Date: 19990104
Docket: 95-3844-GST-G
BETWEEN:
THE MARITIME LIFE ASSURANCE COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on December 10 and 11, 1997 at Halifax, Nova
Scotia, by the Honourable Judge E.A. Bowie
Reasons for judgment
BOWIE J.T.C.C.
[1] This appeal is brought from a reassessment made under Part
IX of the Excise Tax Act (the Act), which levies a
tax on goods and services (the GST). The issue which the appeal
raises is whether certain amounts, called investment
administration fees (IAFs), were received by the Appellant in
circumstances which attract the tax. The last reassessment was
made on August 29, 1995, and is for the period between January 1,
1991 and December 31, 1993. The tax in question has since been
paid, under protest, and this appeal will determine whether it is
recoverable. There is no dispute about the computation of the
tax; it is exigible in the amount assessed, or not at all.
facts
[2] The Appellant is a life insurance company. Its business
consists of selling and servicing a varied menu of life insurance
products, including a variety of annuity contracts designed to
produce a retirement income for the policyholder at a specified
future date. The contracts with which this appeal is concerned
provide for the company to invest the premiums paid by the
policyholder in one or more segregated funds (the funds). These
funds are specified groups of properties which the Appellant
holds in a variety of investment vehicles in respect of policies
issued by it. Policyholders typically purchase retirement annuity
policies on which they pay premiums to build up equity in the
policy during their working lifetime. On maturity, this equity is
used to provide annuity payments to them. Policyholders can elect
to have their premiums invested in one or more specific funds,
and the value of their policy, from time to time and at maturity,
is governed by the value of the fund, or funds, in which it
participates. The assets of the funds belong to the Appellant.
The policyholder's right is to receive certain amounts from
the Appellant, either by way of an annuity beginning on a
preselected date, or at an earlier date by taking the surrender
value of the policy.
[3] During the relevant time period, the Appellant maintained
seven separate funds, of which five are relevant to this appeal.
The Growth Fund is invested primarily in Canadian equities chosen
for their growth potential. The Bond Fund is comprised of bonds
issued by Canadian corporations. The Balanced Fund consists of
both equities and bonds. The Money Market Fund is invested in
short term money market instruments. The Property Investment Fund
is invested in mortgage loans. Policyholders may elect to
participate in one, or in more than one, of these funds. Each
fund consists at any given time of a certain number of units, and
the value of the units is determined periodically by valuing all
the assets in the fund, and dividing that total by the number of
units outstanding. When a policyholder's premium is added to
a fund, the amount of the premium is divided by the unit value of
the fund to determine the number of additional units of that fund
that are to be attributed to that policy. The value of each
policy, therefore, fluctuates with the value of the assets held
by the fund, or funds, in which it participates as a unit holder,
and of course it increases as premiums are paid and units in the
funds are assigned to it. These funds are similar in their
operation to mutual funds, and in fact compete in the
market-place with them.
[4] In addition to the fund participation which I have
described, the Appellant's deferred annuity policies
generally offer a number of what may be called insurance
features, either as part of the basic policy provisions, or as
available options. These include a guaranteed minimum value at
maturity, regardless of the fund value, which may be seen as
insurance against a possible decline in the value of the fund
assets, a guaranteed payment upon death of the insured prior to
maturity, regardless of the policy value at the time of death,
and the payment of bonuses, in the form of fund units, at
specified anniversary dates, usually at five-year intervals after
the fifteenth year.
[5] Investment decisions for the funds, other than the Money
Market Fund, are made in the following way. The Appellant
formulates a broad outline of the investment philosophy of each
fund. It then retains investment advisors to manage the fund
assets within these guidelines, and to provide investment advice
to the company. Each such advisor has a specific asset base to
manage, and they make the investment decisions and place the
trading orders to implement those decisions. The terms of their
engagement provide that they shall furnish a quarterly economic
analysis and monthly transaction summaries and portfolio listings
to the Appellant. These managers have a very broad discretion as
to the investment decisions they make. However, their contract
requires them to comply with any specific directions given to
them by the Appellant. Their remuneration is paid quarterly from
the funds they manage. It is common ground that the service they
provide is subject to GST, and that too is paid from the funds,
as are the brokerage charges on the trades made by them.
