La Mutuelle Des Fonctionnaires Du Québec v. Minister of National Revenue, [1989] 2 CTC 2223

Couture, C.J.T.C.:—This appeal is from an assessment issued by the respondent dated August 21, 1986 whereby the latter refused to allow the appellant to deduct a sum of $820,907 in computing its income for the 1983 taxation year.

In its income tax return for the taxation year under appeal, the appellant, which operates an insurance business, claimed the sum of $820,907 as a deduction for a refund it claims to have credited to the insureds covered by a long-term disability insurance contract.

In response to a notice of objection dated August 5, 1985, the respondent issued the notice of reassessment dated August 21, 1986 making certain adjustments to an assessment of July 10, 1985, but maintaining that the sum of $820,907 was not deductible in computing the appellant's income.

In his reply to the notice of appeal, counsel for the respondent argued that the appellant had filed its notice of appeal beyond the 90-day time limit provided for in section 169 of the Income Tax Act (the Act).

Learned counsel submitted in his reply that since the notice of reassessment was dated August 21, 1986, and the appellant's notice of appeal was mailed on November 20, 1986, according to the postmark, it follows that the appellant was beyond the 90-day time limit by one day.

The documentary evidence submitted by counsel for the appellant showed clearly that although the notice of reassessment was dated August 21, 1986, it was mailed by the respondent only on August 22, 1986, at least according to the postmark, this being the date which appears on the envelope which contained the said notice of reassessment.

In the face of this evidence, counsel for the respondent recognized the validity of the appellant's notice of appeal and admitted that he was satisfied in the circumstances that it had been filed within the time limits prescribed in the Act.

The appellant's first witness, one Wayne Tweddell, said he was a corporate actuary, and had been director of group insurance, actuarial department and administration, with the appellant since 1979. He confirmed that the sum of $820,907 had been established in accordance with the principles prescribed by the Canadian Institute of Actuaries for valuation of future payments on life insurance policies. These actuarial principles, according to the witness, require that provisions or reserves be entered in an insurance company's books for all amounts payable in future and that they be shown in the liabilities on its balance sheet since this is a contractual commitment toward the insureds.

In the appellant's case, the sum of $820,907 was shown on its balance sheet under an item called ‘Provision for participation of insureds in profits—dividends and refunds $8,236,609.”

The witness filed as an exhibit the group insurance contract between La Mutuelle des Fonctionnaires du Québec (Mutuelle) and Assurance-Vie Desjardins on the one hand and the Fédération Nationale des Enseignants et Enseignantes du Québec (the Fédération) on the other hand, a contract under which the $820,907 refund was established. It should be noted that the appellant was responsible for only 75 per cent of the insurance contract, while Assurance-Vie Desjardins assumed the rest, and the $820,907 represented 75 per cent of the total amount of the refund.

He explained that this was a group insurance contract with a refund formula, a contract under which any surpluses or profits from an annual experience would eventually, depending on the type of contract, be returned to the insureds in one form or another. Such surpluses or profits are calculated by deducting from the income from the premiums paid by the insureds and from the interest income earned by the company the benefits paid to the insureds, the administration fees and certain reserves stipulated in the contract. Any surpluses or profits remaining are deposited into a stabilization fund. The amount in this stabilization fund may not exceed a certain maximum stipulated in the contract, and any amount over this maximum constitutes the refund which is the subject of this appeal. This stabilization fund may be used to reduce any future deficits and, in the event the contract is terminated, the balance in this fund will be applied to the final calculation of the experience credit as provided in the contract.

The amount of the refund bears interest at the rate prescribed in the contract, and if the experience shows a surplus, this surplus belongs to the appellant.

When cross-examined by counsel for the respondent, the witness admitted that the amount of the refund established at December 31,1983 was not necessarily the amount which would eventually be remitted to the insureds. He explained that this amount was the result of actuarial calculations made in accordance with the standards dictated by a professional discipline and the recommendations of the Canadian Institute of Actuaries.

