T-2188-88
BETWEEN:
MUTUELLE DES
FONCTIONNAIRES DU QUÉBEC
Plaintiff
- and -
HER MAJESTY THE
QUEEN
Defendant
REASONS FOR
DECISION
TREMBLAY-LAMER J.
The plaintiff, La Mutuelle des fonctionnaires du Québec, is
appealing a decision of the Chief Judge of the Tax Court of Canada, who
dismissed its appeal in relation to a notice of reassessment issued in regard
to it for the 1983 taxation year. It is an appeal de novo.
I. The facts
The plaintiff, La Mutuelle des fonctionnaires du Québec
(hereinafter “La Mutuelle”), is an insurance company specializing in group
insurance. Since January 1, 1976, La Mutuelle and Assurance-vie Desjardins have
been co-insurers under a master group insurance contract (their respective
responsibilities are 75% and 25%) covering the Fédération nationale des
enseignants et enseignantes du Québec (hereinafter “the Fédération”). This
contract has since 1977 been renewed on January 1 of each succeeding year.
In 1980 the master contract was revised. The concept of an
experience credit calculation and a long-term disability insurance coverage
refund was introduced at that time. A few years later, it was again revised. The
refund credit was however maintained in its initial form. The contract, as
revised at the beginning of 1983, stipulates that the return is to be
calculated during the 90 days following the end of the insurance period to
which it pertains, and the years 1983, 1984 and 1985 constitute a single
insurance period under the contract.
The major purpose of the return credit formula is to return
to the policyholders the surpluses or profits realized during an insurance
period. Under clause 3.1 of Schedule 1 of the master contract, the surplus corresponds to
the total premiums paid by the policyholders and the interest credits, minus
(a) the amount of the claims paid, (b) the amount of the reserve for claims
incurred but not reported, (c) the increase in the reserve for claims pending,
(d) the increase in the other reserves, (e) the amount of the retention
charges, and (f) the balance of any previously accumulated deficits. The
remainder is a surplus which, under clause 3.1, must be deposited in a
stabilization fund, which is defined in clause 3.10 of the Schedule. The
stabilization fund may not exceed a maximum level. When it attains its maximum
permissable level, any additional amount is considered a refund, which is to be
returned to the policyholders. This refund bears interest at the rate
prescribed in the schedule. At issue in this appeal is a refund of this nature.
Applying the principles in clauses 3.1 and 3.10 of schedule
1 of the master contract to its 1983 fiscal year, La Mutuelle established as an
expenditure a refund of $820,907, which, as we previously noted, represented an
amount that was to be returned to the policyholders. While the total amount of
the refund was $1,026,133, La Mutuelle, being responsible for only 75% of the
contract, retained only 75% of this amount, or $820,907, as an expenditure. By
a notice of assessment dated July 10, 1985 the Minister of National Revenue
disallowed the deduction. La Mutuelle filed an objection to this notice of
assessment. On August 21, 1986 a notice of reassessment was issued, but the
disallowance of the $820,907 deduction was maintained. La Mutuelle appealed
this ruling to the Tax Court of Canada.
II.Relevant statutory provisions
The resolution of this dispute lies primarily if not
exclusively in the construction of section 140 of the Income Tax Act (hereinafter the “Act”),
which at the relevant time provided:
140. In
computing the income for a taxation year of an insurance corporation, whether a
mutual corporation or a joint stock company, from carrying on an insurance
business other than a life insurance business, there may be deducted every
amount credited in respect of that business for the year to a policyholder of
the corporation by way of dividend, refund of premiums or refund of premium
deposits if the amount was, during the year or within 12 months thereafter,
(a)paid to the policyholder,
(b) applied in discharge, in whole or in part, of a
liability of the policyholder to pay premiums to the corporation, or
(c) credited to the account of the policyholder on
terms that he is entitled to payment therof on or before expiry or termination
of the policy.
III.Decision of the Tax Court of Canada judge
Chief Judge Couture explained, first, that the fact the
refund is calculated during the 90 days after the end of the insurance period
does not contravene the letter or spirit of section 140 of the Act, in his
opinion. Equally consistent with the letter of section 140 of the Act is the
fact that a refund was determined on December 31, 1983 notwithstanding clause
3.1 of the contract, according to which 1983, 1984 and 1985 are supposed to
constitute only a single insurance period. Nor was it contrary to section 140
that the refund was determined not only under the formula set out in the
contract but also under the rules of the Canadian Institute of Actuaries. In
the opinion of Chief Judge Couture, the difficulty for the plaintiff lies in
the term requiring that the amount must have been, during the 12 months
following the end of the insurance period, paid to the policyholder, applied in
discharge of his liability to pay premiums, or credited to his account on terms
that he is entitled to payment thereof on or before expiry or termination of
the policy. In fact, he says he is of the opinion that this requirement was not
met:
The evidence
has established clearly that the $820,907 was part of the appellant’s
liabilities and constituted an obligation under the contract for the appellant,
but there is no evidence to the effect that this amount was credited to the
insured.... No one from the Fédération testified that during the twelve
months following 1983 this sum was either:
(a)paid to the insured;
(b) applied in discharge, in whole or in part, of a
liability of the insured to pay premiums to the corporation; or
(c) credited to the account of the insured on terms
that he is entitled to payment therof on or before expiry or termination of the
policy, pursuant to section 140. [emphasis added by Couture C.J.T.C.]