[6] The Money Market Fund is invested by employees of the
Appellant working in its Investment Department. They make the
investment decisions, and place the buy and sell orders to
implement them. They are paid salaries, and of course no GST
liability arises.
[7] The Bank of Nova Scotia acts as banker for the funds, and
as custodian of their securities. Each fund has one or more
separate bank accounts, to which premiums for investment, the
income from the securities in the fund, and the proceeds of sales
of securities by the fund are all deposited, and from which
payments to purchase securities, and all the other charges
against the funds, are disbursed. Signing authority for these
accounts lies with officers of the Appellant, but, in order to
comply with regulatory requirements, the funds' assets must
be kept separate from those of the company.
[8] The Appellant's various policies make provision for it
to charge several different fees. An investment administration
fee (the IAF), an annual administration fee, a transfer fee, a
flexible withdrawal fee, and a collection fee, are all variously
provided for in the Financial Fitness Builder policy, a specimen
of which was included in the exhibits at trial. It is the IAF
with which this appeal is directly concerned. As to it, the
policy says:
An Investment Administration Fee is deducted from each
segregated fund before the determination of the unit value. This
fee is currently 1.75% of the proportionate market value of the
particular segregated fund and is deducted on each Valuation Day
at a rate of 1.75% divided by the number of Valuation Days in a
calendar year. Currently this rate is .03365% per week. The
Investment Administration Fee will never exceed 3% of the
proportional market value of a segregated fund.
The other policies that were entered in evidence have similar
provisions in respect of the IAF. The other fees are of
relatively small amount, and their contribution to the
Appellant's revenues can be ignored for purposes of this
appeal. The Appellant's revenue from deferred annuity
policies is principally derived from the IAFs. The other major
source of revenue is the spread on Guaranteed Income Certificate
policies, which is the difference between the rate of interest
which the Appellant can obtain as a lender in the market, and the
rate which it pays to the holders of its Guaranteed Income
Certificate policies.
[9] Mr. Moffat, Director of Retail Finance of the Appellant,
and Mr. Cotnam, the actuary responsible for fixing the IAFs to be
charged, both gave evidence. Mr. Moffat has worked for the
Appellant for some 30 years, and is fully conversant with its
business. He said in evidence that the terms investment
administration fee and investment management fee are used
interchangeably by the Appellant, and that they are fees charged
to the client, that is the policyholder, to cover such things as
the commissions paid to the agents who bring in the business, the
cost of marketing materials in relation to policies, the costs of
issuing the policies, underwriting costs in connection with
annuity contracts, and services to customers, which include such
things as reports, advice, and changes to policies requested by
policyholders. There is also a profit component in the IAF.
[10] Mr. Moffat described the process by which the IAF is
actually administered in this way. Each of the funds is valued at
the end of every week by aggregating the value of all the assets
of the fund as at the valuation date.[1] The annual fee is expressed as a
percentage of the fund; in most policies it is 1½%, but it
may be subject to increase by the Appellant. An amount,
calculated by the formula 7/365 x 1½%[2] x the total fund value, is
deducted from each fund and transferred to the Appellant's
general account to pay the IAFs for the funds for the week. The
remaining balance of each fund is then divided by the number of
outstanding units to establish the unit value of the fund as at
that date. There is no invoicing of the fund by the Appellant;
the amount calculated is simply transferred by journal entries in
the books of the Appellant, and in the records of the bank.
[11] Mr. Cotnam, as an actuary, has the responsibility to
examine the company's costs relating to new products, and to
consider the amounts that must be charged as fees in order to
make the product a profitable one. On the sale of policies based
on Guaranteed Investment Certificate, the company covers its
overhead and makes its profit on the spread between the interest
rates it earns, and the rates which it pays to policyholders. On
the segregated fund policies, it must cover its costs and make
its profit from the various fees spelled out in the policies, but
primarily the IAFs. He confirmed that those costs include
commissions to agents, policy-issuing costs, policy-maintenance
costs, valuation expenses for the funds, the cost of supervising
the investment advisors, the cost of any insurance benefits
(either life insurance or market insurance) provided by the terms
of the policy, bonuses to be paid, and all of its other overhead
expenses. These components are broken down in the documents
called Outline of Policy Matrix which form part of Exhibit
A-1.
positions of the parties
[12] By virtue of section 165, the charging provision, and of
various definitions found in section 123, the Act imposes
GST on the supply of services made in the course of business.
