Stone,
J.A.:—This
appeal
from
a
judgment
of
the
Trial
Division
rendered
July
28,
1987,
raises
an
issue
whether
the
appellant,
which
carried
on
a
life
insurance
business
in
Canada
in
the
taxation
year
1976,
also
carried
on
an
insurance
business
in
that
year
in
a
country
other
than
Canada,
namely,
Bermuda
within
the
meaning
of
subsection
138(9)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148,
as
amended
("the
Act"),
and
the
deductibility
in
the
1976
taxation
year
of
certain
amounts
pursuant
to
Part
XII
of
the
Act.
It
was
heard
together
with
an
appeal
in
court
file
no:
A-846-87
between
the
same
parties
from
another
judgment
of
the
same
trial
judge
rendered
on
the
same
day.
That
appeal
is
exclusively
concerned
with
the
deductibility
in
the
1975
taxation
year
pursuant
to
Part
XII
of
amounts
received
by
the
respondent
from
a
wholly-owned
subsidiary.
I
propose
to
deal
with
all
issues
in
these
reasons
and
to
file
a
copy
in
court
file
no:
A-846-87
thereby
making
them
reasons
for
judgment
in
that
appeal
to
the
extent
applicable.
For
the
sake
of
convenience,
I
will
deal
first
with
the
Bermuda
business
issue
raised
in
this
appeal
and
then
with
the
issues
under
Part
XII
of
the
Act
raised
in
both
appeals
in
respect
of
both
taxation
years.
Bermuda
Business
Issue
In
computing
its
gross
investment
income
for
the
1976
taxation
year,
the
respondent
sought
to
take
advantage
of
the
election
provided
for
in
subsection
138(9)
of
the
Act,
(9)
Where
in
a
taxation
year
an
insurer
(other
than
a
resident
of
Canada
that
does
not
carry
on
a
life
insurance
business)
carried
on
an
insurance
business
in
Canada
and
in
a
country
other
than
Canada,
there
shall
be
included
in
computing
its
income
for
the
year
from
carrying
on
that
business
in
Canada,
(a)
if
the
insurer
has,
in
prescribed
manner
and
in
accordance
with
prescribed
conditions,
made
an
election
under
this
subsection
in
respect
of
the
year,
such
part
of
its
gross
investment
revenue
for
the
year
as
is
gross
investment
revenue
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,
and
(b)
in
any
other
case,
such
part
of
its
gross
investment
revenue
for
the
year
as
is
determined
in
accordance
with
prescribed
rules
to
be
applicable
to
the
carrying
on
by
it
of
that
business
in
Canada,
and
if
the
insurer
has
not
so
elected
in
respect
of
the
year,
the
amounts
deductible
under
paragraphs
3(b),
(c)
and
(d)
in
computing
its
income
for
the
year,
the
amounts
required
by
paragraphs
4(b)
and
(c)
to
be
included
in
computing
such
income,
the
amounts
determined
under
subparagraphs
(12)(o)(ii)
and
(iv)
for
the
period
ending
with
the
year
shall
be
determined
in
accordance
with
prescribed
rules
and
the
aggregate
of
taxable
dividends
for
the
purposes
of
each
of
paragraphs
138(6)(a),
138(6)(b)
and
208(2)(b)
shall
be
determined
in
accordance
with
rules
prescribed
for
the
purposes
of
each
of
those
paragraphs
respectively.
on
the
basis
that
in
that
year,
as
well
as
carrying
on
a
life
insurance
business
in
Canada,
it
also
“carried
on
an
insurance
business
.
.
.
in
a
country
other
than
Canada".
The
denial
of
this
election
by
the
Minister
of
National
Revenue
and
consequent
re-assessment
of
the
respondent's
income
led
to
the
action
being
launched
in
the
Trial
Division
and
to
the
judgment
that
is
now
under
attack
in
the
first
appeal.
In
1976,
after
carrying
on
an
insurance
business
in
Canada
from
its
office
in
London,
Ontario
for
many
years,
the
respondent
decided
to
branch
out
to
Bermuda.
With
a
view
to
so
doing,
it
consulted
Bermuda
solicitors
as
to
pertinent
aspects
of
Bermuda
law,
studied
the
potential
of
the
market
there
and,
in
May
of
that
year,
appointed
Harnett
&
Richardson
Ltd.
of
Hamilton
as
its
Bermuda
agents
with
authority
to
apply
for
a
licence
to
allow
it
to
carry
on
a
life
insurance
business
in
that
country.
That
licence
was
in
fact
issued
on
June
24,
1976.
In
the
meantime,
about
the
same
time,
the
respondent's
Canadian
solicitors
met
with
Bermuda
bankers,
lawyers
and
the
appointed
agents.
Back
home
in
Canada
the
heads
of
its
several
departments
considered
changes
in
its
operating
procedures
which
entry
into
the
Bermuda
market
would
require.
The
forms
of
policies
and
applications
were
reviewed
and
adjusted.
The
Bermuda
agents
were
brought
to
Canada
for
indoctrination
sessions.
A
system
of
controls
for
premium
billings
and
collections
for
use
in
Bermuda
was
developed.
Harnett
&
Richardson
solicited
many
residents
of
Bermuda
as
potential
policy
holders,
and
provided
rate
quotations
to
others
there.
