McDonald
J.A.:
—
This
is
an
appeal
from
a
judgment
of
the
Tax
Court
of
Canada
dated
December
14,
1994
which
allowed
the
Respondent’s
appeal
and
vacated
the
assessments
made
against
him.
As
the
appeal
was
heard
with
the
appeal
in
Court
File
A-12-95,
a
copy
of
these
reasons
will
be
filed
in
that
matter
and
shall
become
reasons
for
judgment
therein.
Mr.
Kalef
was
a
director
of
Dynamics
Incorporated
(“Dynamics”).
Dynamics
was
incorporated
under
the
laws
of
Ontario.
Mr.
Kalef
was
not
one
of
the
first
directors
named
in
the
Articles
of
Incorporation.
Dynamics
was
petitioned
into
bankruptcy
and
on
June
28,
1985,
the
Trustee
exercised
its
power
under
the
Bankruptcy
Act,
R.S.C.
1985,
c.
D-3,
to
control
all
of
theassets
of
the
company
to
the
exclusion
of
Mr.
Kalef.
On
July
21,
1987,
the
Minister
of
National
Revenue
assessed
Mr.
Kalef
for
unremitted
payroll
deductions
of
Dynamics.
On
July
22,
1987,
the
Minister
assessed
Mr.
Kalef
for
unremitted
Part
VIII
tax
of
Dynamics.
Decision
Under
Appeal
The
Tax
Court
Judge
agreed
with
Mr.
Kalef
s
argument
that
once
a
Trustee
in
Bankruptcy
is
appointed
and
takes
control
of
a
corporation’s
assets
to
the
exclusion
of
its
directors,
a
director
ceases
to
be
one
for
the
purposes
of
subsection
227.1(4)
of
the
Income
Tax
Act,
1970-71-72,
c.
63.
Under
subsection
71(2)
of
the
Bankruptcy
Act!
the
trustee
has
the
power
to
deal
with
the
assets
of
the
company.
The
directors
of
Dynamics
retained
some
limited
powers
but
the
trustee
had
both
the
assets
and
the
power
to
deal
with
them.
After
the
date
of
the
bankruptcy,
Mr.
Kalef
no
longer
had
the
ordinary
power
of
a
director
to
satisfy
or
dispute
the
Minister’s
claim
against
the
corporation’s
assets.
It
was
argued
that
the
Notices
of
Assessment
were
invalid
since
Mr.
Kalef
ceased
to
have
the
rights
and
powers
of
a
director
more
than
two
years
before
the
Crown
commenced
proceedings
against
him.
Mr.
Kalef
was
therefore
not
a
director
for
the
purposes
of
dealing
with
the
Minister’s
claims
against
Dynamics.
The
Tax
Court
Judge
relied
on
McConnachie
v.
Minister
of
National
Revenue,
[1991]
2
C.T.C.
2072,
91
D.T.C.
873
(T.C.C.),
in
which
the
Tax
Court
found
that
the
purpose
of
subsection
227.1(4)
is
to
protect
directors
from
indefinite
liability.
It
was
held
that
this
protection
would
be
greatly
diminished
if
directors
of
a
bankrupt
corporation
are
considered
to
be
continuing
in
office
until
they
die,
resign
or
the
company
is
struck
from
the
register.
Issue
Does
the
director
of
a
corporation
cease
to
hold
the
position
for
the
purposes
of
subsection
227.1(4)
of
the
Income
Tax
Act
when
a
Trustee
in
Bankruptcy
is
appointed?
Analysis
Subsection
227.1(1)
makes
a
director
of
a
company
vicariously
liable
for
any
failure
by
the
company
to
withhold,
deduct
or
remit
source
deductions.
The
section
reads
as
follows:
227.1(1)
Where
a
corporation
has
failed
to
deduct
or
withhold
an
amount
as
required
by
subsection
135(3)
or
section
153
or
215,
has
failed
to
remit
such
an
amount
or
has
failed
to
pay
an
amount
of
tax
for
a
taxation
year
as
required
under
Part
VII
or
VIII,
the
directors
of
the
corporation
at
the
time
the
corporation
was
required
to
deduct,
withhold,
remit
or
pay
the
amount
are
jointly
and
severally
liable,
together
with
the
corporation,
to
pay
that
amount
and
any
interest
or
penalties
relating
thereto.
The
justification
for
the
imposition
of
vicarious
liability
is
simple.
The
directors
of
a
company
are
its
directing
mind.
They
are
the
persons
responsible
for
insuring
that
the
corporation
fulfils
its
financial
obligations.