Certain transactions are exempted from taxation, among them the
supply of a financial service,[3] an expression which is defined in section
123(1), and which includes the issuing of an insurance
policy.
[13] 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 arm's length with
the insurer and
(a) the insurer shall be deemed to be a trustee of that
trust; and
(b) the activities of the segregated fund shall be
deemed to be activities of the trust and not activities of the
insurer.
For purposes of the imposition of the tax, this provision
makes each of the segregated funds a person separate from the
Appellant, with the result that the supply of a service by the
Appellant to any of the funds is a supply of a taxable service,
unless the service in question comes within the definition of a
financial service, and is therefore exempt.
[14] The assessment under appeal is supported by the
Respondent on the basis that the funds, being separate entities
from the Appellant for purposes of the Act, but having no
separate existence in fact, and therefore no employees of their
own, function only through the actions of others, namely the
outside investment managers, and the personnel of the Appellant.
Counsel for the Respondent argued that, in addition to the
service provided by the outside investment managers, the
Appellant provides to each fund a single management or
administrative service which, in his words, consists of the
following:[4]
... record keeping and bookkeeping activities and monitoring
the performance of outside investment managers, ... [and] ...
selling the segregated fund policies through outside selling
agents, investing the money received by way of premiums through
outside investment managers, monitoring the individual
policyholders' accounts, valuing the segregated fund assets
and establishing the unit values, record keeping and bookkeeping
and liquidating the policyholders' accounts, whether on the
maturity dates or prior thereto, public relations and settling
legal disputes, all of which was done for the segregated accounts
by the Appellant. In short the entire business of the segregated
funds was directed and managed by the Appellant, for all of which
it received a flat percentage fee, the IAF.
The IAFs, he argues, are the consideration paid by the funds
to the Appellant for this service, and are therefore the base to
which the 7% tax is to be applied.
[15] The position of the Appellant is that the IAFs in this
case are part of the consideration paid by the policyholder for
the issuance and the maintenance by the Appellant of a life
insurance policy – in short, they are a component of the
premium. It is not disputed that insurance premiums are payments
for a financial service[5] and so exempt from tax. Counsel argued that the
Appellant made only one supply – that of insurance
contracts to policyholders. He characterizes the IAFs as part of
the Appellant's cost of supplying the insurance policies to
its policyholders, who are the only recipients of a supply from
it.
[16] Both counsel urged me to view the IAFs as being
consideration for one supply only. Mr. Chambers took the position
that because the Appellant did not charge the funds separate fees
for separate services, but rather a single percentage fee to
cover all the services, it represents a single consideration for
a single supply, and not a multiple supply of several services.
Mr. Harris took the position that the entire IAF should be
considered as premiums received from the Appellant's
insureds, and therefore exempt. For the reasons that follow, I do
not subscribe to either of these views.
[17] Counsel for the Appellant also argued that any service
rendered to the funds by the Appellant ought to be regarded as a
financial service, notwithstanding the provisions of paragraph
(g) of the definition of that term, as retroactively
amended.[6] In view
of the conclusion that I have reached, it is unnecessary to
decide that point.
analysis
[18] In considering the application of the Act, it is
important to approach the matter in a common-sense way, and with
an eye for the reality of the transactions involved. This
principle was applied by Rip J. of this Court in O. A. Brown
Ltd. v. Canada,[7] where at paragraph 28 he quoted from Lord
Widgery's judgment in Customs and Excise Commissioners v.
Scott,[8] as
follows:
Lord Widgery CJ, stated "that it is to hope when
answering Lord Denning MR's question in the future in
this type of case people do approach the problem in substance and
reality". He added:
... I think it would be a great pity if we allowed this
subject to become over-legalistic and over-dressed with legal
authorities when, to my mind, once one has got the question
posed, the answer should be supplied by a little common sense and
concern for what is done in real life ...
The question to which Lord Widgery referred there was simply
this: "What did the taxpayer supply in consideration of the
money that he charged ...? "[9]
[19] It is also important to remember that in the present case
there is no contract that has been struck between the deemed
trusts and the Appellant, their deemed trustee. The only bargain
that has been made here is between the Appellant and the
policyholder. The substance and reality is that the policyholder
has agreed to pay a consideration, consisting of both the cash
premium and the amount of the IAF attributable each year to the
policy, and to receive in return all of the rights under the
policy. These are the accumulation of wealth in one or more
professionally managed funds, and may include a guaranteed
minimum accumulation at maturity, a guaranteed amount payable if
death occurs before maturity, bonus payments at intervals after
the fifteenth year, and possibly other benefits as well. These
are insurance services supplied to the policyholders.