A
bank
account
was
opened
in
Bermuda
and
the
sum
of
$100,000
deposited
therein.
Near
the
end
of
the
year,
in
December,
one
of
the
respondent's
marketing
executives
was
dispatched
to
Bermuda
to
conclude
a
formal
agency
agreement
with
Messrs.
Harnett
&
Richardson
and,
at
the
same
time,
handed
over
to
that
firm
the
respondent's
insurance
policies
being
effected
on
the
lives
of
two
local
residents.
The
agency
agreement
is
entitled
"Broker's
Agency"
and
though
the
respondent
is
referred
to
therein
as
"Agent",
the
very
first
clause
makes
it
clear
that
the
relationships
created
by
the
agreement
were
of
“independent
contractors".
The
Agent's
duties
are
set
forth
in
clause
2:
2.
Duties—The
Agent,
after
being
properly
licensed,
is
hereby
authorized,
and
the
Agent
agrees
to
solicit
applications
and
to
receive
premiums
for
the
Company
upon
the
terms,
within
the
limits,
and
in
accordance
with
the
instructions,
rules
and
regulations
of
the
Company.
The
Agent,
in
his
dealings
with
or
on
behalf
of
the
Company,
agrees
to
conform
to
and
abide
by
the
instructions,
rules
and
regulations
of
the
Company,
however
published
or
communicated,
and
as
amended
or
added
to
from
time
to
time.
Clause
4
places
a
number
of
limits
on
the
agent's
authority:
Limitation
of
Authority—The
Agent
agrees
that
he
has
no
authority
on
behalf
of
the
Company
to:
(a)
Bind
the
Company
in
any
way;
(D)
b)
Interpret
a
contract
of
insurance
so
as
to
bind
the
Company;
(C)
Make,
alter
or
discharge
any
contract;
(d)
Extend
the
time
for
payment
of
any
premium;
(e)
e)
Waive
any
forfeiture
or
grant
any
permit;
(f)
Incur
any
liability
on
behalf
of
the
Company;
(g)
Make
or
allow
the
delivery
of
any
policy
not
issued
under
a
binding
receipt,
unless
the
applicant
is
at
the
time
in
good
health
and
the
first
premium
has
been
paid;
(h)
Collect
a
premium
on
any
policy
or
a
payment
on
any
policy
loan
except
as
he
may
be
authorized
under
this
Agreement;
(i)
Give
a
receipt
for
any
premium
or
payment
except
upon
the
printed
form
of
receipt
furnished
by
the
Company
for
that
purpose;
(j)
Vary
any
of
the
conditions
contained
in
any
printed
form
or
receipt;
(k)
Institute
or
defend
legal
proceedings
for
any
cause
in
connection
with
the
transaction
of
the
Company's
business;
(I)
Publish
any
advertisement
relating
in
any
way
to
the
business
of
the
Company
until
a
copy
of
same
has
been
submitted
to
and
approved
by
the
Company.
Whether
or
not
the
respondent
carried
on
an
insurance
business
in
Bermuda
in
1976
is
a
question
of
fact
and
of
construction
of
the
statute
to
be
determined
in
the
light
of
settled
legal
principles.
The
appellant
contends
that
the
correct
legal
test
to
be
applied
is
the
one
that
emerges
from
a
line
of
English
cases
beginning
with
Grainger
and
Son
v.
Gough
(Surveyor
of
Taxes),
[1896]
A.C.
325
(H.L),
as
applied
in
F.L.
Smidth
&
Co.
v.
F.
Greenwood
(Surveyor
of
Taxes),
[1921]
3
K.B.
583
(C.A),
affirmed
[1922]
1
A.C.
417
(H.L.),
and
more
recently
in
Firestone
Tyre
&
Rubber
Co.
Ltd.
v.
Lewellin,
(H.M.
Inspector
of
Taxes)
(1957),
37
T.C.
111
(H.L.).
It
consists
in
looking
at
the
place
or
country
in
which
operations
take
place
from
which
profits
in
substance
arise.
The
application
of
the
test
is
well-illustrated
in
Smidth.
The
House
of
Lords
was
there
called
upon
to
decide
whether
a
firm
of
Danish
manufacturers
and
dealers
in
machinery
were
caught
by
the
language
of
a
British
taxing
statute
on
the
basis
that
by
reason
of
their
activities
in
the
United
Kingdom
they
had
“profits
arising
or
accruing
from
a
trade
.
.
.
exercised
within
the
United
Kingdom".
Those
activities
were
engaged
in
from
an
office
in
London
which
had
been
put
in
charge
of
a
full
time
employee
who
was
required
to
ascertain
the
requirements
of
intended
purchasers,
to
inspect
the
sites
of
any
proposed
machinery
installations
and
take
samples
of
earth,
to
report
to
the
firm
and
forward
samples
for
testing,
and
to
superintend
important
installations
of
the
firm’s
products.
Negotiations
in
relation
to
contracts
between
the
Danish
manufacturers
and
their
customers
in
the
United
Kingdom
were
conducted
directly
from
Copenhagen
where
the
contracts
were
made
and
from
which
the
machinery
was
delivered
f.o.b.
At
each
stage
of
the
case—at
trial,
before
the
Court
of
Appeal
and
in
the
House
of
Lords
—it
was
found
that
the
activities
in
the
United
Kingdom
were
not
reached
by
the
statutory
language.