The witness explained the operation of the stabilization fund provided for in an appendix to the contract as follows:

It's a fund in which part of the surplus, if any, is deposited at the end of an insurance period. The refund is calculated, part of it is deposited in this stabilization fund, up to a certain maximum, and then this fund is used to avoid premium increases, is used by the policyholder perhaps to stabilize its future premiums or future experience.

This fund belongs to the policyholder.

He added in response to another question from counsel:

We receive premiums, we pay claims with those premiums, we make investment income as well because we invest them, we charge a fee for administration; the rest is deposited in the stabilization fund up to a certain maximum, the rest is paid as a refund to the policyholder.

In the event the fund is exhausted or shows a deficit, the appellant is responsible for the deficit.

The appellant’s second witness was Roger Bilodeau, its treasurer and director of finance. His duties within the appellant consist in preparing the annual and periodic financial statements and in preparing the appellant's income tax returns, on forms T-2 and C-17. In 1983 he held the position of assistant director of finance and his duties were identical to those he is still performing today.

In cross-examination, he confirmed what Mr. Tweddell had stated, namely that the $820,907 credited to the stabilization fund at the end of 1983 might in fact have been reduced by additional claims by the insureds during the period in which it was subject to such claims pursuant to the provisions of the contracts. He confirmed that the appellant, to pay such additional claims, if there were any, drew on the stabilization fund to meet this obligation.

The appellant's third witness was Benoît Racine, a chartered accountant who practises as a partner with Caron, Bélanger. Caron, Bélanger have been the appellant's auditors since 1970 and the witness is the partner responsible for auditing all the insurance companies that are clients of the firm. He explained briefly the process which the auditors must follow to meet the requirements of the special regulations governing insurance companies operating in Quebec when they conduct an audit of such a company.

He maintained that, in his opinion as a chartered accountant, the $820,907 was at December 31,1983 an obligation of the appellant which had to be reflected in its financial statements as a liability. Otherwise, he said, the balance sheet would not show the true financial picture.

In response to counsel for the respondent's questions, he admitted that the $820,907 was an estimate since it was impossible at December 31, 1983 to obtain an exact figure. He maintained, however, that this amount should not vary substantially, since this would indicate a certain incompetence on the part of the actuary.

Counsel for the appellant’s argument is that since the $820,907 was established in accordance with the standards prescribed by the Canadian Institute of Actuaries, the said amount in the opinion of the chartered accountant must be deducted from the appellant's income to arrive at the true financial situation at the end of its fiscal year, being December 31, 1983, and since this sum represented an obligation on the part of the appellant toward the insureds covered by the contract shown in the appellant's liabilities, it followed, according to him, that the requirements of section 140, in particular paragraph (c), had been satisfied and that therefore the sum in question was deductible in computing the appellant's income for 1983.

Counsel for the respondent for his part submitted that he fully agreed with the arguments of counsel for the appellant with respect to determination of the $820,907 by the appellant’s actuary and with the opinion of its accountant that it should be deducted from the appellant's income for the reasons given, but he added that these factors alone were not sufficient to conclude that this sum was deductible pursuant to the provisions of section 140. Reference had to be made, he argued, to the provisions of the contract in force between the parties.

The contract, as mentioned earlier, is between Mutuelle and Assurance- Vie Desjardins (hereinafter referred to as the Insurer) and the Fédération (hereinafter referred to as the Policyholder).

It is stipulated in the preamble to the contract:

The provisions in the following pages, including Schedules I and II, form an integral part of this contract just as if they appeared above the signatures opposite.

In clause 1 we find the following definitions, among others:

1.5 "Insured": a member, a retired person or one of their dependants insured under the contract;

1.26 "Policyholder": Fédération Nationale des Enseignantes et Enseignants du Québec (F.N.E.E.Q.-C.N.T.U.)"

Clause 11 of the contract reads as follows:

CLAUSE 11-EFFECT OF THE CONTRACT

This contract is complete in itself and fully reflects the intention of the parties. It is deemed to include the essential elements of the specifications, of the offer of service and of the written agreements signed. These documents do not form part of the contract and can only be used to explain its scope, in the event of ambiguity. In the event of a contradiction, the contract shall prevail.