[20] The functions of record keeping, evaluation, retaining
and supervising the outside investment managers, and investing
the money market fund are, in reality, also part of the
operations of the Appellant, but, in the notional world of
section 131, they are the services supplied to the
funds.
[21] I shall call these two groups of services "the
insurance services" and "the fund services".
[22] Superficially, it might be thought that because the
entire IAF, 1½% per annum, passes from the funds to the
Appellant, then that entire amount must be viewed as being the
consideration for the fund services. In my view, that is not
so.
[23] The contention of the Crown ignores that the major cost
components of the IAF are charged by the Appellant specifically
to pay for the insurance services, which are financial services
quite distinct from the fund services. I refer here to the life
insurance and market insurance benefits, bonuses, and other
benefits which some of the policies provide to the policyholders.
These are financial services within the definition of that term.
They are also, in reality, supplied to someone other than the
funds. They therefore cannot be considered simply to be part and
parcel of one service supplied to the funds. Nor can the IAF,
which pays for them, be thought of as the consideration simply
for one service supplied to the funds.
[24] Counsel for the Crown relies on the judgment of Rip J. in
O. A. Brown Ltd.[10] to support the proposition that all the items listed
at paragraph 12 above constitute a single service, for which
the IAF is the consideration. That case was concerned with the
application of the Act to a buyer of livestock who made
purchases at auctions to order for its customers, and then resold
the livestock to those customers. In reselling the animals, the
taxpayer invoiced its customers for the cost to it of the
animals, plus its out-of-pocket expenses for feed,
transportation, insurance, inoculation and branding, together
with a mark-up of $1.00 per 100 pounds of livestock. Rip J.
adopted the substance and reality approach advocated by Lord
Widgery C.J., and found that O. A. Brown Ltd. made only one
supply, that of livestock. In reaching this conclusion, he said
at paragraph 31:
... The appellant seeks reimbursement of these costs and
charges a fee for this service. It is difficult to isolate these
buying activities as being distinct supplies, independent of the
whole activity. Only if taken together do they form a useful
service. In substance and reality, the alleged separate supply,
that of a buying service, is an integral part of the overall
supply, being the supply of livestock. The alleged separate
supplies cannot be realistically omitted from the overall supply
and in fact are the essence of the overall supply. The alleged
separate supplies are interconnected with the supply of livestock
to such a degree that the extent of their interdependence is an
integral part of the composite whole. The services are rendered
under a single contract, for a single consideration, albeit the
invoice is itemized. The appellant is making a single supply of
livestock and the commission and disbursements charged are part
and parcel of the consideration for that supply. They do not
amount to separate supplies. This is simply a matter of common
sense. No GST is collectible on the commission charged and the
disbursements.
[25] Rip J. was dealing with a situation in which the contract
was entered into between one buyer and one seller, for one
aggregate service supplied by one of them to the other. The
present case is materially different in that the IAF is not
simply the consideration for the fund services. It was fixed on
the basis that it would cover the cost of those services, as well
as several others, which are insurance services, and which do not
benefit the funds at all. These insurance services account for
the major component of the IAFs. As counsel for the Appellant
correctly points out, there is a deemed person in the form of the
fund, but there is no deemed supply. It follows that what can be
considered a supply to the fund is simply that which benefits the
fund.
[26] I find, contrary to the submission of counsel for the
Respondent, that the selling of policies is not a service
provided by the Appellant to the funds. The Appellant's
business is the sale of policies, and it does that for its own
benefit. The contracts of insurance are between the Appellant and
its policyholders. The fact that some or all of the premiums are
invested in the funds does not change this fact, nor does it make
the Appellant's sales efforts a service provided to the
funds. Without these sales, the Appellant would have no
business.
[27] Once it is understood that the IAF, although a single
consideration, has two separate components, or groups of
components, one of which relates to the insurance services and
the other to the fund services, then it is apparent that the
result must be governed by sections 123 and 139 of the
Act.