At
pages
593-94,
Atkin,
L.J.
in
the
Court
of
Appeal
enunciated
the
test
upon
which
the
appellant
now
relies:
The
question
is
whether
the
profits
brought
into
charge
are
“profits
arising
or
accruing"
to
the
respondents
“from
any
trade
.
.
.
exercised
within
the
United
Kingdom”
within
the
meaning
of
Schedule
D
of
the
Income
Tax
Act
1853.
The
question
is
not
whether
the
Respondents
carry
on
business
in
this
country.
It
is
whether
they
exercise
a
trade
in
this
country
so
that
profits
accrue
to
them
from
the
trade
so
exercised.
We
have
the
guidance
of
the
House
of
Lords
on
this
subject
in
Grainger
v.
Coug/?
[1896]
Appeal
Cases
at
page
325.
Lord
Herschell,
after
pointing
out
that
there
is
a
difference
between
trading
in
a
country
and
trading
with
a
country,
says:—"How
does
a
wine
merchant
exercise
his
trade?
I
take
it,
by
making
or
buying
wine
and
selling
it
again
with
a
view
to
a
profit.”
Similarly
a
manufacturer
of
machinery
exercises
his
trade
by
making
the
machinery
and
selling
it
again
with
a
view
to
a
profit.
There
are
indications
in
the
case
cited
and
other
cases
that
it
is
sufficient
to
consider
only
where
it
is
that
the
sale
contracts
are
made
which
result
in
a
profit.
It
is
obviously
a
very
important
element
in
the
enquiry,
and,
if
it
is
the
only
element,
the
assessments
are
clearly
bad.
The
contracts
in
this
case
were
made
abroad.
But
I
am
not
prepared
to
hold
that
this
test
is
decisive.
I
can
imagine
cases
where
the
contract
of
re-sale
is
made
abroad,
and
yet
the
manufacture
of
the
goods,
some
negotiation
of
the
terms,
and
complete
execution
of
the
contract
take
place
here
under
such
circumstances
that
the
trade
was
in
truth
exercised
here.
I
think
that
the
question
is,
where
do
the
operations
take
place
from
which
the
profits
in
substance
arise?
To
my
mind
there
is
no
evidence
in
the
present
case
of
any
other
place
than
Denmark.
No
doubt
operations
of
importance
take
place
here,
orders
are
solicited,
and
the
successful
adapting
of
the
goods
bought
for
the
purposes
of
the
buyer’s
business
is
supervised
here.
But
in
the
words
of
Lord
Watson
in
the
case
cited,
at
page
340
:—"there
may,
in
my
opinion,
be
transactions
by
or
on
behalf
of
a
foreign
merchant
in
this
country
so
intimately
connected
with
his
business
abroad
that
without
them
it
could
not
be
successfully
carried
on,
which
are
nevertheless
insufficient
to
constitute
an
exercise
of
his
trade
here
within
the
meaning
of
Schedule
D,”
and
he
instances
the
case
of
the
purchase
of
goods
here
for
the
purpose
of
sale
abroad.
Sully
v.
The
Attorney
General,™
which
is
reported
in
5
Hurlstone
and
Norman
at
page
711,
is
a
case
to
which
I
shall
have
to
refer
on
the
second
point.
In
the
words
of
Lord
Herschell
at
page
336
:
“What
is
done
there"
that
is,
soliciting
orders,
“is
only
ancillary
to
the
exercise
of
his
trade
in
the
country
where
he
buys
or
makes,
stores,
and
sells
his
goods".
On
this
part
of
the
case
I
think
the
learned
Judge
came
to
the
right
conclusion
in
law.
Grainger
and
Son
v.
Gough,
3
T.C.
at
page
467.
3
T.C.
at
page
471.
(2)
2
T.C.,
149.
3
T.C.
at
page
467.
The
respondent
resists
the
application
of
this
test
and
maintains
that
the
trial
judge
was
right
in
concluding
as
he
did
having
regard
to
the
activities
engaged
in
in
Bermuda,
to
definitions
contained
in
both
the
Canadian
and
Bermuda
legislation,
and
to
the
overall
scheme
of
the
Act.
According
to
the
respondent,
a
proper
way
of
testing
whether
an
insurance
business
was
carried
on
in
Bermuda
in
1976
would
be
to
see
whether
that
sort
of
business
was
solicited
there
on
its
behalf
and
also
whether
the
life
insurance
contracts
were
made
there.
It
is
apparent
that
the
learned
judge
did
not
rest
his
conclusion
on
any
single
factor
but,
as
he
himself
put
it
at
pages
13-14
of
his
reasons
for
judgment,
upon
"the
cumulative
effect"
of
applying
the
"profits"
or
“profits
generated"
test
and
tests
relied
upon
by
the
respondent,
for
at
the
latter
page
of
his
reasons
for
judgment
(Appeal
Book,
at
page
24)
he
said
this:
The
contracts
of
insurance
issued
in
1976
were
made
in
Bermuda,
a
vital
part
of
the
company’s
business,
its
sales
operations,
was
conducted
in
Bermuda
through
its
agent,
and
the
inducement
to
have
residents
of
Bermuda
enter
into
life
insurance
contracts
clearly
fell
within
the
common,
and
also
legislatively
defined,
meaning
of
carrying
on
the
insurance
business.
