Date: 19980810
Docket: 96-3525-IT-G
BETWEEN:
THE GREAT-WEST LIFE ASSURANCE COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] This appeal is in respect of the Appellant’s 1988
taxation year.
ADMISSIONS FROM THE PLEADINGS
[2] The Appellant, The Great-West Life Assurance Company
(“GWL”), in its Notice of Appeal, states the
following:
1. The Appellant is a corporation incorporated under the laws
of Canada and has its head office at 100 Osborne Street N.,
Winnipeg, Manitoba, R3C 3A5.
2. The Appellant is resident in Canada and it has carried on
an insurance business, including the business of life insurance,
in Canada and in the United States of America, for many years
including the 1988 taxation year and up to the present time.
3. At all relevant times G.W.L. Properties Ltd.[1] was a corporation
incorporated under the laws of British Columbia.
4. At all relevant times all the issued shares of G.W.L.
Properties Ltd. were owned by the Appellant. At the end of 1988
the Appellant also held a note receivable from G.W.L. Properties
Ltd. in the amount of $124,500,000. These shares and note are
hereinafter referred to collectively as the “GWLP
Securities”.
5. The Appellant and G.W.L. Properties Ltd. have a December 31
fiscal year end.
6. In calculating its income and filing its income tax return
for the 1988 taxation year:
(a) the Appellant took the view that the GWLP Securities were
property classified as “investment property” within
the meaning of paragraph (d) of the definition in Income Tax
Regulation 2405(3);
(b) the Appellant designated the GWLP Securities to be
included as part of the property comprising the value of its
“Canadian investment Fund for the year” under
Regulation 2400(1)(b) and (d), and accordingly treated the GWLP
Securities as “property used by it in or held by it in the
course of carrying on its insurance business in Canada”
pursuant to Income Tax Regulation 2400(1); and
(c) therefore as required by income Tax Regulation 2400(1) and
paragraph 138(9)(a) of the Income Tax Act the Appellant included
in its “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 its insurance business in Canada” the income
derived from the GWLP Securities and proceeded to calculate its
total income under subsection 138(9) on this basis.
7. The Minister issued a Reassessment on the Appellant for the
1988 taxation year, notice of which was dated July 28, 1994 in
which he made a number of changes increasing the calculation of
income of the Appellant and re-assessed tax thereon.
8. The Appellant duly filed a Notice of Objection to the
Reassessment of July 28, 1994, objecting to certain of the
changes made by the Reassessment.
9. The Minister then issued a further Reassessment on the
Appellant for the 1988 taxation year, notice of which was dated
June 17, 1996, which Reassessment reversed some, but not all, of
the changes made by the earlier Reassessment of July 28,
1994.
...
[3] GWLP was created to hold investments in real estate.
Originally, it issued shares to GWL in return for properties
known as the “Bentall Group”. Later, additional
assets were transferred to GWLP by GWL; GWLP also owned other
shares for mortgages and notes. GWLP operated out of GWL Winnipeg
investment division offices. GWLP did not have any employees and
contracted services from GWL.
[4] For the taxation year in question, part of the gross
investment revenue (“GIR”) earned by GWLP was
$47,812,982. The parties agree this GIR was from arm’s
length sources.
[5] The intercompany accounts between GWL and GWLP were shown
in financial working papers by the Appellant. Specifically,
account number “5095” recorded amounts due to the
Appellant from GWLP and “5097” recorded amounts due
from the Appellant to GWLP. These accounts in the working papers
were used to calculate the interest payable or receivable between
GWL and GWLP on a month by month basis. For 1988, an additional
$5,480,029 interest income was earned by GWLP from GWL as a
computation of interest earned on monthly balances in the
taxation year on monies advanced by GWLP to GWL. This interest
income is at the heart of this dispute. The Appellant maintains
this is GIR from arm’s length sources. The Minister of
National Revenue (the “Minister”) maintains this
interest was from non-arm’s length sources. This interest
income is the main issue in this case, that is, whether the
interest income constitutes GIR from arm’s length
sources.
[6] Also during the taxation year, a .5% management fee was
payable by GWLP to GWL for management services in relation to
$49,709,601; that sum equals $248,548.
