Maritime Life Assurance Co. v. R., [1997] 3 C.T.C. 2561, 97 D.T.C. 1321

Bowie T.C.J.:

1 The question for decision in these appeals is whether the cash value of certain insurance policies is available to satisfy Requirements to Pay under subsection 224(1)[FN1: <ul>that subsection, as it applies to these Requirements to Pay, reads asfollows:<li><p>224(1) Where the Minister has knowledge or suspects that a person is, or will be within 90 days, liable to make a payment to another person who is liable to make a payment under this<em>Act</em>(in this subsection and subsections (1.1) and (3) referred to as the “tax debtor”), the Minister may in writing require the person to pay forthwith, where the moneys are immediately payable, and in any other case as and when the moneys become payable, the moneys otherwise payable to the tax debtor in whole or in part to the Receiver General on account of the tax debtor's liability under this<em>Act</em>.</p></li></ul>] of the Income tax Act (the Act) served by the Minister of National Revenue upon the Appellant. The policies were issued by the Appellant to Dr. Subhash Kohli and his wife, Dr. Renuka Kohli. I shall refer to them as SK and RK, respectively, or as the policy holders. No witnesses were called at the trial. The parties filed a comprehensive Statement of Agreed Facts, together with an extract from the transcript of the examination for discovery of a representative of the Appellant company. I shall set out the material facts somewhat more briefly than is done in the Statement of Agreed Facts, which (except for the excerpt from the transcript) is attached as Appendix “A” to these reasons.

2 The Appellant is a Canadian insurance company which writes life, accident and sickness insurance policies, including annuity contracts which may be registered as registered retirement savings plans (RRSPs) under section 146 of the Act. SK and RK practiced medicine in New Brunswick for several years. In November 1987, SK left Canada permanently; RK followed in 1988. Both ultimately moved to the United Kingdom. Neither the Appellant nor the Respondent presently has any knowledge of where they now reside. What is known, however, is that at the time they left Canada each of them was indebted for unpaid income tax, penalties and interest under the Act. In May 1996, SK owed $311,788 and RK owed $277,307. These amounts greatly exceed the cash values of the two insurance policies in question.

3 The insurance policies are life insurance policies which provide for the payment of an annuity on a specified maturity date. If the policyholder dies before the maturity date then the accumulated value is payable to the named beneficiary, if there is one, or to the estate of the policyholder if no beneficiary has been named. Each of RK and SK has made a revocable designation of the other as beneficiary. In both cases, funds were transferred by the policyholder from another RRSP to become an initial premium under the new policy issued by the Appellant. By the terms of the policies these initial premiums, together with any additional premiums that the policyholders might elect to contribute after the date of issue of the policy, are to be invested, and the earnings reinvested, in one or more segregated funds maintained by the company. SK's policy matures on July 22, 2005, when he reaches 65 years of age. RK's policy matures on December 1, 2017, when she reaches 71 years of age. These maturity dates may be changed at the option of the policyholders, but only to a date falling between the 60th birthday and the last day of the year in which the insured becomes 71. Under these provisions the earliest maturity dates that could be elected by SK and RK are July 22, 2000, and December 31, 2006, respectively. At the maturity date the policyholder may elect to take the proceeds as either a term annuity or a life annuity.

4 These policies are written on standard printed forms used by the Appellant company, both of which contain a provision, subparagraph 4(4) (the termination provision), which permits the policy owner, at any time prior to the maturity date, to terminate the policy and receive its cash value, either as an immediate single payment, or in the form of an annuity. Both policies also contain a number of endorsements. These are separate printed sheets attached to the standard policy form, which change or add to its terms. Each policy contains an endorsement which is commonly included by the company in policies which are to be registered as RRSPs (the RRSP endorsement). The two RRSP endorsements are not identical, the policies which contain them having been issued at different times. For the purposes of this appeal, however, it is the first clause which is important, and in each case it reads as follows:

• 1. The right to surrender the registered contract for its cash value may not be exercised.