The
vicarious
liability
imposed
by
subsection
227.1(1)
is
not
indefinite.
A
time
limit
on
the
liability
of
a
director
is
found
in
subsection
227.1(4):
227.1(4)
No
action
or
proceedings
to
recover
any
amount
payable
by
a
director
of
a
corporation
under
subsection
(1)
shall
be
commenced
more
than
two
years
after
the
director
last
ceased
to
be
a
director
of
that
corporation.
In
this
appeal
the
Respondent
has
argued
that
the
time
limit
established
by
subsection
227.1(4)
has
elapsed
and
that
he
can
no
longer
be
held
vicariously
liable
for
Dynamics’
failure
to
remit
either
its
payroll
deductions
or
tax
under
Part
VIII.
Mr.
Kalef
contends
that
he
ceased
to
be
a
director
when
the
Trustee
in
Bankruptcy
assumed
control
of
Bynamics,
since
this
was
the
moment
at
which
he
lost
actual
control
over
the
company.
The
learned
Tax
Court
Judge
accepted
this
argument
and
vacated
the
reassessments
against
Mr.
Kalef.
The
simple
question
is:
did
Mr.
Kalef
cease
to
be
a
director
of
the
company
upon
the
appointment
of
the
trustee?
The
Income
Tax
Act
neither
defines
the
term
director,
nor
establishes
any
criteria
for
when
a
person
ceases
to
hold
such
a
position.
Given
the
silence
of
the
Income
Tax
Act,
it
only
makes
sense
to
look
to
the
company’s
incorporating
legislation
for
guidance.
Bynamics
was
incorporated
under
the
Ontario
Business
Corporations
Act,
S.O.
1982,
c.
4.
Subsection
1(1)
of
the
Ontario
Business
Corporations
Act
defines
the
term
“director”
as
follows:
l(l)“director”
means
a
person
occupying
the
position
of
director
of
a
corporation
by
whatever
name
called
and
“directors”
and
“board
of
directors”
include
a
single
director.
Pursuant
to
subsection
1(1)
of
that
statute,
if
a
person
is
“occupying
the
position
of
director
of
a
corporation”
he
or
she
is
a
director.
The
definition
is
quite
passive.
There
is
no
requirement
that
the
person
exercise
the
power
of
a
director
or
exert
direct
control
over
the
company’s
assets
in
order
to
be
a
“director”.
The
Ontario
Business
Corporations
Act
also
outlines
the
circumstances
under
which
a
director
ceases
to
occupy
the
position.
Subsection
121(1)
of
the
statute
states:
121(1)
A
director
of
a
corporation
ceases
to
hold
office
when
he
or
she,
(a)
dies
or,
subject
to
subsection
119(2),
resigns;
(b)
is
removed
in
accordance
with
section
122;
or
(c)
becomes
disqualified
under
subsection
118(1).
Mr.
Kalef
did
not
fulfil
any
of
these
requirements.
He
could
have
resigned
or
attempted
to
resign
from
his
position
as
a
director
of
the
company
but
he
did
not
do
so.
The
only
impediment
to
resignation
in
the
Ontario
Business
Corporations
Act
is
found
in
subsection
119(2).
That
subsection
states
that
the
first
directors
of
a
company
cannot
resign
unless
a
successor
is
appointed.
Mr.
Kalef
was
not
one
of
the
first
directors
of
Bynamics
and
that
subsection
therefore
does
not
apply.
For
the
purposes
of
the
Ontario
Business
Corporations
Act
Mr.
Kalef
remained
a
director
of
Bynamics
notwithstanding
the
appointment
of
the
Trustee
in
Bankruptcy.
The
Federal
Court-Trial
Division
decision
in
Perri
v.
Minister
of
National
Revenue,
[1995]
2
C.T.C.
196,
(sub
nom.
R.
v.
Wellburn),
95
D.T.C.
5417,
was
released
after
the
decision
of
the
Tax
Court
Judge
in
this
matter.
In
that
case
MacKay
J.
concluded
that
the
appointment
of
a
receiver
does
not
indicate
the
time
at
which
the
directors
of
the
company
cease
to
hold
their
positions
for
the
purposes
of
the
Income
Tax
Act.
He
discussed
the
proper
interpretation
to
be
given
to
subsection
227.1(4)
as
follows:
Subsection
227.1(4)
limits
an
action
to
recover
on
that
vicarious
liability,
not
with
reference
to
the
ability
of
directors
to
redress
any
failure
of
the
corporation,
that
is,
within
the
term
of
their
office
as
directors,
but
to
a
reasonable
period
after
they
cease
to
hold
office,
i.e.,
two
years
after
the
person
last
ceased
to
be
a
director
of
the
corporation.
