Richard J.: — This is an appeal pursuant to subsection 175(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “Act”), and section 48 of the Federal Court Act, R.S.C. 1985, c. F-7, from a decision of the Tax Court of Canada dated August 9, 1991, [1992] 1 C.T.C. 2004, 91 D.T.C. 1137 (T.C.C.) which dismissed appeals of two reassessments issued by the Minister of National Revenue (the Minister) on June 8, 1989, and confirmed on March 28, 1990. The appeal is a trial de novo. No witnesses were called and argument proceeded before me on agreed facts.
Issues
The plaintiff seeks the following relief:
(a) That the reassessments dated June 8, 1989, be varied or referred back to the Minister to calculate the unearned premium reserves for the purpose of the Canadian reserve liabilities in 1985 and 1986 so as to deduct the amount of the deferred policy acquisition expenses allowed by the relevant authority referred to in the definition of the Canadian reserve liabilities, in accordance with Regulation 2405(3) and paragraph 62(1 )(b) of the Foreign Insurance Companies Act, R.S.C. 1985, c. I-13 (FICA); and
(b) That such reassessments be varied or referred back to the Minister so as to exclude the interest on the income tax credit balances for purposes of computing the income of the plaintiff under Part I of the Act and to include such interest under Part XIII of the Act, subject to the exceptions under paragraph 212( 1 )(b) of the Act, for such years.
Background
The appellant is a German corporation which carries on a reinsurance business throughout the world, including a branch in Canada which is licensed according to the FICA. The reassessments in question relate to the 1985 and 1986 taxation years.
Pursuant to subsection 138(9) of the Act, a non-resident insurer must include in its gross investment revenue that portion of its revenue which is derived from property “used by it in the year in, or held by it in the year in the course of, carrying on that business in Canada.”
The amounts to be included in the calculation of investment revenue derived from property used in the course of business are set out in Part XXIV of the Income Tax Regulations, C.R.C. 1978, c. 945, as am (the “Regulations”), at sections 2400 to 2409. One of the amounts to be included in this calculation is “Canadian reserve liabilities” (CRL), which is defined in subsection 2405(3) of the Regulations as follows:
“Canadian reserve liabilities” of an insurer, as at the end of a taxation year, means the aggregate amount of the insurer’s liabilities and reserves (other than liabilities and reserves in respect of amounts payable out of segregated funds) in respect of its insurance policies in Canada, as determined for the purposes of the relevant authority at the end of the year;
The reserves to be considered in calculating the CRL are provided for in the FICA. The FICA requires that a foreign reinsurer carrying on business in Canada must deliver annual statements of the operations of the company relating to Canada, and must keep statutory reserves in the country under the supervision of the Federal Superintendent of Insurance (the “relevant authority”), so that there is adequate security for the policies which are in force in Canada.
For purposes of determining its CRL, the plaintiff excluded $245,000.00 in 1985 and $214,000.00 in 1986, on the basis that these amounts were not included in the definition of subsection 2405(3) of the Regulations. These amounts were included by the Minister in a Notice of Reassessment dated June 8, 1989, on the basis that they were reserves or liabilities. It is no longer relevant what these amounts represent since the appellant has accepted the Minister’s decision on this question.
Further, in determining the property used by it in the year or held by it during the year in the course of carrying on an insurance business in Canada for purposes of Section 2400 of the Regulations, the plaintiff included a value for the year of investment property equal to the capitalized interest earned on income tax credit balances (1.e. overpayments) in the amount of $508,000.00 for 1985 and $2,258,000.00 for 1986. The interest earned on this property was included as gross investment revenue.
By Notice of Reassessment dated June 8, 1989, the Minister excluded the capitalized interest from the calculation of the value for the year of investment property, and the interest earned on the overpayments was included as business income. The defendant confirmed the reassessment by a Notice of Confirmation dated March 28, 1990.
The plaintiffs appeal to the Tax Court of Canada on the two above issues was dismissed by Rip T.C.J. on August 9, 1991. The plaintiff does not dispute Mr. Justice Rip’s reasons, but has advanced new grounds for contesting the reassessments in the present appeal.
Unearned Premium Reserves
The appellant submits that in calculating the unearned premium reserves for purposes of the CRL in 1985 and 1986, the Minister must take into consideration the amount of the deduction with respect to deferred policy acquisition expenses allowed by the relevant authority.