[7] In December 1988, GWLP redeemed some of its preference
shares for the sum of $199,500,000. The redemption was paid in
two ways, a reduction of the amount owing by GWL to GWLP by
$75,000,000 and the balance by the issue of a promissory demand
note (December 15, 1988) from GWLP to GWL for $124,500,000 at the
rate of prime plus 1%. For the rest of the year
(December 15-31, 1988) $739,325 of interest was payable by
GWLP to GWL on this promissory demand note. The share redemption
account was recorded in a separate column in the
Appellant’s financial working papers.
[8] As a numbered footnote to the financial statements for
1988 there was a note to reader (note 7c., Exhibit A-1, tab 8)
referring to interest income. The note indicated that $5,480,029
in interest income (from the numbered accounts “5095”
and “5097”) flowed one way (GWL to GWLP) whereas
$739,325 flowed the other way (GWLP to GWL) (interest income on
the demand promissory note for share redemption for the period
December 15, 1988 to December 31, 1988).
[9] Both of these computations (the management fee ($248,548)
and the interest charge ($739,325)) are part of the
Appellant’s alternative submissions elaborated more fully
below.
SCHEME OF THE LEGISLATION AND REGULATIONS
[10] The purpose of section 138 of the Income Tax Act
(the “Act”) is to set out the rules for
computing the income, taxable income and taxes payable by an
insurance corporation.[2]
[11] The 1988 scheme of the provisions are as follows.
[12] Paragraph 138(2)(a). The income of the Appellant
for a taxation year as an insurer carrying-on business in Canada
and in the United States of America was “the amount of its
income for the year from carrying on that insurance business in
Canada”.
[13] Subsection 138(9). In computing the insurer’s
income for the year from carrying-on business of its insurance
business in Canada the aggregate of that part of its GIR for the
year that was its GIR from property used by it or held by it in
the year in the course of carrying-on that insurance business in
Canada and such additional amounts as prescribed by
regulation.
[14] Paragraph 138(12)(l). The “property”
used by the insurer in the year (in the course of carrying-on
insurance business in Canada) is deemed to be property to be
determined in accordance with prescribed rules.
[15] Regulation 2400(1) of the Income Tax Regulations (the
“Regulations”) prescribed such property that was
designated or required to be designated by the insurer in a
taxation year subject to certain rules.
[16] Regulation 2400(1) distinguishes between
“investment property” and all other
“non-segregated property”.
[17] Regulation 2400(1). An insurer’s “investment
property” fell to be designated or required to be
designated by paragraphs 2400(1)(a), (b),
(c), (d) and (f) while paragraph
2400(1)(e) deemed the Appellant’s other
“non-segregated property” to have been designated by
the insurer.
[18] For the purposes of this appeal, regulation 2405(3) is
definitive. “Investment property” is defined therein
as the property of the insurer that is a share of, or a debt
owing to the insurer by a designated corporation subject to the
condition; the GIR from the investment property of the designated
corporation (other than GIR from persons with whom the
corporation did not deal at arm’s length) is not less than
90% of the gross revenue (“GR”) for the
corporation.
[19] Otherwise, investments held by an insurer in a
corporation qualified as “investment property” of the
insurer only if not less than 90% of the corporation’s GR
was GIR from arm’s length sources.
[20] GIR means non taxable dividends interest ... included in
its gross revenue for the year.
[21] GR means all amounts received or receivable otherwise
than on the account of capital.
[22] Not all the insurer’s “investment
property” was permitted or required to be designated. Only
those portions as were equal in the amount of the insurer’s
Canadian Investment Fund (“CIF”)[3] and such portions of the
insurer’s investment property not required to satisfy. CIF
were not required to be designated with the result
“investment property” not designated did not fall to
be included in computing income.
CIF COMPUTATION FOR GWL
[23] The evidence of Douglas Samuel Magnusson (Vice-President
of Taxation for the Appellant) described the CIF computation and
how GWL completed part of its tax return.[4]
In response to a question about:
Q ... the computation of the Canadian investment fund ...
?
He replied:
A The concept of Part 2400 of the Regulations starts with the
division of a company’s assets into two kinds, investment
property and non-investment property. There is an underlying
assumption that the non-investment property can be allocated
between Canadian and non-Canadian business on a factual
basis.