Termination
of
office
under
the
law
generally
may
vary
from
province
to
province
and
from
one
circumstance
to
another
depending
upon
the
relevant
provincial
or
federal
legislation.
I
may
not
fully
comprehend
what
was
contemplated
when
the
learned
Tax
Court
Judge
suggested
such
a
view
“would
in
some
circumstances,
such
as
those
under
consideration,
render
the
limitation
period
devoid
of
meaningful
substance”.
In
my
view,
the
limitation
period
would
be
no
more
or
less
devoid
of
substance
if
it
commences
to
run
when
a
director’s
office
terminates
under
applicable
legislation
than
if
the
limitation
period
runs
with
the
result
of
the
Tax
Court’s
decision,
for
in
either
case
vicarious
liability
extends
for
two
years
after
a
former
director
can
act,
as
a
director,
to
do
anything
about
a
failure
by
the
corporation
to
meet
its
obligations
under
the
Acct.
I
agree
with
the
reasoning
of
MacKay
J.
While
it
may
be
open
to
Parliament
to
expressly
deviate
from
the
principles
of
corporate
law
for
the
purposes
of
the
Income
Tax
Act,
I
do
not
think
such
an
intention
should
be
imputed.
Given
the
silence
of
the
Income
Tax
Act
I
think
the
guidance
of
the
applicable
corporate
legislation,
in
this
case
the
Ontario
Business
Corporations
Act,
should
be
taken.
A
director
cannot
and
should
not
obtain
the
benefits
of
incorporation
under
the
Ontario
Business
Corporations
Act
without
accepting
the
responsibilities
as
well.
At
all
pertinent
times
Mr.
Kalef
was
a
director
of
Dynamics.
He
did
not
cease
to
be
a
director
by
virtue
of
the
appointment
of
the
Trustee
in
Bankruptcy.
He
did
not
meet
any
of
the
requirements
for
ceasing
to
be
a
director
established
by
the
Ontario
Business
Corporations
Act.
The
time
limit
found
in
subsection
227.1(4)
of
the
Income
Tax
Act
does
not
apply
to
bar
the
reassessments.
I
would
allow
the
appeal
and
would
set
aside
the
decision
of
the
Tax
Court
of
Canada
with
one
set
of
costs
in
this
appeal
and
in
Court
File
No.
A-12-95.
Appeal
allowed.
[INDEXED
AS:
MUNICH
REINSURANCE
CO.
Munich
Reinsurance
Company
(Canada
Branch)
v.
Her
Majesty
the
Queen
Federal
Court-Trial
Division
(Richard
J.),
February
22,
1996
(Court
File
No.
T-3083-9I
),
on
appeal
from
a
decision
of
the
Tax
Court
of
Canada
[1992]
1
C.T.C.
2004.
Income
tax
—
Federal
-
Foreign
Insurance
Companies
Act,
R.S.C.
1985,
c.
I-13
—
62(l)(b)
—
Income
Tax
Act,
R.S.C.
1985,
c.
1
(5th
Supp)
-
12(l)(c),
212
-
The
taxpayer
was
a
German
corporation
which
carried
on
a
reinsurance
business
through
a
Canadian
branch
licensed
under
the
Foreign
Insurance
Companies
Act
(FICA).
In
calculating
its
Canadian
reserve
liabilities
(as
part
of
the
calculation
of
its
gross
investment
revenue),
the
taxpayer
excluded
certain
amounts.
In
determining
the
property
used
or
held
by
it
during
the
year,
the
taxpayer
included
a
value
for
the
year
of
investment
property
equal
to
capitalized
interest
earned
on
Overpayments
of
income
tax
instalments.
The
Minister
reassessed.
The
Minister
calculated
the
Canadian
reserve
liabilities
without
making
the
deductions
set
out
in
the
FICA
and
the
Minister
included
interest
on
the
overpayments
of
income
tax
in
business
income.
The
taxpayer
appealed
against
the
assessment,
and
its
appeal
was
dismissed
by
the
Tax
Court
of
Canada.
The
taxpayer
appealed
further
to
the
Federal
Court-Trial
Division.
In
this
appeal,
which
proceeeded
by
way
of
trial
de
novo,
the
taxpayer
did
not
dispute
the
Tax
Court
of
Canada’s
reasons
but
advanced
new
grounds
for
contesting
the
reassessments.
