event has occurred before the end of the year that has given or is likely to give rise to a claim under the policy (in this paragraph referred to as “the liability”), such amount as the corporation may claim not exceeding the lesser of

(1) a reasonable amount in respect of the liability as at the end of the year, and

(ii) the reserve, in respect of the liability, reported by the corporation in its annual report for the year to the relevant authority.

Paragraph 12(l)(tz) has the effect of bringing into income all amounts received during the year, whether referable to goods and services to be supplied or delivered by the taxpayer in the year, or in a later year. Paragraph 18(1)(a) provides that in computing income, deductions for expenses may be taken only to the extent that they have been made or incurred. Paragraph 18(l)(e) is a general prohibition against the deduction of reserves and contingent liabilities “...except as expressly permitted...”. Section 20 of the Act makes specific provision for certain deductions in computing income which would otherwise be impermissible. Paragraph 20(1)(m) permits certain reserves to be deducted in the computation of income, but it is not disputed that it has no application here. Paragraph 20(7)(c) of the Act and 1400(e) of the Regulations together provide for the only deduction for a reserve that may be taken in computing the income of a general insurance business. Stripped of unnecessary words, and substituting the words “claim under the policy” for the word “liability” to which it is abbreviated in the Regulations, paragraphs 20(7)(c) and 1400(e) read as follows:

20(7)(c) ...an insurance corporation may ... deduct as policy reserves such amounts as are prescribed for the purposes of this paragraph.

1400 ...an insurance corporation ... may deduct, in respect of ... a policy where an event has occurred before the end of the year that has given or is likely to give rise to a claim under the policy ... the lesser of

(i) a reasonable amount in respect of the claim under the policy...;

and

(ii) the reserve in respect of the claim under the policy, reported to the relevant authority;

It is immediately apparent from the foregoing that the Appellant, to be entitled to deduct a reserve for future increases in reinsurance premiums for the year, must bring those amounts within the words “a reasonable amount in respect of the claim under the policy”, or “the reserve, in respect of the claim under the policy reported ... to the relevant authority” (emphasis added). It follows that the amount that may be deducted can only be in respect of a claim under the policy. Counsel for the Appellant, arguing that these words are broad enough to embrace the amounts in question for increments in the reinsurance premiums which the Appellant will be called upon to pay in the future, relied on the following words of Dickson C.J. in Nowegijick v. RÏ[7] -

The words “in respect of” are, in my opinion, words of the widest possible scope. They import such meanings as “in relation to”, “with reference to” or “in connection with”. The phrase “in respect of” is probably the widest of any ex- pression intended to convey some connection between two related subject matters.

Giving the expression its widest meaning, it is not possible, in my view, for the operative words of the Regulations to take in the amounts here in question. The word “policy”, as it is used there, can only refer to a policy of insurance written by the Appellant, and not to a policy of reinsurance ceded by it to another company. It cannot be said in any sense that the amounts here in issue pertain to, or are in connection with, in relation to, or in reference to a claim arising under the policy entered into between the Appellant and its insured, even though that claim may have the indirect effect of causing an increase in the premium that the Appellant must pay under a different policy with a different party in respect of its reinsurance. To give the words the meaning for which the Appellant contends would be to insert into the Regulations something that is not there: it would require the addition of such words as “and increased reinsurance premiums” following the word “claim” where it first appears in paragraph 1400(e). This I cannot do. As Major J. said, speaking for the majority of the Supreme Court of Canada in Friesen v. The Queen^:[8]

...It is a basic principle of statutory interpretation that the court should not accept an interpretation which requires the insertion of extra wording where there is another acceptable interpretation which does not require any additional wording....

I conclude, therefore, that on the plain meaning of the words of paragraph 1400(e), read in their context, the Appellant is not entitled to deduct the reserve in question.

I should comment, however, on the submission of the Appellant as to the extrinsic materials in the form of explanatory notes issued by the Department of Finance. In his written submission filed at the trial, counsel for the Appellant relies upon the Department of Finance Regulatory Impact Analysis Statement (RIAS) of April 14, 1994, together with the testimony of Mr. Brown to the effect that under generally accepted accounting principles the reserve for reinsurance rate adjustments would be an appropriate deduction from income in the policy year, and the decision of the Federal Court of Appeal in Canderefl[9] to support the proposition that paragraph 1400(e) permits the deduction of a reserve for reinsurance rate adjustment. In particular counsel relies on the following quotation from the RIAS:

Section 1400 of the Income Tax Regulations provides for the deduction of certain reserves by an insurance corporation in computing its income.

This regulation is relieving in nature and designed to ensure the appropriate measurement of income for tax purposes.

This statement was made in reference to the addition to the Regulations of paragraph 1400(^7) by SOR/94-297 in 1994. Whatever else it might do, it does not address the meaning to be attributed to paragraph (e) as it was enacted in 1979 by SOR/79-425. The only explanatory note accompanying that regulation is not helpful. It simply reads:

These amendments revise the method of calculating policy reserves in respect of insurance businesses pursuant to amendments to paragraph 20(7)(c) and section 138 of the Income Tax Act.

If resort to extrinsic material of this kind, or to the legislative history, were considered useful, then the most helpful material would be the amendments made to section 1400 in 1990 and 1996. SOR/90-661, dated September 20, 1990, amended paragraph 1400(e) to refine the method of calculation of the permitted reserve, and to make specific provision for reserves in respect of structured settlements. The RIAS published with it contains the following with respect to paragraph (e):

Paragraph 1400(e) provides for the reserve amount in respect of unpaid claims of an insurer arising in the course of its other than life business. The amendments to this paragraph are consequential to the introduction of paragraph 18(l)(e.l) of the Income Tax Act. Paragraph 18(1) (6.1) prohibits the deduction of a reserve for unpaid claims except as otherwise expressly permitted. Paragraph 20(7)(c) of the Income Tax Act in turn allows a reserve by prescription for such unpaid claims. Paragraph 1400(e) provides for the calculation of that reserve amount.

The 1996 amendment was made by SOR/96-443, dated September 17, 1996, after the trial herein. It was, however, released in draft form on December 8, 1994. It, too, changes the manner of calculating the reserve under paragraph (e). Significantly, it adds paragraph (6.1) to section 1400, to clarify that reserves may be deducted for claims incurred but not reported, but it is silent as to reserves for reinsurance rate adjustments, although Judge Brulé’s decision in Co-Operators was released in February 1993. The relevant parts of the accompanying RIAS read:

Paragraph 1400(e) of the Income Tax Regulations prescribes, for the purpose of paragraph 20(7)(c) of the Income Tax Act, the maximum reserves an insurer may deduct in respect of claims incurred but not paid under its non-life insurance policies.

...In addition, [the amendments] replace the reasonableness limits by limits that are explicitly based on actuarial principles. Furthermore, a new rule is introduced in paragraph 1400(e.1) to clarify that reserves can be claimed for incurred but not reported claims.

If there were ambiguity to resolve, and I repeat that in my view there is not, then these materials would lead to the conclusion that it was not the intention of the drafter that reserves for reinsurance rate adjustment be included within the ambit of paragraph 1400(e).

The appeals are dismissed, with costs.

Appeal dismissed.