Those
circumstances,
combined
with
the
other
activities
carried
on
by
the
plaintiff's
agent
in
Bermuda,
to
which
I
have
already
made
reference,
have
satisfied
me
that
in
1976
the
plaintiff
did
carry
on
its
business
in
Bermuda.
I
should
deal
first
with
the
approach
which
I
conceive
should
be
taken
in
deciding
whether
the
respondent
carried
on
an
insurance
business
in
Bermuda
in
1976
within
the
meaning
of
subsection
138(9)
of
the
Act.
Here
I
must
confess
to
some
doubt
that
the
"profits"
or
“profits
generated"
test
enunciated
by
Atkin,
L.J.
in
Smidth
is
the
one
to
be
applied.
As
the
trial
judge
observed,
that
test
was
developed
to
determine
whether
certain
activities
engaged
in
within
the
United
Kingdom
resulted
in
"profits
arising
or
accruing
from
a
trade
.
.
.
exercised
within
the
United
Kingdom".
Moreover,
Atkin,
L.J.
himself
took
care
to
observe
that
the
question
was
not
whether
"the
respondents
carry
on
business
in
this
country".
I
agree
with
the
learned
trial
judge
that
under
the
subsection
this
latter
question
is
indeed
broader
than
the
one
which
had
to
be
answered
by
the
English
courts
upon
the
United
Kingdom
legislation.
According
to
the
appellant,
the
whole
object
of
subsection
138(9)
is
to
identify
and
isolate
an
insurer's
"gross
investment
revenue
from
property
used
by
it.
.
.,
or
held
by
it.
.
.
in
the
course
of,
carrying
on
that
business
in
Canada"
and
hence,
by
necessary
implication
to
eliminate
from
taxation
in
Canada
revenue
from
property
used
or
held
by
it
in
carrying
on
an
insurance
business
outside
of
Canada.
From
this
it
is
argued
that
under
the
subsection
the
question
is
reduced
to
discovering
whether
the
profits
sought
to
be
held
arose
out
of
a
trade
which
was
exercised
in
Bermuda,
making
the
“profits”
or
"profits
generated"
test
relevant
and
applicable.
I
do
not
think
it
follows
from
the
fact
that,
in
one
respect,
the
statute
focuses
on
the
generation
of
gross
investment
revenue
from
property
in
Canada,
Parliament
thereby
intended
that
the
determination
of
whether
a
business
was
carried
on
in
the
same
year
in
a
country
other
than
Canada
should
depend
solely
on
whether
profits
in
substance
arose
from
the
taxpayer's
activities
in
that
country.
Indeed,
I
am
inclined
to
the
view
that
the
phrase
"carried
on
an
insurance
business
.
.
.
in
a
country
other
than
Canada"
is
not
to
be
limited
by
considerations
that
may
or
may
not
be
determinative
of
whether
such
a
business
was
carried
on
in
Canada.
These
are
words
of
broad
import
and
must
be
construed
as
such.
I
am
generally
of
the
view
that
the
learned
trial
judge
was
right
in
the
conclusion
he
arrived
at
on
this
aspect
of
the
case.
Against
the
possibility
that
I
may
be
wrong
in
that
view
I
should
now
consider
whether
the
respondent's
activities
in
Bermuda
in
1976
satisfy
the
"profits"
or
"profits
generated"
test
laid
down
in
the
cases.
Counsel
for
the
appellant
submits
that
those
activities
were,
as
he
put
it,
but
"preliminary"
or
"preparatory"
or,
to
use
the
words
of
Lord
Herschell
quoted
by
Atkin,
L.J.,
merely
“ancillary”
to
the
carrying
on
of
a
business
and
did
not
amount
in
themselves
to
the
doing
of
such.
That,
he
says,
is
particularly
so
with
respect
to
the
solicitation
of
insurance
business
through
agents
there,
such
activities
later
maturing
into
the
making
of
insurance
contracts
on
lives
of
individuals
residing
in
Bermuda.
Activities
of
substance
(i.e.
those
bearing
on
the
making
of
decisions
that
gave
rise
to
revenue
or
to
the
reasonable
expectation
of
same),
he
contends,
all
occurred
at
the
respondent's
head
office
in
Canada,
and
these
he
catalogues
as
follows:
(
a)
deciding
whether
or
not
to
accept
and
underwrite
the
risks;
(b)
deciding
what
rates
to
charge
following
an
assessment
of
a
particular
risk;
(c)
preparing
and
issuing
policies
for
delivery
to
Bermuda
applicants
;
(d)
deciding
on
whether
or
not
to
pay
claims
submitted;
(e)
controlling
the
appellant's
financial
affairs
and
sending
funds
to
Bermuda
to
be
disbursed
to
claimants;
(f)
otherwise
closely
controlling
the
appellant's
financial
inflows
and
outflows,
both
with
respect
to
its
policies
and
with
respect
to
the
investments
made
by
it
from
the
premiums
collected
by
it
in
Bermuda.
Additionally,
counsel
took
issue
with
some
of
the
trial
judge's
findings
regarded
by
him
as
relevant
to
his
determination
that
the
respondent
had
indeed
carried
on
an
insurance
business
in
Bermuda
in
1976.