First
the
taxpayer
submitted
that
in
calculating
the
unearned
premiums
for
the
purposes
of
the
Canadian
reserve
liabilities
the
Minister
must
consider
the
deductions
with
respect
to
policy
acquisition
expenses
allowed
by
Federal
Superintendent
of
Insurance.
The
taxpayer
also
submitted
that
the
interest
received
on
income
tax
overpayments
should
be
excluded
from
income.
HELD:
Appeal
allowed
in
part.
Subsection
62(1)
of
the
FICA
specifies
what
liabilities
the
company
must
include
in
its
annual
statements
to
the
Federal
Superintendant
of
Insurance,
and
makes
clear
that
the
reserve
is
not
simply
equivalent
to
unearned
premiums,
but
that
its
calculation
requires
a
deduction
with
respect
to
acquisition
expenses.
The
definition
of
Canadian
reserve
liabilities
in
subsection
2405(3)
of
the
Income
Tax
Regulations
makes
specific
reference
to
the
calculations
required
by
the
Superintendant.
Since
the
Superintendant
requires
only
that
the
adjusted
amount
be
kept
in
Canada
as
a
reserve,
there
is
no
reason
to
apply
the
taxation
provisions
to
the
entire
unadjusted
amount.
In
order
to
determine
the
aggregate
reserves
of
the
insurer,
the
appropriate
deductions
must
be
made.
With
respect
to
the
treatment
of
interest
earned
on
overpayments
of
income
tax
instalments,
the
taxpayer
contended
that
since
the
capitalized
interest
is
not
investment
property
for
purposes
of
the
Act
(as
determined
by
the
Tax
Court),
the
interest
must
be
considered
income
from
business
subject
to
taxation
under
Part
XIII
and
then
excluded
from
tax
by
virtue
of
sub-subparagraph
212(l)(b)(ii)(C).
In
the
Court’s
view,
the
interest
generated
from
the
income
tax
balances
is
income
in
satisfaction
of
interest
within
the
meaning
of
paragraph
12(
1
)(c)
of
Part
I
the
Act.
It
is,
therefore,
excluded
from
calculation
under
Part
XIII
of
the
Act.
Paul
Steep,
Gabrielle
Richard
for
the
plaintiff.
Marie-Thérèse
Boris
for
the
defendent.
Cases
cited:
R.
v.
Ensite
Ltd.
(sub
nom.
Ensite
Ltd.
v.
R.),
[1986]
2
S.C.R.
509,
[1986]
2
C.T.C.
459,
86
D.T.C.
6521.
Legislation
cited:
Income
Tax
Act,
R.S.C.
1985,
c.
1
(5th
Supp)
-
12(l)(c)
129
138(8)
175(1)
212(l)(b)
212(l)(b)(ii)(C)
214(3)(c)
Federal
Court
Act,
R.S.C.
1985,
c.
F-7
-
48
Foreign
Insurance
Companies
Act,
R.S.C.
1985,
c.
1-13
-
62(l)(b)
Income
Tax
Regulations,
C.R.C.
1978,
c.
945
—
802
2400-2409
2405(3)
Part
XXIV
Insurance
Companies
Acquisition
Expenses
Regulations
SOR/78-18
—
2
Federal
Court
Rules,
C.R.C.
1978,
c.
663
—
420
420(1)
420(2)(a)
Richard
J.:
—
This
is
an
appeal
pursuant
to
subsection
175(1)
of
the
Income
Tax
Act,
R.S.C.
1985,
c.
1
(5th
Supp.)
(the
“Act”),
and
section
48
of
the
Federal
Court
Act,
R.S.C.
1985,
c.
F-7,
from
a
decision
of
the
Tax
Court
of
Canada
dated
August
9,
1991,
[1992]
1
C.T.C.
2004,
91
D.T.C.
1137
(T.C.C.)
which
dismissed
appeals
of
two
reassessments
issued
by
the
Minister
of
National
Revenue
(the
Minister)
on
June
8,
1989,
and
confirmed
on
March
28,
1990.
The
appeal
is
a
trial
de
novo.
No
witnesses
were
called
and
argument
proceeded
before
me
on
agreed
facts.