Moreover, this contract must be regarded as a consolidation and, on occasion, a reformulation of the riders, the written agreements and the original contract from January 1, 1976. It does not confer any new rights retroactively and the contractual provisions applicable to a claim remain those in effect at the time the claim occurred.

Furthermore, December 31, 1983 must not be regarded as a contract termination date, for all legal purposes, but as the end of a contract year.

Schedule I contains provisions regarding the experience credit and clause 3 of this schedule is entitled "Long-term disability insurance coverage"; its application is at issue in this case.

Calculation of the surpluses and the refund is provided for in clause 3.1, which reads as follows:

3.1 Surplus and refund

The experience credit shall be calculated during the 90 days following the end of the insurance period to which it pertains and the surplus is then determined. The first insurance period covers 3 years, 1983, 1984 and 1985, and the following periods cover one year.

The surplus shall be equal, for each insurance period subject to calculation of an experience credit, to the sum of the participating premiums and the interest credits, minus the following amounts:

(a) the amount of the claims paid;

(b) the increase in 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;

(f) the balance of any previously accumulated deficits.

This surplus shall be deposited into a stabilization fund, as defined in subclause 3.10.

If, when the experience credit is calculated, this deposit means that the stabilization fund exceeds its maximum level, the surplus shall then be considered a refund.

The refund shall be remitted to the Policyholder, which shall arrange to dispose of it pursuant to this contract, either to grant a premium holiday, or to improve existing plans, or to be remitted to the participants according to a formula determined by the Policyholder, or to improve the insurance benefits for its members, according to its constitution and rules. The Insurer assumes no liability for the manner in which the Policyholder disposes of this refund.

This refund shall bear interest at rate I for the 90-day period following the end of the insurance period to which it pertains. Subsequently, it shall bear interest at the annual rate paid on investments of a comparable term.

[Emphasis added. I]

Clause 3.10 describes the Stabilization Fund:

3.10 Stabilization Fund

The surplus, determined under subclause 3.1, shall be deposited into a stabilization fund. The maximum level which the stabilization fund may attain shall be equal to the greater of the following 2 amounts:

—50% of the participating premiums for the last contract year; and

—the initial stabilization fund of $300,000 at January 1, 1980 accumulated with interest at rate IV up to December 31, 1982 and at rate III thereafter.

This stabilization fund shall be used to reduce any future deficit and, in the event the contract is terminated, the balance of this fund shall be applied to the final calculation of the experience credit after deducting the initial stabilization fund accumulated with interest at the above rates.

The said fund, valued at January 1, 1983, is equal to $663,395.25.

The fact the refund is calculated during the 90 days after the end of the insurance period which includes 1983, 1984 and 1985 for purposes of the contract does not contravene the provisions of section 140, in my view. The fact the appellant's actuary may have determined a sum for 1983 according to his professional discipline, notwithstanding the provisions of clause 3.1 of Schedule I, is also in accordance with the provisions of section 140 of the Act since all they require for an amount to be deductible under this section is that it be credited to an insured of the corporation and that it be paid to him within the next 12 months or that it be attributed to him as required by paragraphs (b) or (c). The difficulty I see for the appellant is the requirement that the amount have been credited to an insured.

Since taxation is the rule in tax matters and exemption is the exception, the case law requires that in order to benefit from a provision containing an exemption, each and every one of the conditions provided for in the legislation must be 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. On the contrary, clause 3.1 of Schedule I states specifically that the refund was to be remitted to the “Policyholder” so that he might dispose of it under the contract. The “Policyholder” as defined in clause 1.26 is the Fédération, and not an insured under the contract. 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 thereof on or before expiry or termination of the policy, pursuant to section 140.

The appellant’s contractual obligation is to remit the refund to the Policyholder, who is responsible for distributing it in accordance with the contract. The evidence merely showed that the refund had been paid to the insureds in 1986.

In view of the lack of such evidence, which it was up to the appellant to adduce, I must dismiss its appeal.

Appeal dismissed.