Subsection 2405(3) of the Regulations defines CRL as follows:
..the aggregate amount of the insurer’s liabilities and reserves (other than liabilities and reserves in respect of amounts payable out of segregated funds) in respect of its insurance policies in Canada, as determined for the purposes of the relevant authority at the end of the year.
The appellant relies on subsection 62(1) of the FICA which specifies what liabilities the company must include in its annual statements to the relevant authority. This subsection reads as follows:
62(1) A company shall, in respect of its policies in Canada in force, and in respect of claims under accident and sickness policies in Canada payable in instalments, include in the liabilities shown in its annual statement of Canadian business reserves not less than the following:
(b) for all other policies, a reserve equal to the unearned premiums less a deduction with respect to acquisition expenses of such an amount as may be determined in accordance with the regulations.
The deduction referred to in paragraph 62(1 )(b) is defined in section 2 of the Insurance Companies Acquisition Expenses Regulations, SOR/78-18. This provision reads as follows:
2. The amount of the deduction to be made under... paragraph 47(1 )(b) [now 62(1 )(b)] of the Foreign Insurance Companies Act with respect to acquisition expenses shall be determined by ascertaining the amount of
(a) the actual acquisition expenses incurred,
(b) the proportion of the unearned premiums that may reasonably be considered not to be required for the payment of claims and expenses other than acquisition expenses, and
(c) thirty per cent of the unearned premiums,
and by deeming the amount of the deduction to be equal to the least of the amounts referred to in paragraphs (a) to (c).
Therefore, in calculating the unearned premium reserves to be taken into account in the report to the Superintendent of Insurance, one must first determine the actual amount of unearned premiums, and then subtract the least of the three amounts enumerated in the above provision.
The respondent submits that the unearned premiums appear as a separate entry on the form submitted to the Superintendent of Insurance. Therefore, the Minister ought not to read into the Act a requirement to consider subsequent deductions made by the Superintendent of Insurance pursuant to paragraph 62(1)(b) of the Insurance Companies Acquisition Expenses Regulations^ Furthermore, the respondent argues that unlike in the definition of CRL, there is a specific mention of deferred acquisition expenses in the definition of “Canadian investment funds” also found in subsection 2405(3) and which is in many other respects similar to the definition of CRL. It is suggested that I infer from this fact that the legislator intended to exclude acquisition expenses from the CRL.
I cannot accept the respondent’s arguments on this issue.
The definition of CRL in subsection 2405(3) of the Regulations makes specific reference to the calculations for the purposes of the relevant authority. Paragraph 62(1 )(b) of the FICA makes clear that the reserve is not simply equivalent to unearned premiums, but that the calculation of the reserve requires a deduction with respect to acquisition expenses. Since the relevant authority requires only that the adjusted amount be kept in Canada as a reserve, there is no reason to apply the different taxation provisions to the entire unadjusted amount. In order to determine the aggregate reserves of the insurer, the appropriate deductions must be made.
For 1985, the plaintiff’s unearned premiums (excluding those related to marine insurance) amounted to $33,104,000.00. One must then subtract the lesser of:
(a) the actual acquisition expenses incurred of $6,829,000.00, which amount represents the gross $7,033,000.00 less the $204,000.00 for marine insurance;
(b) the proportion of the unearned premiums that may reasonably be considered not to be required for the payment of claims and expenses other than acquisition expenses, which the appellant estimates at $9,268,000.00; and
(c) thirty per cent of the unearned premiums, being $9,945,000.00.
Therefore, in submitting its report to the relevant authority, the appellant must include a reserve equal to the unearned premiums of $33,104,000.00, less the actual acquisition expenses of $6,829,000.00. Therefore, the amount of the reserve which the appellant is required to keep, and which should be used for calculating the CRL, as required by subsection 2405(3) of the Regulations, is $26,229,000.00.
In the reassessment for 1985, the Minister has omitted the deduction for actual acquisition expenses, and thus, has calculated the CRL using an unearned premium reserve which is equal to the gross unearned premiums of $33,104,000.00. The appropriate deduction of $6,829,000.00 does not factor into the Minister’s calculations.
In the 1986 reassessment, the gross unearned premiums of $39,548,000.000 are used by the Minister. The appropriate deduction for deferred policy acquisition expenses of $8,530,000.00 is again omitted.