With respect to the investment property, there was at one time
an allocation that was based on fact, prior to 1978, and then
formulas were introduced into the Regulation on the theory that
it is difficult to tell which business or which country a
particular asset is used in, particularly if there’s a tax
motivation to move it, and that a formula was more indicative of
perhaps not the facts of the situation, but a reasonable tax
base.
So total investment property is added up in terms of a defined
value for each piece at the beginning of the year and the end of
the year. Certain adjustments are made to that total in order to
arrive at an appropriate definition of what investment property
is used in Canada.
So as you recounted earlier, you start with total investment
property. You add policy loans because they’re a lot like
investment property. You multiply that total by the ratio of
Canadian reserves to total reserves, and then subtract off
Canadian policy loans because you had added total policy loans at
the beginning.
In adding up the total investment property, there are some
adjustments that are made for, first of all, debts of the
corporation and they come in two kinds. One is debts that were
used to acquire a specific piece of investment property, and
they’re subtracted off the value of the property.
The second kind is debts that cannot be traced to the
acquisition of a specific property, and they come off the total
on the theory that while you can’t trace them to a
particular property, ultimately if the company owes more, it must
also have more assets.
Having then arrived at the quantum of the assets that are used
in Canada at the beginning of the year, the CIF at the beginning
of the year, the CIF at the end of the year, you take the average
to arrive at the CIF for the year, with a further adjustment to
take into account the possibility that rather than going nice and
smoothly from the beginning to the end, that perhaps the cash
flow pattern within the year was not smooth. And that is the last
four or five lines that you see in the CIF calculation.
Q So after going through that, you have come out to a dollar
number?
A Well, to a dollar number that represents -- it is the CIF
for the year and represents, if you will, a pot that has to be
filled with assets. And those assets are investment property and
the --
Q Now this is under Regulation 2400(1)(d)?
A Yes.
Q Now when you say it has to be filled with investment
property, how is that done? Is that mandated in the Regulation,
is that discretionary to the insurer; how is that done?
A There is some discretion. The insurer has to have, does have
the discretion to designate assets, but there is an order of
designation that starts with those assets that are essentially
most Canadian, Canadian real estate; then moves to assets that
are, shall we say, less Canadian; and kind of the last thing that
you can designate is assets that are not Canadian, say foreign
real estate.
[24] For 1988, the calculation of the CIF fund, Mr. Magnusson
responded to questions as indicated (at pages 110 and 111 of the
transcript):
Q And going through all the machinations, you come out at the
bottom to that number of $4,000,564,000.00, that’s
correct?
A That’s right.
Q Now having established this number to identify with the CIF
... [the insurer must] fill it ...
...
Q ... and whatever property it is filled with, it is that
income that then is reportable by Great-West Life in its Canadian
income?
A Yes.
Q Now when Great-West Life came to filing its tax return,
obviously Great-West Life designated ... the shares and debt
owing from Great-West Life Properties to cover off or fill the
CIF account ...?
A Yes.
...
A In our view, the shares and debt were investment
property.
[25] Because of the Minister’s determination that the
GWLP Securities were not “investment property” of the
Appellant, the Minister designated other “investment
property” of the Appellant to satisfy the Appellant’s
“Canadian investment fund for the year” pursuant to
paragraph 2400(1)(f) of the Regulations, the income
from which “investment property” had not previously
been included by the Appellant in computing its income.
ISSUE
[26] The essential issue to be decided is whether the GWLP
Securities were “investment property” of the
Appellant (or “GWL”) within the meaning of
subparagraph 2405(3)(d)(v) of the Regulations under
the Act.
THE APPELLANT’S POSITION
[27] The Appellant’s position, as stated in its Notice
of Appeal is:
16. .... the Minister erred in applying the test set out in
subparagraph (d)(v) of the definition of “investment
property” in Income Tax Regulation 2405(3) when he included
in “gross revenue” of G.W.L. Properties Ltd. an
amount of $5,480,029.00 as being on account of interest income
earned by it from the Appellant. The Appellant says that the said
amount was not earned from the Appellant but that it was on
account of interest income earned from arms length third parties
and received by the Appellant in its capacity as trustee on
behalf of GWL Properties Ltd. and therefore should be included in
both the “gross revenue” and “gross investment
revenue” of G.W.L. Properties Ltd.