Issues
The
plaintiff
seeks
the
following
relief:
(a)
That
the
reassessments
dated
June
8,
1989,
be
varied
or
referred
back
to
the
Minister
to
calculate
the
unearned
premium
reserves
for
the
purpose
of
the
Canadian
reserve
liabilities
in
1985
and
1986
so
as
to
deduct
the
amount
of
the
deferred
policy
acquisition
expenses
allowed
by
the
relevant
authority
referred
to
in
the
definition
of
the
Canadian
reserve
liabilities,
in
accordance
with
Regulation
2405(3)
and
paragraph
62(1
)(b)
of
the
Foreign
Insurance
Companies
Act,
R.S.C.
1985,
c.
I-13
(FICA);
and
(b)
That
such
reassessments
be
varied
or
referred
back
to
the
Minister
so
as
to
exclude
the
interest
on
the
income
tax
credit
balances
for
purposes
of
computing
the
income
of
the
plaintiff
under
Part
I
of
the
Act
and
to
include
such
interest
under
Part
XIII
of
the
Act,
subject
to
the
exceptions
under
paragraph
212(
1
)(b)
of
the
Act,
for
such
years.
Background
The
appellant
is
a
German
corporation
which
carries
on
a
reinsurance
business
throughout
the
world,
including
a
branch
in
Canada
which
is
licensed
according
to
the
FICA.
The
reassessments
in
question
relate
to
the
1985
and
1986
taxation
years.
Pursuant
to
subsection
138(9)
of
the
Act,
a
non-resident
insurer
must
include
in
its
gross
investment
revenue
that
portion
of
its
revenue
which
is
derived
from
property
“used
by
it
in
the
year
in,
or
held
by
it
in
the
year
in
the
course
of,
carrying
on
that
business
in
Canada.”
The
amounts
to
be
included
in
the
calculation
of
investment
revenue
derived
from
property
used
in
the
course
of
business
are
set
out
in
Part
XXIV
of
the
Income
Tax
Regulations,
C.R.C.
1978,
c.
945,
as
am
(the
“Regulations”),
at
sections
2400
to
2409.
One
of
the
amounts
to
be
included
in
this
calculation
is
“Canadian
reserve
liabilities”
(CRL),
which
is
defined
in
subsection
2405(3)
of
the
Regulations
as
follows:
“Canadian
reserve
liabilities”
of
an
insurer,
as
at
the
end
of
a
taxation
year,
means
the
aggregate
amount
of
the
insurer’s
liabilities
and
reserves
(other
than
liabilities
and
reserves
in
respect
of
amounts
payable
out
of
segregated
funds)
in
respect
of
its
insurance
policies
in
Canada,
as
determined
for
the
purposes
of
the
relevant
authority
at
the
end
of
the
year;
The
reserves
to
be
considered
in
calculating
the
CRL
are
provided
for
in
the
FICA.
The
FICA
requires
that
a
foreign
reinsurer
carrying
on
business
in
Canada
must
deliver
annual
statements
of
the
operations
of
the
company
relating
to
Canada,
and
must
keep
statutory
reserves
in
the
country
under
the
supervision
of
the
Federal
Superintendent
of
Insurance
(the
“relevant
authority”),
so
that
there
is
adequate
security
for
the
policies
which
are
in
force
in
Canada.
For
purposes
of
determining
its
CRL,
the
plaintiff
excluded
$245,000.00
in
1985
and
$214,000.00
in
1986,
on
the
basis
that
these
amounts
were
not
included
in
the
definition
of
subsection
2405(3)
of
the
Regulations.
These
amounts
were
included
by
the
Minister
in
a
Notice
of
Reassessment
dated
June
8,
1989,
on
the
basis
that
they
were
reserves
or
liabilities.
It
is
no
longer
relevant
what
these
amounts
represent
since
the
appellant
has
accepted
the
Minister’s
decision
on
this
question.
Further,
in
determining
the
property
used
by
it
in
the
year
or
held
by
it
during
the
year
in
the
course
of
carrying
on
an
insurance
business
in
Canada
for
purposes
of
Section
2400
of
the
Regulations,
the
plaintiff
included
a
value
for
the
year
of
investment
property
equal
to
the
capitalized
interest
earned
on
income
tax
credit
balances
(1.e.
overpayments)
in
the
amount
of
$508,000.00
for
1985
and
$2,258,000.00
for
1986.
The
interest
earned
on
this
property
was
included
as
gross
investment
revenue.
By
Notice
of
Reassessment
dated
June
8,
1989,
the
Minister
excluded
the
capitalized
interest
from
the
calculation
of
the
value
for
the
year
of
investment
property,
and
the
interest
earned
on
the
overpayments
was
included
as
business
income.
The
defendant
confirmed
the
reassessment
by
a
Notice
of
Confirmation
dated
March
28,
1990.