Thus, the Minister has erred in not taking into account a deduction with respect to acquisition expenses, as required by paragraph 62(l)(b) of the FICA, when calculating the unearned premium reserve to be added to the CRL of the appellant.
Interest on Tax Refunds
The second issue arising in this case is to determine whether to exclude the interest on the income tax credit balances for purposes of computing the income of the plaintiff under Part I of the Act, and whether such interest falls within Part XIII of the Act, but is excluded by paragraph 212(l)(b) of the Act.
In determining property used by it in Canada, the plaintiff had included the capitalized interest earned on income tax instalments which it had overpaid. The Tax Court concluded that the overpayments of $508,000 for 1985 and $2,258,000 for 1986 were made to avoid paying interest, and not for the purpose of earning interest. Mr. Justice Rip therefore concluded that the interest earned on these amounts was gross investment revenue and could not, as was submitted by the plaintiff, be capitalized to represent investment property used by it in the year in or held by it in the year in the course of carrying on an insurance business in Canada as defined in section 2400 of the Regulations.
The appellant now argues that since the capitalized interest is not investment property for purposes of the Act, the interest must be considered income from business subject to taxation under Part XIII.
In support of this characterization of the interest income, the appellant cites the RV. Ensite Ltd. [1986] 2 S.C.R. 509, (sub nom. Ensite Ltd. v. R.) [1986] 2 C.T.C. 459, 86 D.T.C. 6521 case in which interest derived from investments which were mandatory conditions precedent to trade were found to be income from business and not income from property. Wilson J. was presented, in that case, with a foreign investment which was required by the Philippine government, and was considering whether this investment constituted foreign investment income as the term is defined in section 129 of Part I of the Act.
I note that the overpayment of tax is not a mandatory condition precedent to trade. In any case, whether the income in question be income from property or from business, the Ensite case does not address the question of whether the interest income is subject to Part I or Part XIII of the Act.
As a general rule, non-resident persons are required to calculate their tax payable according to the provisions in Part XIII. However, paragraph 214(13)(c) permits the Governor in Council to prescribe “what amounts are taxable under this Part or what portion of the tax under this Part is payable by that person”. Thus, exceptions may be made in the Regulations to the taxation provisions of Part XIII.
Section 802 of the Regulations reads as follows:
802. For the purposes of paragraph 214(13)(c) of the Act, the amounts taxable under Part XIII of the Act in a relevant taxation year of a taxpayer are amounts paid or credited to the taxpayer in the relevant taxation year other than amounts included pursuant to Part I of the Act in computing the taxpayer’s income from a business carried on by it in Canada.
[Emphasis added.]
Paragraph 12(l)(c) of Part I of the Act reads as follows:
12(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:
(c) any amount received by the taxpayer in the year or receivable by him in the year (depending on the method regularly followed by the taxpayer in computing his profit) as, on account or in lieu of payment of, or in satisfaction of, interest to the extent that such interest was not included in computing his income for a previous taxation year.
Thus, the income from interest is taxable under Part I, and therefore excluded from calculation under Part XIII of the Act.
Even if I were to find that the income is taxable under Part XIII, there are exceptions to the interest covered by this Part set out in paragraph 212(1)(b). The appellant seeks to invoke sub-subparagraph 212(l)(b)(ii)(C) to argue that the income is not taxable under Part XIII either. However, the exception is limited to “bonds, debentures, notes, mortgages, hypothecs or similar obligations.” The obligation of the government to pay interest on an overpayment of income tax is not a “similar obligation” since it is neither an instrument nor a contract, but a statutory obligation. Therefore, if I were to find that the income were taxable under Part XIII, I would still not find that it was exempted by paragraph 212(1 )(b).
Therefore, the income in question falls within the scope of Part I of the Act, and is therefore removed from consideration for purposes of Part XIII. The interest generated from the tax credit balances is income in satisfaction of interest within the meaning of paragraph 12( 1 )(c) of the Act.
Conclusion
For the reasons set out above, the plaintiff’s appeal is allowed in part. The reassessments of June 8, 1989 are referred back to the Minister to calculate the unearned premium reserves for purposes of the CRL in 1985 and 1986 so as to deduct the amount of the actual acquisition expenses incurred, in accordance with Regulation 2405(3) and subsection 62(1) of the FICA, and in the manner described above. On the issue of the interest earned on income tax overpayments, the appeal is dismissed.
Costs
Since there is divided success on this appeal, there will be no order as to costs.
Appeal dismissed.
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