5 On May 3, 1993, the Minister, having become aware of the existence of these two policies, delivered to the Appellant two notices, each styled Requirement to Pay. These purported to require the Appellant to pay specific amounts in respect of the outstanding tax, penalty and interest owing by each of RK and SK. The operative words of each of these documents reads as follows:

You are hereby required to pay to the Receiver General on account of the above-named tax debtor's liability under one or more of the Acts cited below.

• (1) forthwith, the moneys otherwise and immediately payable to the tax debtor which you are liable to pay,

• (2) all other moneys otherwise payable to the tax debtor which you will be, within 90 days, liable to pay, as and when the moneys become payable,

• (3) where the moneys referred to in (1) and (2) include interest, rent, remuneration, a dividend, an annuity or other periodic payment, all such payments to be made by you to the tax debtor (at any time during or after the 90 days) until the liability is satisfied, and

• (4) if the box on the right is x-ed, the moneys that within 90 days you would otherwise loan or advance to, or pay on behalf of, the tax debtor, and, if you are a bank, credit union, trust company or other similar person, pay in respect of a negotiable instrument issued by the tax debtor.

At the present time, we are not paying any funds out of this policy. However, if the policyowner elects a withdrawal of funds, we will advise the taxation office first before paying the proceeds.

6 The effectiveness of the Minister's Requirements to Pay turns, at least initially, upon the answer to the question whether or not the cash values of the policies were “payable”, within the meaning of that word as it is used in subsection 224(1), when the Requirements were made. I understood both counsel to accept that the answer to this question depends simply upon whether or not SK and RK could, at that time, require the Appellant company to pay the cash value of the policies to them forthwith. That this is so is placed beyond dispute by a number of authorities, the most recent of which is the decision of the Federal Court of Appeal in Canada (Attorney General) v. Yannelis[FN2: <p>(1995), 130 D.L.R. (4th) 632 (Fed. C.A.).</p>] . It was held there that the word “payable”, as used in the Unemployment Insurance Regulations, subparagraph 58(8)(b)(i)

...refers to the point in time when vacation pay is due to a claimant in the sense that he is entitled by his contract of employment or by the general law to have it paid to him and his employer is under an obligation to pay it. In other words, it is payable when a claimant is in a position at law to enforce payment. That point in time, as was held in Legge, supra, should not depend on when unpaid vacation pay happened to have been requested if, as a matter of law, it became payable in the above sense at an earlier time.[FN3: <p>at 638.</p>]

7 It is common ground between the parties, and I agree with them, that the policies here in issue do not create a trust relationship between the Appellant and the policyholders.

8 In support of the position that the policyholders were entitled to be paid the cash value of their policies on demand, counsel for the Respondent relied on subparagraph 4(4) of each policy, and also on the practice of the Appellant company in dealing with the holders of its policies which are registered as RRSPs. The Statement of Agreed Facts and the extract from the examination for discovery of the Appellant's representative satisfy me that at the relevant time the established and invariable practice of the Appellant company was that, if asked by the policyholder to do so, it would pay out the cash value of a registered policy to the policyholder prior to the maturity date. When such a request was received by the company one of its employees would calculate the cash value (which is based on the value of certain segregated funds from time to time, minus administrative charges) and advise the policyholder of the amount, and of the incidence of taxation on the payment, and ask for confirmation that the policyholder still wished to receive the cash value and terminate the policy. If the policyholder confirmed the request, then the employee would complete the transaction by making the payment and cancelling the policy.

