Ernest Sirois v. Minister of National Revenue, [1990] 2 CTC 2331, 90 DTC 1840

Kempo, T.C.J.:—This appeal concerns the appellant's 1986 taxation year wherein the respondent had assessed to income the amount of $4,757.59 on the premise that it was dividend income pursuant to subsection 52(3) of the Income Tax Act (the "Act").

In his reply to notice of appeal dated 18 November 1988, the respondent acknowledged that the assessing reasons were incorrect. Paragraphs 10 and 12 of the reply read thusly:

10. The Notice of Confirmation incorrectly referred to the amount of $4,757.59 as being dividend income pursuant to s. 52(3). However, he now states that the amount of $4,757.59 was properly included in the appellant's income pursuant to s. 56(1)(j) and s. 148(1) of the Income Tax Act.

12. He submits that pursuant to s. 56(1)(j) the amount of $4,757.59 was an amount required by subsection 148(1) to be included in computing the appellant's income for the year.

At the conclusion of the hearing, counsel for the appellant withdrew his preliminary application that the appeal should be allowed because the assessing position had been acknowledged to be erroneous.

The appellant was a policyholder with Union Mutual Life Insurance Company (“Union Mutual”), a mutual life insurance company organized under U.S. law. The policies were acquired in 1958, 1959, 1963 and 1967. Union Mutual had no capital stock. According to the documentary evidence, and I am paraphrasing therefrom, the policyholders of Union Mutual, through their purchase of insurance policies, acquired both insurance coverage and certain proprietary rights which included, inter alia, a pre-emptive right to purchase stock on Union Mutual's conversion into a stock insurance company.

In November of 1986 Union Mutual, through a corporate reorganization, restructured itself as a subsidiary of a new holding company, UNUM Corporation (“Holding”). Each eligible policyholder in Union Mutual had the right to acquire the same percentage of capital stock in Holding as representative of his or her percentage interest in Union Mutual's adjusted surplus. The adjusted surplus was the amount of Union Mutual's surplus as of December 31,1985 as presented in its consolidated balance sheet.

Certain eligible policyholders, of which the appellant was one, had the option of either receiving the entire value of their percentage interest in Union Mutual's adjusted surplus in cash or of electing to apply the entire value toward the purchase of the stock of Holding. Eligible policyholders, other than cash option policyholders, did not have the option to receive their percentage interest in cash but rather its value amount was to be automatically applied toward the purchase price of Holding stock.

In 1986 the appellant chose to exercise his cash option and to receive his percentage interest in cash. In the document, Exhibit A-1 issued by Union Mutual, the plan was touted as affording the eligible policyholders “with an opportunity to convert their illiquid membership interests into cash or stock while maintaining their existing policies". It was emphasized, by way of large bold black lettering, that:

Your In Force Policies And Their Benefits, Values, Premiums And Guarantees Will Not Be Affected. You do not give up your policy(s). Policies, and the protection they provide, remain fully in force.

The appellant alleged the subject cash amount received by him was a capital gain from the disposition of property. The submission was that as a Union Mutual policyholder he had acquired an ownership interest in two distinct properties. One was the life insurance policy and the other was the proprietary interest in the company which was what he disposed of in exchange for cash. The life insurance policies remained unchanged and were not disposed of.

The respondent submitted there had been a disposition of an interest in a policy in that the subject cash amount was received by the appellant by virtue of the fact that he held a life insurance policy. In other words, counsel said, "what we have here is the appellant electing to receive his rights under this policy as an interest, and that this interest is included in his income under 56(1)(j)".

The relevant parts of the applicable fiscal provisions, as they read in 1986, are as follows:

39. (1) For the purposes of this Act,

(a) a taxpayer's capital gain for a taxation year from the disposition of any property is his gain for the year determined under this subdivision . . . from the disposition of any property of the taxpayer other than

[not applicable]

(iii) an insurance policy, including a life insurance policy (within the meaning assigned by section 138), . . .

Section 138 encompasses special rules pertaining to the taxation of insurance corporations which are not relevant to the matter at hand.

56. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(j) any amount required by subsection 148(1) to be included in computing the taxpayer's income for the year;

148. (1) There shall be included in computing for a taxation year of a policyholder in respect of the disposition of an interest in a life insurance policy, other than a policy that is or is issued pursuant to

[not applicable]

the amount, if any, by which the proceeds of the disposition of his interest in the policy that the policyholder became entitled to receive in the year exceeds the adjusted cost basis to the policyholder of that interest immediately before the disposition.

The key fiscal phrase of concern here appears in subsection 148(1), and the question to be resolved is whether the amount received by the appellant represented proceeds “in respect of the disposition of his interest in the subject policies".

The Court holds that the position taken by counsel for the appellant was the correct one and is to be adopted. What the appellant received was proceeds from the disposition of those property rights held merely in connection with, or incidental to, his interest under the subject policies. When analyzed in light of the true situation, the subject amounts were not proceeds arising from or in respect of the disposition of the appellant's interest in the policies within the contemplation of subsection 148(1).

To adopt respondent counsel’s submission would, in my view, result in the inclusion of words in the provision which are not there, expressly or by implication.

Further, the interpretative approach to be utilized would resolve the matter in the appellant's favour. It is a well known interpretative principle or rule that a fiscal charging provision is to be strictly construed in favour of a taxpayer and against the taxing authority.

In conclusion, the appeal is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amount of $4,757.59 received by the appellant during his 1986 taxation year from Union Mutual represented a capital gain from the disposition of property which was not an interest in a life insurance policy within the meaning of subsection 148(1) of the Act.

Appeal allowed.