The refund was not, during the 12 months following December
31, 1983, paid to the policyholder, applied in discharge of its liability to
pay premiums, or credited to its account. On the contrary, in the opinion of
Couture C.J.T.C., the evidence shows that the refund was paid to the
policyholders only in 1986. Since the plaintiff had failed to demonstrate that
it was entitled to the deduction under section 140 of the Act, its appeal was
dismissed.
IV.Parties’ submissions
The plaintiff’s submissions are as follows. It explains,
first, that the refund was calculated in accordance with the formula in the
contract. The $820,907 was its contributory share (75%) in the refund. In
determining the refund, the rules of the Canadian Institute of Actuaries were
followed. For accounting purposes this refund ought to be considered an expense
and accordingly appear in the liabilities column of the financial statements.
The refund is determinate, it bears interest, it is payable at the end of the
contract and the terms of payment are those provided for in the Civil Code
of Québec and the contract.
Plaintiff’s counsel argues that the $820,907 belonged to
the policyholder (as representative of all the insured) from 1983 on, since the
evidence shows unequivocally that the debt was owing to it at that date. Any
other interpretation would create a distortion since it would effectively
increase La Mutuelle’s income for 1983 by $820,907, although that money did not
belong to it. The refund, as determined by the actuaries, was correctly
deducted, in accordance with the requirements of the Act.
The defendant submits that the amount was not credited to
the policyholder since there was no obligation under the contract to calculate
this amount each year. On the contrary, the evidence simply testifies to “an
illustration of experience” in 1983. The calculation of the refund will be made
only at the end of the insurance period.
Furthermore, under the contract the surpluses must be
deposited in a stabilization fund. When this fund attains the maximum level,
any additional amount will be considered a refund. In 1983 it was impossible to
know what the amount of the refund would be at the end of the insurance period.
A deficit was even possible at the end of this period, and this would have had
to be paid by the plaintiff.
The words “credited to the account of” the policyholder
must be given to mean “put at the disposal of”. But there is no evidence in the
record that at the end of 1983 the amount was in fact at the disposal of the
policyholder.
V.The issue
This dispute bears solely on the construction of paragraph
140(c) of the Act. Was the refund credited to the account of the policyholder
in 1983 or within 12 months thereafter?
VI.Analysis
The plaintiff argues that when determining whether a sum
has been credited to the account of the policyholder, it is necessary to refer
to generally recognized accounting principles. Under those principles, once a
sum, because it constitutes a contractual liability, appears in the liabilities
column of the financial statements, it must be considered as having been
credited to the account of the person to whom it is destined.
The expression “credited to” has been the subject of
several decisions rendered by the Tax Court of Canada.
They show, in my view correctly, how the expressions “to
credit” or “credit to the account” should be construed.
A finance company, when it adds the interest it owes a
client to his account each month, credits the sums to that client’s account.
That is what was held in Solomon Hart Green v. Minister of National Revenue. The judgment notes the
importance of the positive act by which the sums are placed at the
disposal of a third person.
The Tax Court of Canada expressed itself similarly in La
Compagnie Minière Québec Cartier v. Ministre du Revenu National. The issue in that case
involved determining whether a sum had been credited to a third party. Tremblay
J. expressly rejected the argument that is being advanced by the plaintiff in
the case at bar:
[Translation]
The Court
instead regards an accounting system as a form for describing business
transactions. By saying “credited to”, was Parliament trying to focus on the
form? Or was it trying to focus on the substance?
I am rather
inclined to think it was the latter. And the substance of “crediting to” or
“crediting” seems instead to be “an operation by which someone puts a sum of
money at the disposal of someone else.”
Can one conclude, from the mere fact that, in the case at
bar, the $820,907 appears in the liabilities of La Mutuelle and bears interest,
that in 1983 that sum was in fact at the disposal of the policyholder?
I do not think so. The policyholder (for its insured) had
no control over this sum in 1983 or during the 12 months thereafter. The
evidence discloses that the sum in question is but an “illustration of
experience”. The plaintiff’s witnesses confirmed that
the approximate amount for 1983 was cumulative with that of subsequent years,
so that the exact amount of the refund could not be definitively known until
the end of the insurance period. In fact, it was possible that the amount of
the refund would be equal to zero if the claims paid out happened to eliminate
the stabilization fund. The estimated amount in 1983 would yield a right to
payment only if there was a surplus.
As my colleague Noël J. stated, in J.L. Guay Ltée v.
Minister of National Revenue:
In most tax
cases only amounts which can be exactly determined are accepted. This means
that ordinarily provisional amounts or estimates are rejected, and it is not
recommended that data which is conditional, contingent or uncertain be used in
calculating taxable profits.
Furthermore, it is conceded that in the event of a deficit
in the stabilization fund, it is La Mutuelle and not the policyholder
(acting on behalf of the insured) that would have had to dig into its own funds
to honour its obligations under the contract. It is hard for me to see how, in
such a situation, it can be stated that back in 1983 the money had been
credited to the policyholder’s account.
The fact that a sum is included in the liabilities as a
“provision for refund” is not, per se, a sufficient positive act to
warrant a finding that this sum was in fact credited to the policyholder’s
account.
I do not think it is necessary to linger on the distinction
between the policyholder and the insured, since the sum was not, in my opinion,
credited to the account of either the policyholder or the insured.
For these reasons, the plaintiff’s appeal is dismissed with
costs.
OTTAWA, Ontario
November 28, 1996
“Danièle Tremblay-Lamer”
J.
Certified true translation
Christiane Delon
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