These
were
that
the
agents,
(
a)
arranged
for
medical
examination
of
applicants
for
insurance
policies;
(b)
bound
the
respondent
to
interim
insurance
coverage;
(c)
performed
"persistency
ratings"
of
applicants
for
insurance;
(d)
satisfied
themselves
that
the
applicants
were,
at
the
date
of
delivery
of
the
insurance
policies
to
them,
in
continued
apparent
good
health;
and
(e)
completed
the
contracts
of
insurance
by
delivery
of
the
policies
to
them.
I
can
find
no
material
error
in
any
of
these
findings.
A
review
of
the
record
suggests
that
an
obligation
did
rest
upon
the
agents
under
the
terms
of
their
appointment
or
approved
practice
to
arrange
medical
examinations
and
to
be
satisfied
at
the
time
of
delivery
of
the
policies
in
Bermuda
that
the
applicants
continued
in
apparent
good
health.
I
do
not
think
it
at
all
material
that
the
need
for
medical
examinations
on
the
two
lives
insured
were
apparently
waived.
Such
evidence
as
does
exist
in
the
record
is
rather
clear
to
the
effect
that
the
agents
did
satisfy
themselves
as
to
the
continued
good
health
of
the
applicants
when
they
delivered
the
policies
to
them
in
Bermuda
on
December
30,
1976.
It
seems
clear
too,
even
from
the
conditions
of
the
policies
themselves,
that
they
were
only
to
come
into
effect
upon
delivery.
Thus,
among
the
"General
Provisions
and
Conditions"
(Appeal
Book,
Common
Appendix,
Vol.
1,
at
page
179)
it
is
explicitly
provided:
The
contracts
shall
not
come
into
force
unless
(1)
.
.
.
(2)
this
policy
has
been
delivered
to
the
policy
owner,
his
agent
or
assign,
or
the
beneficiary
and
(3)
no
change
shall,
subsequent
to
the
completion
of
the
said
application,
have
taken
place
in
the
insurability
of
the
Life
Insured
.
.
.
.
While
it
appears
that
no
"persistency
ratings"
were
carried
out
by
the
agents
in
Bermuda
along
the
lines
applied
by
the
respondent
in
Canada,
there
was
evidence
to
the
effect
that
the
agents
did
carry
out
some
sort
of
persistency
rating
on
the
Bermuda
policy
holders.
Finally,
while
the
evidence
also
supports
the
conclusion
that
interim
insurance
was
not
actually
arranged
in
1976
it
nevertheless
is
to
the
effect
that
this
came
about
because
of
failure
on
the
part
of
the
agents
to
collect
the
premiums
at
the
time
the
insurance
applications
were
submitted
due
to
a
misunderstanding
on
their
part
that
such
was
a
necessary
precondition
to
interim
insurance
becoming
effective.
There
appears
no
doubt,
however,
that
the
agents
did
possess
authority
to
arrange
interim
insurance
and
that,
but
for
this
misunderstanding,
they
would
have
done
so
in
1976.
If
the
respondent's
activities
in
Bermuda
had
consisted
only
of
soliciting
orders
there
for
acceptance
in
Canada
it
might
be
arguable
on
the
basis
of
certain
utterances
in
Grainger
&
Son
v.
Gough,
supra,
that,
to
use
the
phraseology
of
Lord
Herschell,
what
was
done
in
Bermuda
was
only
"ancillary"
to
the
carrying
on
of
a
business
in
Canada.
Although,
as
the
appellant
has
demonstrated,
many
things
had
to
be
and
were
in
fact
done
in
Canada
in
order
to
bring
insurance
policies
on
the
lives
of
residents
of
Bermuda
into
existence,
it
remains
that
other
acts
of
overriding
importance
and
significance
had
to
be
done
and
could
only
be
done
in
Bermuda.
The
initial
solicitation
of
business
was
but
one
of
these.
There
must
be
added
to
it
the
other
activities
of
the
agents
identified
in
the
judgment
below,
the
absence
of
at
least
two
of
which
would
have
meant
that
no
policies
could
have
come
into
force
in
Bermuda.
I
have
in
mind
the
requirement
that
policies
be
delivered
there
in
order
for
them
to
be
legally
effective
and.
the
further
requirement
that
the
agents,
in
effect,
make
a
subjective
but
fundamentally
important
assessment
prior
to
such
delivery
that
no
change
had
occurred
in
the
insurability
of
the
lives
of
the
applicants
between
the
date
of
their
applications
and
the
date
the
policies
were
delivered
to
them.
Had
these
activities
not
transpired
in
Bermuda,
no
life
insurance
policies
would
have
issued
there
from
which
profits
could
generate.
All
in
all
I
am
satisfied
that
the
“profits”
or
"profits
generated"
test,
if
it
is
applicable
at
all,
is
satisfied.
The
respondent
further
submits
from
the
scheme
of
the
Act
that
one
can
only
conclude
the
licensing
of
the
insurer
to
carrying
on
business
in
Bermuda
under
its
domestic
legislation
and
the
actual
issuance
of
life
insurance
policies
there
constituted
a
carrying
on
of
business
within
the
meaning
of
subsection
138(9).
I
do
not
find
it
necessary
to
examine
the
merits
of
this
contention
in
order
to
be
satisfied,
as
I
am,
that
the
respondent
did
in
fact
carry
on
an
insurance
business
in
Bermuda
in
1976
in
the
sense
of
the
subsection.
