Date: 20101027
Docket: A-496-09
Citation: 2010 FCA 285
CORAM: EVANS
J.A.
SHARLOW
J.A.
STRATAS
J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
INNOVATIVE INSTALLATION INC.
Respondent
REASONS FOR JUDGMENT OF THE
COURT
(Delivered from the Bench at Toronto, Ontario, on October 27, 2010)
EVANS J.A.
[1]
This is an
appeal by the Crown from a decision of the Tax Court of Canada (2009 TCC 580),
in which Justice MacArthur (Judge) allowed an appeal by Innovative
Installations Inc. (Innovative) from an assessment by the Minister of National
Revenue of $120,000 under Part III of the Income Tax Act. R.S.C. 1985
(5th Supp.) c. 1 (Act) in respect of a capital dividend of $160,000 declared by
Innovative on June 14, 2004.
[2]
The Judge
held that, contrary to the position of the Crown, Innovative was entitled to
include in its capital dividend account (CDA) the sum of $160,000 without being
assessed for tax. This sum had been paid by Sun Life Insurance Company on the
death of the principal of Innovative, Rod Peacock, pursuant to a group creditor
life insurance policy that Sun Life had issued to the Royal Bank of Canada
(RBC). Innovative had a business loan from RBC, which offered to enrol
Innovative (and other clients to which it had made loans) in a group creditor
life insurance policy to provide for the discharge of a loan on the death of a
person essential to the ability of the debtor to discharge its loan from the
bank.
[3]
Under the
terms of the group policy, Innovative paid the premiums to RBC as part of its
loan repayments, and RBC remitted them to Sun Life. The sum insured was the
amount outstanding on the loan from time to time. On the death of a named
person who was “key” to the debtor, Sun Life paid the proceeds of the policy to
RBC as the policyholder. RBC was contractually obliged to use those proceeds to
discharge the borrower’s debt.
[4]
At the
time of the death of Mr Peacock, Innovative owed $196,922 to RBC. Between the
time of his death and the payment of the proceeds of the policy by Sun Life to
RBC, Innovative had paid another $21,422 on the loan. RBC used the proceeds of
the policy to discharge the outstanding balance of the loan ($175,500), and
credited Innovative’s RBC bank account with the rest ($21,422).
[5]
A dividend
payable by a private corporation is deemed, on the election of the
corporation, to be a capital dividend to the extent of the corporation’s CDA,
and is not included in computing shareholders’ income: subsection 83(2) of the
Act. Section 89 specifies what is included in a corporation’s “capital dividend
account”. For the purposes of this appeal, the relevant provision is subparagraph
89(1)(d)(ii), which reads in part:
|
…all
amounts each of which is the proceeds of a life insurance policy of
which the corporation was not a beneficiary on or before June 28, 1982 received
by the corporation in the period and after May 23, 1985 in consequence of
the death of any person
…
|
…les
montants dont chacun représente le produit d’une police d’assurance-vie
dont la société n’était pas bénéficiaire au plus tard le 28 juin 1982 que
la société a reçu au cours de la période et après le 23 mai 1985 par
suite du décès d’une personne, …
[…]
|
[6]
The Judge held that,
although Sun Life had paid the proceeds of the policy to RBC, as was required
by the group insurance policy, Innovative “received” “proceeds of a life
insurance policy” when RBC applied them, as the contract required, to discharge
Innovative’s debt. He reasoned that the policy was principally for the benefit
of Innovative, which had paid the premiums. Consequently, when the proceeds
were used by RBC to benefit Innovative by discharging its debt, Innovative
“received” them for the purpose of subparagraph 89(1)(d)(ii). Vis-à-vis
Innovative, RBC was merely the conduit through which the proceeds flowed.
[7]
We are not persuaded
that the Judge erred in so concluding. The Crown advanced two principal
arguments in support of its appeal.
[8]
First, it says, the
Judge erred in finding that Innovative’s CDA included the proceeds of the group
life insurance policy, because he thereby improperly ignored the form of the
transactions in favour of the economic realities of the situation.
[9]
We disagree. The
Judge’s conclusion is consistent with the terms of the contract between RBC and
Sun Life, and between RBC and Innovative. Once Sun Life had paid the proceeds
of the policy to RBC pursuant to the policy, RBC was bound to pay them to
Innovative’s benefit by discharging the loan. He correctly pointed out that it
would have been anomalous to conclude that Innovative had not “received” the
proceeds because it had effected insurance through RBC, but would have
“received” them if it had contracted directly with Sun Life. Paragraph
89(1)(d) does not require that a corporation receive the proceeds
directly from the insurer or that it be named as the beneficiary of the policy.
It only had to have “received” them in consequence of Mr Peacock’s death.
[10]
Second, the Crown
says that the Judge erred in treating this as a case of constructive receipt in
that Innovative merely received the benefit of the proceeds of the policy. The
concept of constructive receipt was inappropriate here, because Innovative had
no prior claim to be paid the proceeds.
[11]
We do not agree.
While Sun Life was contractually bound to pay the proceeds to RBC, RBC was
contractually bound by the terms of the group insurance policy to credit
Innovative with them by discharging the balance of the loan. Innovative could
have sued RBC in the event that it failed to apply the proceeds of the policy
to pay off the loan and, if necessary, probably could have joined RBC to an
action against Sun Life if it failed to pay the proceeds of the policy to RBC
on Mr Peacock’s death.
[12]
In argument, the
Crown submitted that, on the basis of the Judge’s decision, both RBC and
Innovative could be regarded as recipients of the proceeds of the policy. This
concern is unfounded. For the purpose of subparagraph 89(1)(d)(ii),
there was only one recipient of the proceeds of the policy: Innovative.
[13]
For these reasons,
the Crown’s appeal will be dismissed with costs.
“John M. Evans”
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-496-09
(AN APPEAL FROM THE JUDGMENT OF THE
HONOURABLE MR. JUSTICE C.H. MCARTHUR FROM THE TAX COURT OF CANADA, DATED
NOVEMBER 12, 2009, IN TAX COURT FILE NO. 2008-724(IT)(G)).
STYLE OF CAUSE: HER MAJESTY THE QUEEN v. INNOVATIVE INSTALLATION INC.
PLACE OF HEARING: TORONTO, ONTARIO
DATE OF HEARING: OCTOBER 27, 2010
REASONS FOR JUDGMENT
OF THE COURT BY: (EVANS, SHARLOW, STRATAS
JJ.A.)
DELIVERED FROM
THE BENCH BY: EVANS J.A.
APPEARANCES:
|
MARIE-THÉRÈSE BORIS
RICKY Y.M. TANG
|
FOR THE APPELLANT
|
STEPHEN S. DU
|
FOR THE RESPONDENT
|
SOLICITORS OF RECORD:
|
MYLES J. KIRVAN
Deputy Attorney General of Canada
Toronto, Ontario
|
FOR THE
APPELLANT
|
|
DU MARKOWITZ
LLP
TORONTO, ONTARIO
|
FOR THE RESPONDENT
|
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