The
plaintiffs
appeal
to
the
Tax
Court
of
Canada
on
the
two
above
issues
was
dismissed
by
Rip
T.C.J.
on
August
9,
1991.
The
plaintiff
does
not
dispute
Mr.
Justice
Rip’s
reasons,
but
has
advanced
new
grounds
for
contesting
the
reassessments
in
the
present
appeal.
Unearned
Premium
Reserves
The
appellant
submits
that
in
calculating
the
unearned
premium
reserves
for
purposes
of
the
CRL
in
1985
and
1986,
the
Minister
must
take
into
consideration
the
amount
of
the
deduction
with
respect
to
deferred
policy
acquisition
expenses
allowed
by
the
relevant
authority.
Subsection
2405(3)
of
the
Regulations
defines
CRL
as
follows:
..the
aggregate
amount
of
the
insurer’s
liabilities
and
reserves
(other
than
liabilities
and
reserves
in
respect
of
amounts
payable
out
of
segregated
funds)
in
respect
of
its
insurance
policies
in
Canada,
as
determined
for
the
purposes
of
the
relevant
authority
at
the
end
of
the
year.
The
appellant
relies
on
subsection
62(1)
of
the
FICA
which
specifies
what
liabilities
the
company
must
include
in
its
annual
statements
to
the
relevant
authority.
This
subsection
reads
as
follows:
62(1)
A
company
shall,
in
respect
of
its
policies
in
Canada
in
force,
and
in
respect
of
claims
under
accident
and
sickness
policies
in
Canada
payable
in
instalments,
include
in
the
liabilities
shown
in
its
annual
statement
of
Canadian
business
reserves
not
less
than
the
following:
(b)
for
all
other
policies,
a
reserve
equal
to
the
unearned
premiums
less
a
deduction
with
respect
to
acquisition
expenses
of
such
an
amount
as
may
be
determined
in
accordance
with
the
regulations.
The
deduction
referred
to
in
paragraph
62(1
)(b)
is
defined
in
section
2
of
the
Insurance
Companies
Acquisition
Expenses
Regulations,
SOR/78-18.
This
provision
reads
as
follows:
2.
The
amount
of
the
deduction
to
be
made
under...
paragraph
47(1
)(b)
[now
62(1
)(b)]
of
the
Foreign
Insurance
Companies
Act
with
respect
to
acquisition
expenses
shall
be
determined
by
ascertaining
the
amount
of
(a)
the
actual
acquisition
expenses
incurred,
(b)
the
proportion
of
the
unearned
premiums
that
may
reasonably
be
considered
not
to
be
required
for
the
payment
of
claims
and
expenses
other
than
acquisition
expenses,
and
(c)
thirty
per
cent
of
the
unearned
premiums,
and
by
deeming
the
amount
of
the
deduction
to
be
equal
to
the
least
of
the
amounts
referred
to
in
paragraphs
(a)
to
(c).
Therefore,
in
calculating
the
unearned
premium
reserves
to
be
taken
into
account
in
the
report
to
the
Superintendent
of
Insurance,
one
must
first
determine
the
actual
amount
of
unearned
premiums,
and
then
subtract
the
least
of
the
three
amounts
enumerated
in
the
above
provision.
The
respondent
submits
that
the
unearned
premiums
appear
as
a
separate
entry
on
the
form
submitted
to
the
Superintendent
of
Insurance.
Therefore,
the
Minister
ought
not
to
read
into
the
Act
a
requirement
to
consider
subsequent
deductions
made
by
the
Superintendent
of
Insurance
pursuant
to
paragraph
62(1)(b)
of
the
Insurance
Companies
Acquisition
Expenses
Regulations^
Furthermore,
the
respondent
argues
that
unlike
in
the
definition
of
CRL,
there
is
a
specific
mention
of
deferred
acquisition
expenses
in
the
definition
of
“Canadian
investment
funds”
also
found
in
subsection
2405(3)
and
which
is
in
many
other
respects
similar
to
the
definition
of
CRL.
It
is
suggested
that
I
infer
from
this
fact
that
the
legislator
intended
to
exclude
acquisition
expenses
from
the
CRL.
I
cannot
accept
the
respondent’s
arguments
on
this
issue.
The
definition
of
CRL
in
subsection
2405(3)
of
the
Regulations
makes
specific
reference
to
the
calculations
for
the
purposes
of
the
relevant
authority.