17. Alternatively the Appellant submits that if the said
interest income of G.W.L. Properties Ltd. was earned from the
Appellant and not from arms length third parties, then the
correct amount of interest income to be included in “gross
revenue” of G.W.L. Properties Ltd. is not $5,480,029.00 but
$5,480,029.00 net of:
(i) $248,548.00 recorded as fees paid by G.W.L. Properties
Ltd. to the Appellant in 1988; and
(ii) $739,325.00 recorded as interest paid by GWL Properties
Ltd. to the Appellant in 1988.
THE RESPONDENT’S POSITION
[28] The Respondent’s position as stated in the Reply to
the Notice of Appeal is:
11. ... the GWLP Securities were not “investment
property” of the Appellant, within the meaning of
subparagraph 2405(3)(d)(v) of the Regulations under the Income
Tax Act, because less than 90% of the gross revenue of GWL
Properties Ltd. was “gross investment revenue” from
arm’s length sources, with the result that the Minister of
National Revenue correctly designated other “investment
property” of the Appellant to satisfy its “Canadian
investment fund for the year” (1988), with the further
result that as a combination of the ensuring increase of the
Appellant’s “gross investment revenue for the
year”, the increase of the Appellant’s income due to
the deemed designation of the GWLP Securities as other “non
segregated property” of the Appellant and the recalculation
of the additional amount which the Appellant was required to
include in its income by virtue of paragraph 138(9)(b) of the
Income Tax Act and section 2411 of the Regulations under
the Income Tax Act, the Appellant’s “income
for the year (1988) from carrying on its insurance business in
Canada”, within the meaning of subsections 138(2) and
138(9) of the Income Tax Act increased by $16,678,039.
THE APPELLANT’S FIRST ARGUMENT
[29] The effect of the Revenue Canada reassessment is that the
splitting of the investments between GWLP and the Appellant
(compared to all the investment having been kept entirely in
either one of the companies) results in over $16 million
more income since the GWLP Securities lost their status as
investment property.
[30] GWLP was an investment company, all of the funds were
transferred to the Appellant, invested by the Appellant and made
part of the Appellant’s investment pool. The Appellant
acted as a trustee for GWLP funds. While the Appellant paid
interest in the sum of $5,480,029 as a calculation of interest on
monthly balances owed by the Appellant to GWLP, the Appellant
submits in these circumstances the $5,480,029 was earned, albeit
indirectly, from arm’s length sources; that is, income
earned on the monies advanced to the Appellant by GWLP and
invested by the Appellant.
[31] Further, the circumstances of this case in the
Appellant’s submissions are similar to those in R A
Jodrey Estate v. Min. of Finance, (NS), [1980]
C.T.C. 437 (S.C.C.), where the Supreme Court of Canada found
that one company was simply a conduit for the other so far as the
holding of property. The Appellant’s submission adds that
the Supreme Court of Canada did not come to its conclusion by
ignoring the separate legal status of the companies but
considered the overall economic effect to the taxpayer
estate.
SECOND ARGUMENT OF THE APPELLANT
[32] The appropriate amount of interest revenue to be used for
the purpose of the “investment property” definition
is not $5,480,029 but the amount of $5,480,029 reduced by
$248,548.[5]
[33] The interest revenue earned by GWLP from the Appellant
should be reduced by that portion of the asset management fee
paid by GWLP to the Appellant which was calculated on the
$49,709,601 receivable from the Appellant as this fee portion was
paid/received between the same companies, was on the same asset
and was calculated by terms of the same agreement as the interest
revenue.
[34] The Appellant submits the true picture of the economic
affairs of the taxpayer is the important principle for income tax
purposes.
THIRD ARGUMENT OF THE APPELLANT
[35] The Appellant says that the appropriate amount of
interest revenue to be used for the purpose of paragraph
2405(3)(d)(v) in the “investment property”
definition is not $5,480,029 but the amount of $5,480,029 reduced
by $739,325.[6]
[36] Generally, the intercompany transactions between GWLP and
the Appellant recorded in numbered accounts “5095”
and “5097” were consolidated for the purpose of
computing the interest factor on a monthly average basis.
Interest was not accounted for transaction by transaction or day
by day.