Data
Services
Issue
The
second
issue
in
this
appeal
and
the
sole
issue
in
the
second
appeal
arise
as
a
consequence
of
the
fact,
found
by
the
trial
judge,
that
in
the
1975
and
1976
taxation
years
the
respondent
had
excess
computer
capacity
that
was
needed
to
meet
peak
demands
of
its
life
insurance
business
but
not
otherwise.
These
services
consisted
of
preparing
cheques
or
accounting
statements
or
data
processing
and
some
programming—whatever
can
be
done
on
a
computer.
Because
the
respondent's
business
was
subject
to
the
provisions
of
the
Canadian
and
British
Insurance
Companies
Act,
R.S.C.
1970,
c.
I-15,
it
was
prohibited
from
selling
this
excess
capacity
directly
to
the
public
for
a
fee.
In
the
taxation
years
in
question
subsection
208(1)
of
the
Act,
found
in
Part
XII
thereof,
levied
on
the
"taxable
Canadian
life
investment
income"
a
15
per
cent
tax.
This
income
was
defined
in
subsection
209(3)
as
the
excess
of
the
life
insurer's
"net
Canadian
life
investment
income”
over
the
aggregate
of
certain
defined
amounts.
A
life
insurer's
"net
Canadian
life
investment
income"
was,
under
subsection
209(1),
its
"gross
Canadian
life
investment
income”
minus
certain
specified
amounts.
In
the
1975
and
1976
taxation
years
paragraph
209(2)(d)
of
the
Act
provided
as
follows:
209(2)
A
life
insurer's
net
Canadian
life
investment
income
for
a
taxation
year
is
its
gross
Canadian
life
investment
income
for
the
year
minus
the
aggregate
of
(d)
50%
of
the
aggregate
of
each
amount
deductible
under
Part
I
in
computing
the
insurer's
income
for
the
year
from
carrying
on
its
life
insurance
business
in
Canada,
except
to
the
extent
that
such
amount
(i)
is
included
in
any
of
the
amounts
determined
in
respect
of
the
insurer
for
the
year
under
paragraph
(a),
(b)
or
(c),
(ii)
is
deductible
under
subsection
138(3)
in
computing
its
income
for
the
year
from
carrying
on
its
life
insurance
business
in
Canada,
(iii)
was
paid
or
payable
by
the
insurer
under
a
life
insurance
policy
before
the
end
of
the
year,
(iv)
was
an
outlay
or
expenses
laid
out
or
incurred
by
it
for
the
purpose
of
earning
income
from
its
group
life
insurance
business,
or
(v)
was
payable
by
the
insurer
to
a
province
as
a
tax
in
respect
of
premiums
collected
by
it
in
the
year
under
life
insurance
policies.
By
arrangement
with
the
Superintendent
of
Insurance
appointed
under
the
above
mentioned
statute,
the
respondent
was
permitted
to
provide
the
excess
capacity
to
a
wholly-owned
subsidiary
for
sale
by
it
to
the
public.
A
subsidiary
was
soon
incorporated
under
the
name
Lonlife
Data
Services
Ltd.
It
had
no
employees
and
owned
no
data
processing
equipment
or
premises
from
which
to
conduct
such
a
business.
Its
functions
were
performed
by
the
respondent's
employees,
from
the
respondent's
premises
and
with
the
respondent's
equipment.
According
to
the
trial
judge's
finding
(at
page
15
of
his
reasons
for
judgment)
the
subsidiary
(referred
to
by
him
as
"L.D.S.")
"paid
the
plaintiff
[respondent]
for
this
capacity
an
annual
amount
calculated
as
a
percentage
of
certain
actual
and
fictional
expenses
incurred
by
the
plaintiff
[respondent]
in
the
operation
of
the
computer"
and
also
that
"[By]
the
direction
of
the
Superintendent
of
Insurance
the
plaintiff,
in
this
arrangement
with
L.D.S.,
was
not
permitted
to
make
a
profit
or
suffer
a
loss
as
determined
by
the
methods
of
accounting
prescribed
for
life
insurance
companies".
The
manner
in
which
the
matter
was
dealt
with
by
the
respondent
in
carrying
out
the
directive
of
the
Superintendent
of
Insurance
so
as
to
produce
neither
a
profit
nor
a
loss
in
the
respondent's
life
insurance
business
as
well
as
the
manner
in
which
it
was
dealt
with
for
income
tax
purposes
in
the
1975
and
1976
taxation
years
is
explained
by
the
trial
judge
at
pages
15-16
of
his
reasons
for
judgment:
For
its
1975
and
1976
taxation
years,
the
plaintiff
carried
on
this
arrangement
with
its
subsidiary
and,
for
the
purposes
of
its
insurance
accounting
requirements,
made
neither
a
profit
nor
sustained
a
loss.
In
its
annual
statements
for
those
years,
which
it
was
required
to
submit
to
the
Superintendent
of
Insurance,
the
revenues
and
expenses
associated
with
the
intercompany
computer
business
were
shown
as
net
amounts
which
sometimes
offset
one
another
in
individual
categories
of
each
and
the
net
totals
of
each
category
of
which
offset
each
other
completely.
