Standard Life –Tax Court of Canada restrictively interprets s. 138(11.3), thereby casting doubt on a favourable CRA interpretation of the s. 95(2)(k) fresh start rule, and applies a “window dressing” doctrine

Prior to the introduction of mark-to-market rules in 2007, Standard life Assurance Company of Canada (which to that point only carried on business in Canada) scrambled to achieve a step-up to fair market value in the cost amount of its assets by purporting to commence carrying on business in Bermuda in December 2006. It relied on the s. 138(11.3) rule, which defined an "insurer" as a Canadian life insurer which also carried on business in another country and provided that where "designated insurance property of the insurer for a taxation year [2006], was owned by the insurer at the end of the preceding taxation year [2005] and was not designated insurance property of the insurer of the insurer for that preceding year," such property could be bumped in the 2006 return.

Pizzitelli J found that in order for s. 138(11.3) to apply, it was necessary for the taxpayer to qualify as an "insurer" in the preceding taxation year (2005) rather than only in the current year, so that the bump was not available. In contrast, in 2014-0536581I7 CRA found that the requirement, in the similar fresh start rule in s. 95(2)(k), that the "affiliate" whose property is sought to be bumped have carried on the business in question in the preceding year, was satisfied notwithstanding that it was not an affiliate in the preceding year.

In any event, the intended Bermuda business did not commence until 2008. In the meantime, there were just a few isolated acts, such as hiring a bookkeeper with essentially nothing to do, entering into a reinsurance contract with an affiliate which was backdated to December 2006, and getting a Bermuda licence which prohibited any business with third parties. This all was "window dressing" - a term which Pizzitelli J defined as "a deception that is not about the legal validity of a transaction, as in sham, but about the taxpayer’s intention for entering into the transaction."

Neal Armstrong. Summary of Standard Life Assurance Company of Canada v. The Queen, 2015 TCC 97 under s. 138(11.3).