[37] A third intercompany account was the “share
redemption loan” account which separately showed a
calculation of $739,325.41 in interest from GWLP to GWL on the
note of $124,500,000 issued to GWL in December 1988.
[38] The share redemption loan account was simply one more
intercompany transaction which occurred in 1988, no different
than the assorted collection of other transactions recorded in
the “5095/5097” accounts.
[39] The economic reality of what occurred in the
Appellant’s submission is that if GWLP is to be considered
as having earned interest revenue from a non-arm’s length
source (i.e. from the Appellant), then the GIR from that
non-arm’s length source ought to be reflected by having
regard to all the intercompany transactions, including the share
redemption loan account, and therefore the $5,480,029 should be
reduced by $739,325.41.
THE RESPONDENT’S RESPONSE TO THE
APPELLANT’S
FIRST ARGUMENT
[40] The true nature of the transaction or event must always
be ascertained, there is no room for the application of a
“substance over form” doctrine whereby the economic
or fiscal results of the transaction or event take precedence
over the legal rights and obligations which the transaction or
event have created.
[41] Intercompany accounts numbered “5095” and
“5097” were not trust accounts, but merely accounts
showing intercompany indebtedness between the Appellant and
GWLP.
[42] While some of the sources of this indebtedness appear to
be dividends earned by GWLP, these dividends are not a component
of the $5,480,029 in issue because this amount is, on the
evidence, the sums of interest charges on monthly balances owing
from the Appellant to GWLP.
[43] The Respondent concludes since this part of GWLP’s
GIR was GIR from a non-arm’s length source (the Appellant)
and since GWLP’s remaining revenue from arm’s length
sources ($47,812,982) was less than 90% of its total GIR
($53,293,011), i.e. 89.72%, the Appellant’s shares in GWLP
and the $124,500,000 owing to the Appellant by GWLP were not
“investment property” within the meaning of
subsection 2405(3) “investment property” (d)
of the Regulations with the result that these shares and the debt
could not be designated as “property used by it in the year
in, or held by it in the year in the course of” carrying on
the Appellant’s insurance business in Canada within the
meaning of paragraph 138(12)(l) of the Act and
subsection 2400(1) of the Regulations.
THE RESPONDENT’S RESPONSE TO
THE APPELLANT’S SECOND ARGUMENT
Whether the amount of $248,548 reduces the
Appellant’s GR and GIR
[44] The Respondent submits the definitions of GIR in
paragraph 138(12)(e) and GR in subsection 248(1) of the
Act make it clear that interest is part of GR and GIR
without any deductions. It is submitted that had the legislator
intended to allow deductions, he would have said so.
THE RESPONDENT’S RESPONSE TO
THE APPELLANT’S THIRD ARGUMENT
Whether the amount of $739,325 reduces the
Appellant’s GR and GIR
[45] The Respondent submits this amount of $739,325 was an
amount of interest that was paid or payable by GWLP to the
Appellant on the $124,500,000 indebtedness that arose on
GWLP’s redemption of its preference shares.
[46] The interest of $5,480,029 was the sum of interest paid
or payable on the monthly balances in the intercompany accounts
while the interest of $739,325 was interest paid or payable on
the $124,500,000 indebtedness.
[47] GWLP’s GIR and GR on account of interest received
or receivable by GWLP cannot be reduced by the interest payable
by it, having regard to the definitions of GR and GIR in
subsection 248(1) and paragraph 138(12)(e) of the
Act, respectively.
ANALYSIS
TRUST
[48] Interest income must be included in GIR pursuant to
subsection 138(12) of the Act: see Munich Reinsurance
Company (Canada Branch) v. M.N.R., 91 DTC 1137
(T.C.C.). However, if the $5,480,029 was income earned by GWL
from arm’s length third parties, then this amount should
have been included in “investment property”. The
Minister acknowledges this in the statement of assumptions at
paragraph (k). The Minister’s position is that the income
was interest income from intercompany loans received by GWLP from
the Appellant. The Appellant submits simply that the amount was
investment income earned by GWL.
[49] An express trust is one in which the person creating it
has expressed his or her intention to have property held by one
or more persons for the benefit of another or others, and may be
evidenced orally, by deed or agreement: see D.W.M. Waters, Law
of Trusts in Canada (2nd ed., Carswell, Toronto, 1984) at
page 15.