9 I turn first to the termination provisions in the policies. Quite apart from the effect of the RRSP endorsement, I do not consider that these termination provisions satisfy the requirement of subsection 224(1) of the Act that there must be amounts “payable” to which the Minister's Requirements to Pay may attach for them to be effective. The termination provisions of these policies are slightly, but not materially, different. They read as follows:

the Subhash Kohli policy:

4(4) Cash Value

If this contract is in effect, the policyowner may receive the Cash Value in cash or in the form of a settlement option as described in Subsection 6(5), at any time prior to or on the Annuity Date. A written request must be provided to the Head Office of the Company. The contract is no longer in effect as of the date of receipt of this request. No right of reinstatement exists after the date of receipt of this request.

the Renuka Kohli policy

4(4) Policy Termination

At any time prior to or on the Annuity Date, if this contract is in effect, the policyowner may receive the Total Cash Value (see Subsection 5(10) in cash or in the form of a settlement option as described in Subsection 6(5). The Total Cash Value will fluctuate in accordance with the value of the assets in each separate fund and is not guaranteed. The contract is no longer in effect as of the date of receipt of this request. No right of reinstatement exists after the date of receipt of this request.

10 In my view, the proper construction to be placed upon the policy is that no amount is payable to the policyholder until either the maturity date has been reached, or a request has been made by the policyholder to cancel the contract in accordance with the termination provision. A request made in accordance with that provision has the effect of terminating the contract of insurance, and creating a debt to the policyholder in the amount of the cash value, calculated according to subsection 6(5) of the policy, on the date that the request is made. Unlike making demand for payment of a demand loan, or withdrawing a deposit from a bank account, an election under subparagraph 4(4) has serious ramifications for the policyholder. It results in cancellation of the insurance contract, and payment of its cash value based on the current value of a segregated fund. This may prove to be very disadvantageous to the policyholder, depending on the state of financial markets at the time. It may also prove to be disadvantageous to the named beneficiary in the event of the death of the policyholder prior to the specified maturity date. Subsection 224(1) of the Act cannot be read as vesting in the Minister the power to make such an election, or any election, in the place of the policyholder. I am reinforced in this conclusion by the judgments of Matlow D.C.J., as he then was, in Bank of Nova Scotia v. Robson[FN5: <p>(1987), 63 O.R. (2d) 159 (Ont. Dist. Ct.).</p>] , and Margeson, T.C.J. in Manufacturers Life Insurance Co. v. Minister of National Revenue[FN6: <p>(1991), 91 D.T.C. 1055 (T.C.C.).</p>]

11 Even if I am wrong in this the Minister's Requirements to Pay are ineffective, because the termination provision in each of these policies is negatived by paragraph 1 of the RRSP endorsement. As appears above, when these policies were issued they were registered as RRSPs at the request of the policyholders. As a result an endorsement was included in each policy at the time it was issued which provides that the right to surrender the policy for its cash value may not be exercised. If those endorsements, and in particular paragraph 1 of them, are effective, then there can be no amount payable under the termination provisions. Counsel for the Minister argued that this endorsement in each of the policies is void, or ineffective, for a number of reasons. The RRSP endorsements, he says, cannot be effective, because the only justification for their inclusion is the requests in the applications signed by RK and SK that their policies be registered as RRSPs, and that the policies be amended or endorsed in such a way as to qualify them for registration. Provisions annulling the right to terminate the policies and take the cash value before maturity were not required to be included in the policies to make them eligible to be registered, and therefore cannot be considered to be operative.

12 I shall assume for present purposes that counsel is correct in asserting that no such provision was required to be included in these policies to make them eligible for registration. Nevertheless, the endorsements were included in the policies, and by the provisions of subsection 135(2) of the Insurance Act[FN7: <p>R.S.N.B. 1973, c. 1-12.</p>] they form part of them. They stand on exactly the same footing as many other paragraphs of the Appellant's printed forms, which, no doubt, had not been seen by the policyholders before they received their policies, and had not been specifically requested by them to be included therein. Counsel did not refer me to any authority for the proposition that such a provision included in a policy of insurance without the specific concurrence of the policyholder, may be considered to be void, or in some other way inoperative. Such a conclusion would potentially be most disruptive of the insurance industry, where policies are issued every day containing clauses that the insured has not specifically requested, and has no reason to expect to find included, whether in the main body of the policy, or in an endorsement attached to it. These two policies were issued by the company, and accepted by the policyholders, with the endorsements as an integral part of them. To hold, years later and in proceedings to which the policyholders are not parties, that paragraph 1 of the RRSP endorsement is void, or otherwise inoperative, would not only be quite unwarranted, it would also be contrary to the specific provisions of the Insurance Act.

