Victoria Insurance Company Limited v. Minister of National Revenue, [1977] CTC 2443, 77 DTC 320

Roland St-Onge:—The appeal of Victoria Insurance Company Limited came before me on June 21, 1977 at the City of Toronto, Ontario and the matter at issue is whether the appellant was a Canadian resident during the 1968, 1969 and 1970 taxation years.

The admitted facts show that the appellant is a corporation duly incorporated (in December of 1967) and organized under the laws of the Bahama Islands. It has since carried on the business of reinsurance and consequently has entered into contracts and treaties with insurers and reinsurers in various parts of the world.

The appellant contends that during the years under appeal, it was a Bahamian resident because everything consistent with residency was effected in the Bahamas and carried on solely in the Bahamas through its authorized officers, employees and agents acting in the Bahamas. Naturally, the respondent contends the opposite, that is the appellant’s business was carried on in Canada.

If the respondent is right, the appellant company would have to pay the following amounts of income tax:

At the hearing, three witnesses were heard: (1) Mr John Arnold Tory, director and solicitor of Scottish and York Holdings Limited and its subsidiaries; (2) Mr Richard Douglas Abbott, CA, officer and auditor and now vice-president and secretary-treasurer of all the Canadian companies; (3) Mr Kenneth Hugh Doyle, president and director of all the Canadian companies. He moved to Nassau in 1970 and became president of the appellant company in 1971.

According to these witnesses, the facts of the appeal are as follows:

The appellant company is a subsidiary of Scottish and York Holdings Limited, an Ontario company owned 49% by the Thomson family and 51% by the public. The said Canadian public company has other subsidiaries: Victoria Insurance Company of Canada (99%) (Canada), Scottish and York Insurance Company Limited (98%) (Ontario), Victoria Insurance Company Limited (Bahamas), and Central Canada Insurance Services (Canada) which has its own subsidiary, Overseas Insurance Services, UK Branch.

In the relevant years, the interest of the Thomson family was mostly in the newspaper business in North America and in the United Kingdom, was valued at some $100,000,000,000 and insurance was only one facet of its business in the world.

The nature of the businesses of Scottish and York Insurance Company Limited (Ontario) and Victoria Insurance Company of Canada (federal) is in the casualty and property risk in Canada.

From 1961 to 1967 these two Canadian insurance companies had experienced a substantial volume of business to a point that they were near their limits. According to the Ontario law, the premiums received could not be in excess of twice the capital and surplus of an insurance company. In 1967 the Canadian companies were above their limits and were asked by the authorities to stay within them. The only way to settle this problem was to increase the capital and surplus or to incorporate a company outside Canada.

Consequently, in 1967 it was decided to incorporate a subsidiary company which would operate outside Canada and would not be subject to the said restriction. In 1965-1966 some attempts had been made to acquire agencies in the United Kingdom and, finally, a branch was established there. Consequently, after 1967 there was participation by the Thomson family in the United Kingdom through a Canadian Subsidiary. The Canadian group decided to incorporate other companies elsewhere.

Mr J A Tory advised the members of the Canadian group of the following points:

1. Because the premiums received by Victoria Insurance Company Limited could not exceed twice its capital and surplus, it would be in the interest of the Canadian group to incorporate an off-shore company.

2. Because there were no insurance restrictions and no income tax in the Bahama Islands and also because the off-shore company would not be subject to Canadian income tax, he suggested that a corporation with sophisticated management be incorporated in Nassau.

Consequently, in 1967-1968 a board of directors, comprised of five members from the Bahamas and four members from Canada, was established. The four Canadian members were: (1) Mr J A Tory; (2) Mr K H Doyle; (3) Mr S F Chapman; (4) Mr L McCabe. All the regular meetings of the board were held in the Bahamas and attended by the Bahamian residents and Mr Doyle. The other Canadian directors never attended the meetings in the Bahamas and in 1969 they all resigned with the exception of Mr Doyle. When they met as directors of Scottish and York Holdings Limited, they never discussed the business of Victoria Insurance Company Limited except the financial report.

Upon cross-examination, Mr Tory stated that the Thomson family had the effective control of the appellant company and could acquire more shares on the Canadian market; that the Canadian companies were over their limit when the appellant was incorporated; that Trust Corporation of Bahamas could provide management, finance and many other services and also was involved in many other insurance companies; that the Bahamian directors had the necessary background in insurance and Mr Doyle the knowledge to manage the appellant company. In re-examination, he explained that the Trust Corporation of Bahamas also had a considerable expertise in the management and investment of funds which is very important for an insurance company.

Mr Abbott testified that prior to 1968 he was the auditor for the Canadian companies and consequently was familiar with their business; that he dealt with the federal and provincial reports; that the Canadian companies had exceeded their limits as follows: twice in 1968; four times in 1969: three and a half times in 1970; that, in mid-1970, the Canadian companies contributed, as requested by the Department of Insurance, an additional amount of $500,000 in capital.

He also stated that the business of insurance differs from that of reinsurance in the sense that the insurance business deals directly with the agents, issues the insurance policy, reports the result to the reinsurance business, all of which requires an office with furniture and a substantial staff. The reinsurer automatically assumes a portion of the premiums and risk and pays a commission to the insurance business.