[50] In Cadillac Fairview Corp. Ltd. v. R [1996] 2
C.T.C. 2197 (T.C.C.), Bowman J. in commenting on the burden of
proof in tax appeals quoted at page 2202 from Odgers’
Principles of Pleading and Practice, 22nd edition at
page 532:
The “burden of proof” is the duty which lies on a
party to establish his case. It will lie on A, whenever A must
either call some evidence or have judgment given against him. As
a rule (but not invariably) it lies upon the party who has in his
pleading maintained the affirmative of the issue...
[51] The effect of both of the aforementioned legal
principles, taken together, is that the burden was on the
Appellant to prove that a trust was created in law between GWL
and GWLP pursuant to which the Appellant held the investment
income of GWLP. The Appellant has not met that burden. No
evidence was advanced which would support the existence of an
express trust in this case and the Appellant was not heard to
argue that a trust arose by operation of law. Furthermore, the
evidence disclosed that all funds that were supposedly held
‘in trust’ for GWLP were co-mingled with the
Appellant’s own funds and were not traceable to any
specific investment which the Appellant made on GWLP’s
behalf. On this basis I find that no trust existed.
CONDUIT AND ECONOMIC RESULT
[52] The Appellant relies upon the decision of the Supreme
Court of Canada in Jodrey (supra) to support the
proposition that GWL was merely a “conduit pipe”
through which GWLP held certain property. Therefore, he argues,
GWLP indirectly earned income from arm’s length sources
because GWL was merely holding certain amounts on its behalf, to
which it was beneficially entitled.
[53] In Jodrey (supra) the taxpayer had
attempted to avoid succession duties through a sophisticated
estate plan. The taxpayer transferred property to an Alberta
corporation which was a wholly owned subsidiary of a second
Alberta corporation, the shares of which were held by the
taxpayer’s children. The purpose of the two-tiered
structure was that when the taxpayer left the residue of his
estate to the first Alberta corporation, the beneficiary was the
second corporation rather than the grandchildren of the taxpayer.
In other words, by interposing two corporations between the
taxpayer and the beneficiaries of his estate, succession duties
were avoided. The Supreme Court of Canada held that the parent
company was beneficially entitled to the residue of the estate
within the meaning of the Nova Scotia legislation dealing with
succession duties, therefore the legislation deemed the residue
to be received in the grandchildren’s hands.
[54] Jodrey (supra) was an estate planning
situation which involved succession duties whereas the present
case deals with the inclusion in income of certain amounts
receivable by a company carrying-on an insurance business in
Canada. Furthermore, in Jodrey (supra) the taxpayer
had incorporated a number of holding companies for a specific
purpose. Here GWL was an operating insurance company and GWLP was
an operating company holding investment including real estate,
shares and notes. Finally, Jodrey (supra) dealt
with transactions which were structured solely to avoid tax
whereas here there is no tax avoidance.
[55] I note there was a very strong dissent by Dickson J. (as
he then was), Ritchie and McIntyre JJ. concurring, wherein he
said the following at page 464:
Generally speaking, in the absence of fraud or improper
conduct the courts cannot disregard the separate existence of a
corporate entity; see Pioneer Laundry and Dry Cleaners Ltd. v.
M.N.R., [1938-39] CTC 411; 1 DTC 499-69.
[56] He continued at page 465:
There is a tendency to think loosely in terms of a parent
owning the assets of its wholly-owned subsidiary but that is not
so in law. No one would suggest that a person owning 100 shares
of Canadian Pacific is the owner of, or has a beneficial interest
in, the assets of Canadian Pacific. No distinction can be made in
principle between ownership of 100 shares in a major corporation
and ownership of all of the issued shares in a small company. In
neither case does the shareholder own any asset other than
shares. And the situation is unaffected by the fact that one or
more shareholders may have voting control and thereby be in a
position to acquire the assets or a portion thereof on wind-up,
or upon a distribution of assets other than on wind-up. If
shareholders are beneficially entitled to the property of a
corporation in which they hold shares, then subsection 2(5) would
not have been necessary.
[57] In Otineka Development Corporation Limited et al. v.