This
was
as
required
and
to
the
satisfaction
of
the
Superintendent
of
Insurance.
In
filing
its
income
tax
returns
for
the
same
years,
however,
the
plaintiff
did
not
report
the
revenues
and
expenses
in
the
same
manner
as
it
did
for
the
Superinten-
dent
of
Insurance.
Indeed
it
reported
all
of
the
funds
received
from
L.D.S.
as
income
and
all
of
the
expenses,
which
it
considered
as
deductible
expenses,
as
expenses.
This
had
the
result
of
increasing
the
plaintiffs
income
as
well
as
its
expenses.
It
also
gave
rise
to
the
result
which
formed
the
basis
for
the
defendant
reassessing
the
plaintiff
for
those
two
years.
The
reassessment
was
for
additional
tax
in
each
year
under
Part
XII
of
the
Income
Tax
Act
by
reason
of
the
defendant
reducing
the
expenses
deductible
in
computing
the
amounts
on
which
the
Part
XII
tax
was
applicable.
Part
XII
of
the
Act,
now
repealed,
contained
special
provisions
for
the
taxation
of
investment
income
of
a
life
insurer
arising
in
the
course
of
its
Canadian
life
insurance
business.
Subsection
209(2)
also
provided
for
the
deduction
of
expenses
incurred
in
carrying
on
its
life
insurance
business.
Fifty
percent
of
any
expense
so
incurred
was
allowed
as
a
deduction
and
the
resultant
taxable
income
was
taxed
at
the
rate
of
15%.
By
adding
50%
of
the
gross
expenses
associated
with
its
income
from
L.D.S.
to
50%
of
each
of
the
other
expenses
incurred
in
carrying
on
its
life
insurance
business,
the
plaintiff
reduced
its
taxable
income
from
its
life
insurance
business
by
an
equivalent
amount
and
its
tax
by
15%
of
that
amount.
It
is
convenient
to
recite
at
this
point
paragraph
46
of
the
respondent's
written
argument
(the
contents
of
which
are
not
disputed)
so
as
to
better
understand
how
the
matter
was
treated
by
the
respondent
in
computing
its
income
for
tax
purposes
in
the
two
years
in
question:
46.
In
computing
its
income
for
its
1975
and
1976
taxation
years
for
purposes
of
the
Act,
the
Respondent
reconciled
its
net
income
as
shown
in
its
statement
prepared
for
the
Superintendent
of
Insurance
with
net
income
for
tax
purposes
on
the
form
T2S(1)
in
its
1975
and
1976
tax
returns.
This
was
done
by
making
the
following
adjustments:
(a)
showing
amount
received
from
Lonlife
as
revenue,
(b)
increasing
the
various
expense
accounts
by
amounts
in
the
aggregate,
equal
to
the
amount
received
from
Lonlife,
(c)
adding
back
to
income
all
depreciation
(as
increased
in
the
manner
referred
to
above)
charged
in
its
accounts
for
financial
statement
purposes,
(d)
claiming
capital
cost
allowance
to
the
extent
permitted
under
the
Act
and
Regulations,
and
(e)
adding
back
to
income
the
notional
or
fictional
amount
of
head
office
rent
which
had
also
been
increased
as
set
out
above
.
.
.
The
deductions
were
disallowed
by
the
appellant
on
the
ground
that
the
amounts
so
shown
as
income
were
not
income
of
the
respondent
but
were
operating
expenses
incurred
by
the
respondent
on
behalf
of
the
subsidiary
for
which
the
respondent
was
reimbursed
and,
secondly,
that
even
if
the
amounts
received
by
the
respondent
from
its
subsidiary
were
income
from
the
sale
of
excess
computer
capacity,
the
amounts
were
income
from
a
business
of
the
respondent
other
than
the
respondent's
life
insurance
business
and
the
amount
shown
as
expenses
(50
per
cent
of
the
total
of
which
were
claimed
as
deductions)
were
not
deductible
under
the
provisions
of
subsection
209(2)
of
the
Act
because
they
were
incurred
for
the
purpose
of
earning
income
from
the
sale
of
excess
computer
capacity
and
not
for
the
purpose
of
carrying
on
its
"life
insurance
business".
In
support
of
his
opinion
that
the
appeal
should
be
allowed
and
the
tax
assessments
for
the
years
in
question
be
referred
back
to
the
Minister
for
reassessment
on
the
basis
that
amounts
received
from
the
subsidiary
did
not
reduce
expenses
incurred
by
the
respondent
deductible
under
Part
XII
of
the
Act,
the
trial
judge
reached
the
following
conclusions:
1.
The
amounts
received
by
the
respondent
from
the
subsidiary
as
payment
for
the
excess
computer
capacity
were
properly
characterized
as
income
of
the
respondent;
the
"no
profit/no
loss”
arrangement
carried
out
in
accordance
with
the
directive
of
the
Superintendent
of
Insurance
was
irrelevant
to
the
issue;
the
reduction
of
the
respondent's
overall
costs
represented
additional
income
or
profits
in
his
hands
in
a
business
sense
and,
likewise,
the
respondent
had
a
reasonable
expectation
of
making
a
profit
from
the
arrangement
with
the
result
that
the
revenue
received
from
the
subsidiary
could
be
properly
characterized
as
income;
2.
