Citation: 2006TCC646
Date: 20061206
Docket: 2006-1345(IT)I
BETWEEN:
BERNARD BROUSSEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Lamarre J.
[1] The Appellant is
appealing from an assessment in which the Minister of National Revenue, in
computing the Appellant's income for the 2004 taxation year, added $11,886
thereto on account of investment income in accordance with the T5 slip that the
Appellant received from the Standard Life insurance company.
On April 24, 1984, the Appellant took out a $135,000 life
insurance policy with a 20‑year term. The policy matured on
April 24, 2004, whereupon the Appellant availed himself of the clause
guaranteeing a premium refund. Under this clause, the Appellant was entitled,
upon maturity, to a refund of all the annual premiums that he had paid, without
interest. Consequently, in the course of the 2004 taxation year, Standard Life
paid him $14,983. In the Appellant's case, the amount of premiums paid ($16,120.91)
was higher than the amount refunded ($14,983) because he had chosen the monthly
payment option, and monthly premiums are higher than annual premiums because the
monthly premium option requires additional administration.
[2] In a letter to the
Appellant dated November 11, 2005 (produced by the Appellant as
Exhibit A‑1), Isabelle Bicari, an analyst at Standard Life,
explained that the payment under the premium refund guarantee is a disposition
of the policy within the meaning of subsection 148(1) and paragraph 56(1)(j)
of the Income Tax Act ("the Act"). She set out the
details of the taxable amount as follows:
|
Amount
of disposition (Premium refund)
|
$14,983.00
|
|
Minus adjusted cost basis
|
-
$3,097.00
|
|
Taxable amount
|
$11,886.00
|
|
The adjusted cost basis was calculated as follows:
Total premiums paid:
|
$16,120.91
|
|
Minus the net cost of pure insurance*
|
-
$13,023.91
|
|
Adjusted cost basis
|
$3,097.00
|
* The net cost of pure insurance is determined on December 31 of
each year and deducted from the adjusted cost basis in accordance with Income
Tax Regulation 308.
[3] The Appellant is
contesting this calculation on the basis that the net cost of pure insurance
should not be taken into account in the adjusted cost basis.
[4] Paragraph 56(1)(j)
and the relevant passages of subsection 148(1) of the Act read as follows:
Subdivision d – Other sources of income
SECTION 56: Amounts to be included in
income for year
(1) Without restricting the generality of section 3,
there shall be included in computing the income of a taxpayer for a taxation
year,
. . .
(j) Life insurance
policy proceeds – any
amount required by subsection 148(1) or 148(1.1) to be included in computing
the taxpayer's income for the year;
Life Insurance Policies
SECTION 148: Amounts included in
computing policyholder's income
(1) There shall be
included in computing the income for a taxation year of a policyholder in
respect of the disposition of an interest in a life insurance
policy . . .
the amount, if any, by which the proceeds
of the disposition of the policyholder's interest in the policy that the
policyholder, beneficiary or assignee, as the case may be, became entitled to
receive in the year exceeds the adjusted cost basis to the policyholder of that
interest immediately before the disposition.
[5] The term
"disposition" is defined, inter alia, as follows in
subsection 148(9) of the Act:
"disposition", in
relation to an interest in a life insurance policy, includes
. . .
(c) the dissolution of that interest by virtue of the maturity of the policy.
[6] The term
"proceeds of the disposition" is defined in subsection 148(9) of the
Act as the amount of the proceeds that the policyholder, beneficiary or
assignee, as the case may be, is entitled to receive on a disposition of an
interest in the policy (here, that amount is $14,983). The "adjusted cost
basis" is also defined in subsection 148(9). The relevant parts read
as follows:
"adjusted cost basis" to a policyholder as at a particular
time of the policyholder's interest in a life insurance policy means the amount
determined by the formula
(A + B + C + D + E + F + G + G.1) – (H + I + J + K +
L)
where
A is the total of all amounts each of which is
the cost of an interest in the policy acquired by the policyholder before that
time but not including an amount referred to in the description of B or E [this
exclusion is not applicable here];
. . .
L is:
(a) in the case of an interest in a life insurance policy (other than
an annuity contract) that was last acquired after December 1, 1982 by the
policyholder, the total of all amounts each of which is the net cost of pure
insurance, as defined by regulation and determined by the issuer of the policy
in accordance with the regulations, in respect of the interest immediately
before the end of the calendar year ending in a taxation year commencing after
May 31, 1985 and before that time;
[7] According to this
definition, the adjusted cost basis of the interest that the Appellant acquired
under "A" is $16,120.91 (that is, the total premiums that he paid for
20 years). From this amount one must deduct "L", the net cost of pure
insurance as defined in section 308 of the Income Tax Regulations
("the Regulations"). The relevant part of the Regulations reads:
308. (1) For the purposes of subparagraph
20(1)(e.2)(ii) and paragraph (a) of the description of L in the definition
"adjusted cost basis" in subsection 148(9) of the Act, the net cost
of pure insurance for a year in respect of a taxpayer's interest in a life
insurance policy is the product obtained when the probability, computed on the
basis of the rates of mortality under the 1969-75 mortality tables of the
Canadian Institute of Actuaries published in Volume XVI of the Proceedings of
the Canadian Institute of Actuaries or on the basis described in subsection
(1.1), that a person who has the same relevant characteristics as the person
whose life is insured will die in the year is multiplied by the amount by which
(a) the benefit on death in respect of the taxpayer's interest at the
end of the year
exceeds
(b) the accumulating fund (determined without regard to any policy
loan outstanding) in respect of the taxpayer's interest in the policy at the
end of the year or the cash surrender value of such interest at the end of the
year, depending on the method regularly followed by the life insurer in
computing net cost of pure insurance.
[8] According to
Maurice Marchand, a consultant who works part‑time for Standard Life and
was called by the Respondent as a witness, the net cost of pure insurance is an
actuarial calculation, and was determined in the case at bar to be $13,023.91.
The Appellant submitted that in determining the adjusted cost basis, one
must not deduct the next cost of pure insurance from the total premiums paid
because, in his opinion, his policy does not contain the factors that
section 308 of the Regulations requires in order for such a calculation to
be done (for example, his policy does not provide for an accumulating fund in
relation to his interest in the policy).
[9] I cannot make such
a finding on the basis of Mr. Marchand's testimony because Mr. Marchand was not
asked to answer a question concerning this precise point. Moreover, I see
nothing in the insurance policy in question which would suggest that the net
cost of life insurance should not be computed upon the refund of the premiums
on maturity.
[10] In my opinion, the
Appellant has not shown that Standard Life erred in calculating the taxable
amount. Thus, I would dismiss the appeal.
Signed at Ottawa, Canada, this 6th day of
December 2006.
"Lucie Lamarre"
Translation
certified true
on this 3rd day of
August 2007.
Brian McCordick,
Translator
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