The treaties between the appellant company and the Canadian insurance companies were negotiated one year in advance and renegotiated every year thereafter. The Canadian insurance companies were doing business in the casualty and property insurance and the appellant company paid them a commission to cover part of the expenses incurred in obtaining the contracts from the agents.

The witness also stated that a reinsurance business must have enough assets to cover its liabilities in Canada. In the case at bar, the appellant always had enough assets to cover such liabilities but this could also have been done by the Canadian insurance companies holding back the premiums.

As to how the reinsurance business got contracts, apparently the brokers know which companies are in this kind of insurance and they go directly to such companies. To use the words of the witness, “the reinsurance business comes from outside and does not need a staff to operate’’.

Then some eight written agreements were filed as Exhibits A-2 to A-9 inclusive which represent the reinsurance contracts between the appellant company and the Canadian insurance companies and give a description of the risk.

Exhibits A-2 and A-3 are automobile insurance contracts signed January 1968; the first $15,000 is covered 34 by appellant company, /3 by Canadian companies; the next $35,000, by Victoria Insurance Company Limited; the next $50,000 by other unrelated companies.

Exhibit A-4: same as A-2 except that the amount is $50,000 instead of $35,000.

Exhibits A-5 and A-6 are insurance contracts on properties: 25% of the premiums and the risk is taken by the Canadian companies, 10% of the remaining balance by the appellant company and the rest by other arm’s length companies.

Exhibits A-7 and A-8: the appellant company assumes 10% with a limit of $500,000 and the Canadian companies would not participate.

Exhibit A-9: same as A-5 and A-6 except that the amount of the risk is reduced from $62,000 to $25,000 because the Department of Insurance thought that the risk was too great.

A letter was filed as Exhibit A-10 to show the type of problem they had with the Department of Insurance.

Those contracts of reinsurance are, according to the witness, Standard form followed by the arm’s length companies which are in this kind of business.

Mr Abbott explained that the function of the appellant company is very passive because, once the treaties are put in place, they receive a statement from the Canadian companies with a cheque or a request for a cheque, whatever the result of the transaction.

Upon cross-examination, the witness was asked why the rate of 25% was crossed out and 271/2% inserted. The explanation was that when the rates were renegotiated, somebody in the office changed the rate on the said document instead of rewriting the contracts.

Mr Doyle, who was instrumental in almost all of the negotiations, corroborated the testimonies of the other two witnesses.

He filed the appellant company letter patents and stated that $250,000 was paid by Scottish and York Holdings Limited for 1,000 shares and that it was the sole beneficial owner of the appellant company.

He also gave the names of the appellant company’s five directors who reside in the Bahamas namely Messrs J F Rowe, R M T Orr, J L Hodge, J D Hall and A P Moss.

He stated that the appellant company’s office was in Nassau where all the meetings were held and where all the books, minutes and shareholders’ registry were located; that all the operations were carried out from that office, that is, the returns under the company statute, and those to the Department of Insurance; that the appellant company was incorporated by a solicitor of Nassau; that the accounting is done by an auditor of Nassau; that the money is deposited in the Royal Bank in Nassau; that the trust funds are handled by trust employees and invested in Nassau. In other words, the housekeeping of the appellant company is done 100% in Nassau.

Counsel for the appellant argued that in deciding this appeal, two main points should be taken into consideration: (1) in case of corporate residence, a company resides where its real business is carried on and where the central management and control actually abides;

(2) it is purely a question of fact to establish where that is (De Beers).

Then, counsel for the appellant summarized the facts. Prior to 1967, two Canadian insurance companies, one an Ontario company (Scottish and York Holdings Limited), were operating in Canada and, due to a rapid growth, they had either to increase their capital or incorporate an off-shore company in order to keep the profits within the Thomson family.

Some documentary evidence was filed to show that:

(1) the Federal Insurance as well as the Ontario Insurance Department were after the Canadian companies with respect to their capital and surplus reserve requirements;

(2) the Canadian companies were passing on their risk to non-arm’s length rather than arm’s length companies;

(3) the arrangement of treaties between the Canadian companies and the Nassau company was in accordance with the practice in the industries in an arm’s length situation.

Counsel for the appellant also argued that:

(1) reinsurance with the Canadian and non-arm’s length companies was the only business of the appellant company;

(2) this type of business was very passive and did not need an elaborate staff;

(3) in September 1969 the Canadian directors resigned as directors of the off-shore company and were replaced by Bahamian directors;

(4) in March 1970, Mr Doyle purchased a house and became a permanent resident in Nassau;

(5) the appellant company’s income had not previously been earned in Canada by the Canadian companies but was new income derived from new business (69 new treaties);

(6) the off-shore company was not established to contravene the Ontario or the federal Act but to do business in the Bahama Islands because

(i) there was no need to increase the capital and reserve of the Canadian companies;

(ii) there was no insurance restriction and no income tax in the Bahama Islands.