Paragraph
62(1
)(b)
of
the
FICA
makes
clear
that
the
reserve
is
not
simply
equivalent
to
unearned
premiums,
but
that
the
calculation
of
the
reserve
requires
a
deduction
with
respect
to
acquisition
expenses.
Since
the
relevant
authority
requires
only
that
the
adjusted
amount
be
kept
in
Canada
as
a
reserve,
there
is
no
reason
to
apply
the
different
taxation
provisions
to
the
entire
unadjusted
amount.
In
order
to
determine
the
aggregate
reserves
of
the
insurer,
the
appropriate
deductions
must
be
made.
For
1985,
the
plaintiff’s
unearned
premiums
(excluding
those
related
to
marine
insurance)
amounted
to
$33,104,000.00.
One
must
then
subtract
the
lesser
of:
(a)
the
actual
acquisition
expenses
incurred
of
$6,829,000.00,
which
amount
represents
the
gross
$7,033,000.00
less
the
$204,000.00
for
marine
insurance;
(b)
the
proportion
of
the
unearned
premiums
that
may
reasonably
be
considered
not
to
be
required
for
the
payment
of
claims
and
expenses
other
than
acquisition
expenses,
which
the
appellant
estimates
at
$9,268,000.00;
and
(c)
thirty
per
cent
of
the
unearned
premiums,
being
$9,945,000.00.
Therefore,
in
submitting
its
report
to
the
relevant
authority,
the
appellant
must
include
a
reserve
equal
to
the
unearned
premiums
of
$33,104,000.00,
less
the
actual
acquisition
expenses
of
$6,829,000.00.
Therefore,
the
amount
of
the
reserve
which
the
appellant
is
required
to
keep,
and
which
should
be
used
for
calculating
the
CRL,
as
required
by
subsection
2405(3)
of
the
Regulations,
is
$26,229,000.00.
In
the
reassessment
for
1985,
the
Minister
has
omitted
the
deduction
for
actual
acquisition
expenses,
and
thus,
has
calculated
the
CRL
using
an
unearned
premium
reserve
which
is
equal
to
the
gross
unearned
premiums
of
$33,104,000.00.
The
appropriate
deduction
of
$6,829,000.00
does
not
factor
into
the
Minister’s
calculations.
In
the
1986
reassessment,
the
gross
unearned
premiums
of
$39,548,000.000
are
used
by
the
Minister.
The
appropriate
deduction
for
deferred
policy
acquisition
expenses
of
$8,530,000.00
is
again
omitted.
Thus,
the
Minister
has
erred
in
not
taking
into
account
a
deduction
with
respect
to
acquisition
expenses,
as
required
by
paragraph
62(l)(b)
of
the
FICA,
when
calculating
the
unearned
premium
reserve
to
be
added
to
the
CRL
of
the
appellant.
Interest
on
Tax
Refunds
The
second
issue
arising
in
this
case
is
to
determine
whether
to
exclude
the
interest
on
the
income
tax
credit
balances
for
purposes
of
computing
the
income
of
the
plaintiff
under
Part
I
of
the
Act,
and
whether
such
interest
falls
within
Part
XIII
of
the
Act,
but
is
excluded
by
paragraph
212(l)(b)
of
the
Act.
In
determining
property
used
by
it
in
Canada,
the
plaintiff
had
included
the
capitalized
interest
earned
on
income
tax
instalments
which
it
had
overpaid.
The
Tax
Court
concluded
that
the
overpayments
of
$508,000
for
1985
and
$2,258,000
for
1986
were
made
to
avoid
paying
interest,
and
not
for
the
purpose
of
earning
interest.
Mr.
Justice
Rip
therefore
concluded
that
the
interest
earned
on
these
amounts
was
gross
investment
revenue
and
could
not,
as
was
submitted
by
the
plaintiff,
be
capitalized
to
represent
investment
property
used
by
it
in
the
year
in
or
held
by
it
in
the
year
in
the
course
of
carrying
on
an
insurance
business
in
Canada
as
defined
in
section
2400
of
the
Regulations.
The
appellant
now
argues
that
since
the
capitalized
interest
is
not
investment
property
for
purposes
of
the
Act,
the
interest
must
be
considered
income
from
business
subject
to
taxation
under
Part
XIII.
In
support
of
this
characterization
of
the
interest
income,
the
appellant
cites
the
RV.
Ensite
Ltd.
[1986]
2
S.C.R.
509,
(sub
nom.
Ensite
Ltd.
v.
R.)
[1986]
2
C.T.C.
459,
86
D.T.C.