13 Nor do I accept the argument of counsel that these RRSP endorsements are void or inoperative because they are not signed by the policyholders. The only signatures of the policyholders that are to be found in these policies are on the application forms. The policies themselves are countersigned by the president of the Appellant company, as are the RRSP endorsements. I was not referred to any authority for the proposition that an endorsement attached to a policy of insurance must be signed by the insured in order to be effective.

14 It was also argued that the RRSP endorsements are void, or inoperative, because they make reference to the cash surrender value, a term which is not used in the policies themselves. I see no merit in this argument. A reading of paragraph 1 of the RRSP endorsements, together with the termination provisions, leaves the reader in no doubt as to the intended meaning. There is no distinction to be made between surrender of the policy for its cash value, and cancelling the policy upon paying the cash value to the policyholder. Counsel for the Respondent suggested that the RRSP endorsements are ambiguous, and must therefore be read contra proferentum, and that this would somehow result in paragraph 1 of the RRSP endorsements being nullified. As I have indicated, I find no ambiguity in the language, and I therefore have no need to resort to interpenetrative aids to construe it.

15 There remains the argument that the Appellant's practice of permitting the surrender of a registered policy for its cash value prior to the maturity date, notwithstanding the terms of the RRSP endorsement, entitled the Minister to require payment of the cash value to him pursuant to subsection 224(1) prior to the maturity date. I have already concluded that for the Respondent to succeed, she must show that the taxpayers had a right to payment which was enforceable at law at the time that the Requirements to Pay were made, or one that would have become enforceable within the ensuing 90-day period. The company's policy, no matter how invariable it may be, cannot create such a legal right in these or any other policyholders; a fortiori it cannot create a legal right in the Minister. It amounts to no more than this: if a policyholder requested a change in the terms of the policy which would have the effect of deleting paragraph 1 of the RRSP endorsement, then the company would agree to it, but only after confirming that the policyholder fully understood and accepted the financial implications of this decision. It is the policyholder who must make the request, however. Neither subsection 224(1), nor the practice of the company, gives the Minister any right to make such a request and have it complied with. I agree with the statement of Sheppard L.J.S.C. that:

...there is a substantial distinction between contractual right to collapse a plan and that same right given as a matter of practice which could be changed at any time.[FN8: <p><em>Yorkshire Trust Co. v. 239745 British Columbia Ltd.</em>(1983), 45 B.C.L.R. 361 (B.C. S.C.)at 364.</p>]

16 Inconvenient as it may be, viewed from the perspective of the Minister, I am driven to the conclusion that no amount was “payable” to the policyholders under these policies at the time the Minister issued these Requirements to Pay. Nor will any amounts be payable before the specified maturity dates, unless the policyholders themselves request the company to pay them the cash values before maturity, and the company agrees to do so. The Appellant was not “liable to make a payment” to the policy holders at the time these Requirements were issued, and it therefore cannot be required to make a payment to the Minister under subsection 224(1). In view of the conclusion that I have reached, it will not be necessary to consider whether, as argued by counsel for the Appellant, these policies are exempt from the operation of section 224 by reason of the provisions of provincial law designed to protect insurance policies from seizure by creditors.

17 There may, of course, be other remedies which the Minister can invoke in these cases. However, the only matter before me is the validity of the assessments under appeal. As the circumstances did not justify the Minister in issuing Requirements to Pay under subsection 224(1), the assessments issued following non-compliance are not warranted. The appeals are allowed, and the assessments are vacated. The Appellant is entitled to one set of costs.