As to the dual residence issue, he referred the Board to the following cases: (1) Bedford Overseas Freighters Ltd v MNR, [1970] CTC 69; 70 DTC 6072; (2) Swedish Central Railway Co Ltd v Thompson, [1925] AC 495; (3) Bullock v Unit Construction Co Ltd, 38 TC 712; (4) Tara Explorations & Development Co Ltd v MNR, [1970] CTC 557; 70 DTC 6370; [1972] CTC 328; 72 DTC 6288; (5) The American Thread Co v Joyce, 6 TC 1 (KB and CA); 6 TC 163 (HL); (6) Mitchell v B W Noble Ltd, 11 TC 372; [1927] 1 KB 719.

Counsel for the appellant then argued that according to the evidence adduced, there can be no question (1) that the appellant is resident in Nassau, and (2) it is not resident in Canada; that Mr Doyle was not a shareholder but a director and, as such, was not bound to comply with directions given by the shareholders; that the responsibility of the directors and officials of the company is to the company itself and their duties are controlled by the rules and constitution of the company; that, in the case at bar, the facts proven show that the management and control of the company were exercised and given to a substantial degree de jure and de facto within Nassau by its Bahamian directors; that even if Mr Doyle’s first steps to incorporate an off-shore company were taken in Canada, this cannot be taken into consideration because the bulk of the appellant’s business was carried out in Nassau.

Counsel for the respondent divided his arguments into three questions: (1) What does “management and control” mean? (2) Who exercises it? (3) Where is it exercised?

As to the first question, “management and control” does not mean the supervision of the day-to-day business (The American Thread Co (supra)) or the work of a clever manager (Mitchell v B W Noble Ltd (supra)) but the work of those who have the financial control.

As to the second question, he stated that the directors exercised the management and control but, in the case at bar, there is no evidence to show that the appellant company’s directors had official board of directors’ meetings and that they passed any resolutions.

As to the third question, counsel for the respondent said that in Mitchell v B W Noble Ltd (supra), Mr Gabus was running the business in Paris under a general power of attorney. The board of directors was in London and Mr Gabus attended some of the board of directors’ meetings and made some proposals. Mr Justice A Rowlatt, in the judgment, said that he was not acting as an independent plenipotentiary.

Counsel for the respondent also argued that management and control abides where there is an independence of action on the part of the directors and that holding meetings is not enough to constitute management and control.

Then, to show that there was no independence of action, he gave the example of Mr Rowe, the managing director, who asked Mr Doyle whether his understanding about the deposit of $250,000 as collateral with Roy West was correct. According to him, this should have been done by the board of directors.

Counsel for the respondent went on to say that Mr Doyle was acting as director of the parent company when the $250,000 was placed as collateral for a loan and that that decision was made even before Mr Doyle became a director of the appellant company. He referred the Board to Exhibit 20 to show that the meeting was held in Mr Doyle’s office in Canada before the incorporation of the appellant company and that certain decisions to give business to the appellant company were being made by the parent company; that even if Mr Doyle was not acting as an instrument of the parent company, there were no regular board meetings and there is no evidence to show that some of the documents (A-2 to A-9 inclusive) were signed in the Bahamas.

In the case at bar the facts show that the intention of the owners of the appellant company was to have an off-shore company to handle the surplus risks of their Canadian insurance companies and that the income thereof would not be subject to tax in Canada. Consequently, they took all the necessary steps to achieve this purpose.

There is no doubt that the appellant company, once it obtained its reinsurance contracts, had a passive role. But, whatever had to be done, the evidence shows that it was done in Nassau. The office, the books, the majority of the directors, the solicitor and the auditor of the company and the bank accounts were in Nassau. The board meetings, the reports to different departments of the government, the investment of the funds, the deposits in the bank, everything was carried out in Nassau.

Except the fact that the appellant company was owned by a Canadian company, there is nothing to show that the latter controlled the former.

It is clear that the control de jure was carried out in Nassau and there is no evidence to show that the control de facto was exercised by the owners of the appellant company, ie Scottish and York Holdings Limited. According to the evidence adduced, the appellant company was incorporated in Nassau, had its head office and board meetings there and consequently its directors were protected by the laws of the Bahama Islands, were responsible to the company itself and were controlled by the rules and constitution of the appellant company and not by the shareholders.

As may be seen, there is an independence of action and a sense of permanence great enough to say that the management and control of the appellant company was in the Bahama Islands.

Furthermore, according to the enumeration of what was done in Nassau, it can be said that the housekeeping was actually effectuated there.

The fact that at the outset Mr Doyle negotiated the contracts and told Mr Roy that it was correct to put $250,000 as collateral to obtain a loan does not mean that the Thomson family was controlling the appellant company but shows only that some initial steps were taken in Canada to incorporate an off-shore company in the Bahama Islands. As a matter of fact, some of these steps were taken even before the appellant company was incorporated. One does not control a non-existent company and there is no evidence to show that after the incorporation the appellant company was controlled by the parent company. On the contrary, everything shows that the reinsurance business of the Thomson family was to be carried out in the Bahama Islands and there was no interference between the family and the appellant company.

For these reasons, the appeal is allowed and the matter is referred back to the respondent for reconsideration and reassessment in accordance with the attached reasons for judgment.

Appeal allowed.