6521
case
in
which
interest
derived
from
investments
which
were
mandatory
conditions
precedent
to
trade
were
found
to
be
income
from
business
and
not
income
from
property.
Wilson
J.
was
presented,
in
that
case,
with
a
foreign
investment
which
was
required
by
the
Philippine
government,
and
was
considering
whether
this
investment
constituted
foreign
investment
income
as
the
term
is
defined
in
section
129
of
Part
I
of
the
Act.
I
note
that
the
overpayment
of
tax
is
not
a
mandatory
condition
precedent
to
trade.
In
any
case,
whether
the
income
in
question
be
income
from
property
or
from
business,
the
Ensite
case
does
not
address
the
question
of
whether
the
interest
income
is
subject
to
Part
I
or
Part
XIII
of
the
Act.
As
a
general
rule,
non-resident
persons
are
required
to
calculate
their
tax
payable
according
to
the
provisions
in
Part
XIII.
However,
paragraph
214(13)(c)
permits
the
Governor
in
Council
to
prescribe
“what
amounts
are
taxable
under
this
Part
or
what
portion
of
the
tax
under
this
Part
is
payable
by
that
person”.
Thus,
exceptions
may
be
made
in
the
Regulations
to
the
taxation
provisions
of
Part
XIII.
Section
802
of
the
Regulations
reads
as
follows:
802.
For
the
purposes
of
paragraph
214(13)(c)
of
the
Act,
the
amounts
taxable
under
Part
XIII
of
the
Act
in
a
relevant
taxation
year
of
a
taxpayer
are
amounts
paid
or
credited
to
the
taxpayer
in
the
relevant
taxation
year
other
than
amounts
included
pursuant
to
Part
I
of
the
Act
in
computing
the
taxpayer’s
income
from
a
business
carried
on
by
it
in
Canada.
[Emphasis
added.]
Paragraph
12(l)(c)
of
Part
I
of
the
Act
reads
as
follows:
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:
(c)
any
amount
received
by
the
taxpayer
in
the
year
or
receivable
by
him
in
the
year
(depending
on
the
method
regularly
followed
by
the
taxpayer
in
computing
his
profit)
as,
on
account
or
in
lieu
of
payment
of,
or
in
satisfaction
of,
interest
to
the
extent
that
such
interest
was
not
included
in
computing
his
income
for
a
previous
taxation
year.
Thus,
the
income
from
interest
is
taxable
under
Part
I,
and
therefore
excluded
from
calculation
under
Part
XIII
of
the
Act.
Even
if
I
were
to
find
that
the
income
is
taxable
under
Part
XIII,
there
are
exceptions
to
the
interest
covered
by
this
Part
set
out
in
paragraph
212(1)(b).
The
appellant
seeks
to
invoke
sub-subparagraph
212(l)(b)(ii)(C)
to
argue
that
the
income
is
not
taxable
under
Part
XIII
either.
However,
the
exception
is
limited
to
“bonds,
debentures,
notes,
mortgages,
hypothecs
or
similar
obligations.”
The
obligation
of
the
government
to
pay
interest
on
an
overpayment
of
income
tax
is
not
a
“similar
obligation”
since
it
is
neither
an
instrument
nor
a
contract,
but
a
statutory
obligation.
Therefore,
if
I
were
to
find
that
the
income
were
taxable
under
Part
XIII,
I
would
still
not
find
that
it
was
exempted
by
paragraph
212(1
)(b).
Therefore,
the
income
in
question
falls
within
the
scope
of
Part
I
of
the
Act,
and
is
therefore
removed
from
consideration
for
purposes
of
Part
XIII.
The
interest
generated
from
the
tax
credit
balances
is
income
in
satisfaction
of
interest
within
the
meaning
of
paragraph
12(
1
)(c)
of
the
Act.
Conclusion
For
the
reasons
set
out
above,
the
plaintiff’s
appeal
is
allowed
in
part.
The
reassessments
of
June
8,
1989
are
referred
back
to
the
Minister
to
calculate
the
unearned
premium
reserves
for
purposes
of
the
CRL
in
1985
and
1986
so
as
to
deduct
the
amount
of
the
actual
acquisition
expenses
incurred,
in
accordance
with
Regulation
2405(3)
and
subsection
62(1)
of
the
FICA,
and
in
the
manner
described
above.
On
the
issue
of
the
interest
earned
on
income
tax
overpayments,
the
appeal
is
dismissed.
Costs
0sts
Since
there
is
divided
success
on
this
appeal,
there
will
be
no
order
as
to
costs.
Appeal
dismissed.