The
expenses
were
incurred
by
the
respondent
to
earn
that
income
were
incurred
on
its
own
behalf
and
not
on
behalf
of
the
subsidiary;
practically
all
of
the
expenses
which
went
to
make
up
the
respondent's
annual
charge
to
the
subsidiary
would
have
been
incurred
by
the
respondent
without
the
existence
of
the
arrangement
with
the
subsidiary
and,
accordingly,
were
incurred
by
the
respondent
in
its
own
right
and
not
on
behalf
of
the
subsidiary;
there
was
no
suggestion
in
the
evidence:
.
.
.
that
the
salaries
of
the
plaintiff's
staff
would
have
been
reduced
or
that
the
number
of
employees
of
the
plaintiff
would
have
been
reduced
if
the
plaintiff
had
not
entered
into
the
arrangement
with
L.D.S.
Similarly
the
computer
equipment
would
have
required
the
same
amount
to
maintain
and
repair
it
and
would
have
depreciated
to
the
same
extent.
What
was
charged
by
the
plaintiff
to
L.D.S.
for
the
provision
of
the
excess
computer
capacity
was
an
annual
fee
calculated
in
accordance
with
the
guidelines
of
the
Superintendent
of
Insurance
and
by
reference
to
percentages
of
certain
costs
of
the
plaintiff
allowed
as
costs
under
the
provisions
of
the
Canadian
and
British
Insurance
Companies
Act.
The
expenses
were
incurred
by
the
plaintiff
in
its
own
right
and
not
on
behalf
of
L.D.S.
Indeed
the
rent
and
depreciation
amounts
which
were
allocated
and
made
up
some
$60,000
of
the
1976
charge
to
L.D.S.
were
not
incurred
by
the
plaintiff
at
all
and
therefore
could
not
possibly
be
considered
as
reimbursed
expenses
because
there
was
no
outlay
by
the
plaintiff
and
therefore
nothing
to
be
reimbursed.
(at
page
19
of
the
Reasons
for
Judgment).
3.
Though
the
question
was
“most
troublesome",
as
the
expenses
in
question
were
incurred
by
the
respondent
on
its
own
behalf
and
not
on
behalf
of
the
subsidiary
and
for
the
purpose
of
carrying
on
the
life
insurance
business,
they
were
deductible
under
paragraph
209(2)(d)
of
the
Act;
the
excess
Capacity
was
needed
by
the
respondent
to
handle
the
peak
demand
loads
of
its
life
insurance
business;
the
decision
of
the
Trial
Division
in
The
Excelsior
Life
Insurance
Company
v.
The
Queen,
[1985]
1
C.T.C.
213;
85
D.T.C.
5164
was
applicable.
As
I
am
in
respectful
disagreement
with
the
trial
judge
on
the
third
point
I
need
not
address
the
first
two.
I
cannot
agree
with
the
respondent's
submission
that
the
amounts
claimed
as
expenses
were
incurred
in
carrying
on
its
life
insurance
business
in
that
they
were
associated
with
the
operation
of
its
computer,
the
full
capacity
of
which
was
found
by
the
trial
judge
to
be
required
so
as
to
service
peak
period
demands.
In
reality,
the
respondent
engaged
in
both
a
life
insurance
business
and,
additionally,
in
dealings
related
to
this
excess
computer
capacity.
Not
being
content
to
see
that
capacity
lie
unused
during
non-peak
periods,
the
respondent
chose,
instead,
to
turn
it
to
account
in
the
manner
found
by
the
trial
judge.
In
this
way
the
respondent,
in
my
view,
stepped
across
the
boundary
between
its
life
insurance
business
and
an
entirely
new
and
different
adventure,
a
fact
which,
indeed,
both
the
respondent
and
the
Superintendent
of
Insurance
apparently
well
understood
by
the
"no
profit/no
loss"
arrangement.
In
my
view,
the
expenses
were
not
related
to
the
life
insurance
business
but
to
this
new
adventure.
The
question
before
the
trial
judge
was
one
of
law,
namely,
whether
the
expenses
claimed
were
“deductible
under
Part
I
in
computing
the
[respondent's]
income
for
the
year
from
carrying
on
its
life
insurance
business
in
Canada”
within
the
meaning
of
subsection
209(2)
found
in
Part
XII
of
the
Act.
In
my
opinion
they
were
not.
In
so
concluding
I
could
derive
no
assistance
from
the
Trial
Division’s
decision
in
Excelsior
Life.
As
the
appellant
submits,
all
that
was
decided
there
was
that
the
management
expenses
applicable
to
"segregated
fund"
were
nevertheless
incurred
for
the
purpose
of
gaining
or
producing
income.
The
precise
question
before
us
in
the
case
at
bar
was
not
raised
for
decision
in
that
case.
In
the
result,
I
would:
1.
allow
the
first
appeal
in
part
without
costs
and
would
vary
the
judgment
therein
rendered
July
28,
1987
(court
file
no.
A-847-87)
by
deleting
paragraph
2
thereof.
In
all
other
respects
I
would
confirm
the
judgment
therein;
2.
allow
the
second
appeal
with
costs
both
here
and
in
the
Trial
Division
and
would
set
aside
the
judgment
therein
rendered
July
28,
1987
(court
file
no.
A-846-87).
Appeal
allowed
in
part.
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