The Queen, 94 DTC 1234 (T.C.C.), where a corporate
taxpayer was incorporated and owned by an Indian Band as defined
in subsection 2(1) of the Indian Act and the corporate
Appellant contended it was an agent or trustee of the Board.
Bowman J. stated at page 1236:
Where a corporation holds itself out to third parties as
owning its property and business, keeps separate financial
records, files its own corporate income tax returns and acts like
any other corporation that is independent of its shareholders, it
would require extremely cogent evidence to establish that all
along it was really just an agent or trustee for its shareholders
on the basis of an unwritten oral understanding or assumption on
the part of some of the shareholders or directors.
[58] Judge Bowman also reviewed the position of a subsidiary
and its parent in Continental Bank of Canada et al. v. The
Queen, 94 DTC 1858 (T.C.C.), at page 1869:
Generally speaking it requires extremely compelling evidence
for one company — even a subsidiary — to be regarded
as an agent for another (Denison Mines Ltd. v. M.N.R., 71
DTC 5375 at pp. 5388-5399, affirmed on another issue 72 DTC 6444
(FCA) and 74 DTC 6525 (SCC)). It is even more difficult to regard
a parent as its subsidiary’s agent.
[59] The Appellant also relied upon the statement of Iacobucci
J., in Canderel Limited v. The Queen 98 DTC 6100 (S.C.C.)
at page 6108 where he said in regard to determining an accurate
picture of income:
To my mind, the significance of this statement is to confirm a
much sounder proposition: that the goal of the legal test of
“profit” should be to determine which method of
accounting best depicts the reality of the financial situation of
the particular taxpayer.
[60] I conclude this case cannot support the Appellant’s
argument. Monies were loaned by GWLP to the Appellant. The income
from the loan was not redistributed to GWL. This interest income
was treated by GWLP as its own. This became GIR from a
non-arm’s length source to GWL. The loan monies invested
were not specifically delineated and indeed were mixed with other
monies of GWL. There was a clear delineation of accounts between
the two entities. Secondly, the principle enunciated by Iacobucci
J. does not extend so far as to ignore the separate legal
personalities of corporations to deem one corporation to be the
‘true owner’ of the income of one or more subsidiary
corporations. The legal rights and obligations which arose from
the incorporation of GWLP cannot be ignored simply because it is
convenient for the Appellant to do so.
[61] In the same vein, the Appellant has argued that in
substance although not in form, the amounts held by the Appellant
were really the property of GWLP. In my view the doctrine of
“substance over form” does not have application to
this case. It is a basic principle of income tax law that
liability to tax flowing from a transaction or event is
determined by the legal rights and obligations which that
transaction or event has created and not by its economic results.
As stated by Bowman J. in Carma Developers Ltd. v. The
Queen, 96 DTC 1798 (T.C.C.) at page 1801, “the
essential nature of a transaction cannot be altered for income
tax purposes by calling it by a different name. It is the true
legal relationship, not the nomenclature that governs.”
[62] The Appellant’s second and third
‘alternative’ arguments were premised on the notion
that the interest revenue earned by GWLP should have been reduced
by the amount of either management fees paid by GWLP to the
Appellant or interest payments made by GWLP to the Appellant in
respect of other loan amounts outstanding. In other words, the
figure used to calculate interest revenue for the purposes of
determining “investment property” as that term is
defined in the Act should have been net of certain amounts
paid by GWLP to the Appellant. This position is not supported by
the legislation.
[63] GIR is defined under subsection 138(12) of the
Act:
(e) “gross investment revenue” of an
insurer for a taxation year means the aggregate of
(i) all taxable dividends, interest, rentals and royalties
included in its gross revenue for the year,
[64] There is no good reason to net out certain payments made
by GWLP to the Appellant in determining GIR.
[65] The Minister included in GWLP’s GIR amounts of
interest which were receivable from the Appellant. I can see no
error in this. I conclude the GWLP Securities were
“investment property” of the Appellant within the
meaning of subparagraph 2405(3)(d)(v) of the Regulations
under the Act.
[66] For all these reasons, the appeal is dismissed.
[67] The Respondent is entitled to her costs.
Signed at Ottawa, Canada, this 10th day of August 1998.
“D. Hamlyn”
J.T.C.C.