[28] Subsection 165(1) imposes the tax on the
"recipient" of a taxable supply. Subsection 123(1) of
the Act defines "recipient":
"recipient" of a supply of property or a service
means
(a) where consideration for the supply is payable under
an agreement for the supply, the person who is liable under the
agreement to pay that consideration,
(b) where paragraph (a) does not apply and
consideration is payable for the supply, the person who is liable
to pay that consideration, and
(c) where no consideration is payable for the
supply,
(i) in the case of a supply of property by way of sale, the
person to whom the property is delivered or made available,
(ii) in the case of a supply of property otherwise than by way
of sale, the person to whom possession or use of the property is
given or made available, and
(iii) in the case of a supply of a service, the person to whom
the service is rendered,
and any reference to a person to whom a supply is made shall
be read as a reference to the recipient of the supply.
[29] The IAF is payable pursuant to the terms of the
Appellant's policies, which of course are contracts between
the Appellant and its policyholders. The contracts provide that
the funds are to pay the IAFs, and, of course, that is
fundamental to the Crown's position. The
"recipients" of all the supplies for which the IAFs are
consideration, therefore, for purposes of the Act, are the
funds, even though the major cost component is for the supply of
insurance services to the policyholders.
[30] Section 139 of the Act, as originally enacted,
read as follows:
139 For the purposes of this Part, where a supply of one or
more financial services is made together with one or more
properties or services that are not financial services and the
total of all amounts, each of which would be the consideration
for a financial service so supplied if that financial service had
been supplied separately, is greater than 50% of the single
consideration, the supply of all the properties and services
shall be deemed to be a supply of financial services.
In 1993 it was amended to read:
139 For the purposes of this Part, where
(a) one or more financial services are supplied
together with one or more other services that are not financial
services, or with properties that are not capital properties of
the supplier, for a single consideration,
(b) the financial services are related to the other
services or the properties, as the case may be,
(c) it is the usual practice of the supplier to supply
those or similar services, or those or similar properties and
services, together in the ordinary course of the business of the
supplier, and
(d) the total of all amounts, each of which would be
the consideration for a financial service so supplied if that
financial service had been supplied separately, is greater than
50% of the total of all amounts, each of which would be the
consideration for a service or property so supplied if that
service or property had been supplied separately,
the supply of each of the services and properties shall be
deemed to be a supply of a financial service.
The amended version is applicable to supplies made after
September 14, 1992. However, its requirements are somewhat more
rigorous than those of the original provision, so that if it is
satisfied, then so is its predecessor.
[31] The purpose of the section, in both its versions, is to
provide that where financial and non-financial services are
supplied for a single consideration, and the consideration for
the financial services, if supplied separately, would amount to
more than 50% of that single consideration, then the supply of
each of the services shall be treated as a supply of financial
services, exempt from tax. The financial services supplied in
this case, that is the insurance services, are supplied together
with the services which benefit the funds, for a single
consideration, namely the IAF. Although different persons benefit
from them, they have only one "recipient", by reason of
the definition of that word, and only one consideration. The
financial services and the other services are clearly related.
They all owe their origin to the same insurance policies. The
supply of them together is in the ordinary course of the
Appellant's business. The first three conditions of section
139 are therefore satisfied in the present case.
[32] The remaining question is whether the consideration for
the financial services would be more than 50% of the total
consideration for all the services, if they were supplied
separately. The evidence before me as to the amounts that would
be the consideration for the financial services and the
non-financial services, respectively, if those services had been
supplied separately, is found in the documents titled Outline of
Product Matrix, at Tab 1 of Exhibit A-1, as explained by Mr.
Moffat and Mr. Cotnam, and at Exhibit R-46. A careful examination
of those indicates to me that in each case the cost of the fund
services is substantially less than the cost of the insurance
services supplied to the policyholders in the form of policy
benefits. The consideration that would be charged for the
financial services, therefore, exceeds 50% of the IAF, which is
the total consideration. The requirement of paragraph (d)
section 139 is therefore satisfied, and that section operates to
deem the supply of each of the services to be a supply of a
financial service, and therefore exempt pursuant to Part VII of
Schedule V.
[33] The appeal is allowed, and the assessment is quashed. The
Appellant is entitled to its costs.
Signed at Ottawa, Canada, this 4th day of January, 1999.
"E.A. Bowie"
J.T.C.C.
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