Independent Order of Foresters – Tax Court of Canada finds that Foresters could reduce its taxable life insurance income by allocating assets to an exempt insurance business
The taxpayer was a Canadian resident fraternal benefit society and a life insurer providing accident and sickness (“A&S”) benefits, and individual life insurance to its members. Ss. 149(1)(k) and (3) exempted it regarding its taxable income other than from carrying on its life insurance business, and s. 149(4) provided that its taxable income from carrying on a life insurance business was to be computed “on the assumption that it had no income or loss from any other source.”
The taxpayer included the assets and liabilities of its A&S business (viewed as an insurance business other than a life insurance business) in determining its Canadian investment fund (“CIF”) (i.e., the notional fund used as part of the basis for determining how much of its investment income should be allocated to its two Canadian insurance businesses). Furthermore, it made designations under Reg. 2401(2) of a portion of its investment property (and, therefore, the investment income therefrom) to be in respect of its A&S business and, most jarringly to CRA, made a designation under Reg. 2401(2)(d) that investment properties with a $200 million value, which were not specifically required by the balance of Reg. 2401(2) to be allocated to its two insurance business, were to be allocated to its (exempt) A&S business.
Biringer J found that, consistent with its text, s. 149(4) did not go so far as to effectively deem the taxpayer not to have the A&S business, and instead, in effect only exempted the taxpayer from taxation respecting the A&S business. Furthermore, s. 138(2) effectively provided that the specific income-computation rules for life insurers, including the CIF-related computation rules, had paramountcy.
Among other things, this meant that, as the A&S business existed for Reg. 2401(2) purposes, the taxpayer indeed could designate the $200 million of income-producing assets to the insurance business (here, the A&S business) that happened to be exempted from tax.
The “World Surplus Assets” of the taxpayer were investment assets that were determined to be in excess of that needed for its life insurance divisions to have capital that was a comfortable multiple (around 3.1 X) of the minimum needed to be able to satisfy any claims that might be made against them. A further issue was whether the taxpayer was required to include these assets in computing its CIF, which turned on whether they were “used or held in the course of carrying on an insurance business” as per the CIF definition.
Biringer J accepted the testimony of the taxpayer’s expert that indeed the World Surplus Assets represented assets that were in excess of those required to maintain the required margin of safety, so that, under the Ensite test, such assets were not required to be held in the life insurance business to avoid its destabilization. Furthermore, as a factual matter, the World Surplus Assets (which were managed in a separate fund) were not used or held in the life insurance business subject to some exceptions, e.g., where such assets were used at any time in the year to top-up the capital of any life insurance division.
Neal Armstrong. Summaries of The Independent Order of Foresters v. The King, 2023 TCC 123 under Reg. 2401(2)(d) and Reg. 2400(1) – Canadian investment fund – (a)(ii)(B).