Vila Nova Carvalho v. Minister of National Revenue, [1980] CTC 2275, 80 DTC 1236

John B Goetz:—The issue in this appeal is simply whether the inclusion of the sum of $902.34 by way of dividends in pay out to the appellant on maturity of a life insurance policy in 1976 was income in that year.

Facts

The appellant acquired an endowment policy from Manufacturers Life Insurance Company in Zanzibar, East Africa in 1956. The policy was expressed in East African shillings and payable in that currency on maturity. It was a participatory policy, and the annual dividends were utilized for the acquisition of additional paid up insurance.

In 1973 the appellant immigrated to Canada from East Africa at which time the Manufacturers Life Insurance Company converted the policy into a Canadian contract expressed in Canadian dollars whereby the premiums were reduced in that the appellant was living in a more temperate climate, the pay out was to be in Canadian currency, and the Laws of Ontario would apply as Ontario would be the place of pay out of the policy. The appellant maintains that when he brought the policy into Canada it was a “capital asset’’ and that any dividends accruing to the policy prior to his coming to Canada should be exempt from taxation in 1976. He says if he is charged tax on the full proceeds of the policy, it would result in double taxation in that he claims that he has paid income tax on the accrued dividends while he was in Zanzibar. There does not appear to be an International Tax Convention between Canada and East Africa. When the policy matured in 1976, the appellant was paid the sum of $4,264.77. In filing his tax return, the appellant only included the sum of $427.16 as a policy gain by way of income. This conflicts with the T-5 form which was provided to the appellant by the Manufacturers Life Insurance Company showing a taxable policy gain of $902.34. This was calculated as follows:

The calculation was made as follows:

Cash Value at Maturity		$3,397.00
Plus Bonus Additions		867.77
		$4,264.77
Cash Value of basic policy at
August 5, 1970	$2,055.19
Cash Value of bonus additions at
August 5, 1970	356.00
Premiums paid on and after
August 5, 1970 6 x $158.54	951.24	3,362.42
Taxable policy gain as reported		$ 902.34

In assessing the appellant, the respondent relied, inter alia, on paragraph 56(1 )(k), subsections 148(1), (8) and paragraph (9)(f) of the Income Tax Act, SC 1970-71-72, c 63, as amended. These sections read as follows:

56.(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(k) amounts allocated to the taxpayer in the year by an insurer as provided by paragraph 148(1)(b);

148.(1) There shall be included in computing the income for a taxation year of a policyholder,

(a) in respect of any life insurance policy other than an annuity contract, the amount, if any, by which the proceeds of the disposition of an interest in the policy that he became entitled to receive in the year exceeds the adjusted cost basis of the policy to the policyholder as of the time of the disposition, and

(b) in respect of any life insurance policy (other than a policy that is issued or effected as a registered retirement savings plan) all or any part of the insurer’s reserves for which vary in amount depending upon the fair market value of a specific group of assets (in this section referred to as a “segregated fund”),

(i) sucn portion of any amount allocated to the policyholder in the year under the policy as was allocated out of gross revenue of the insurer from the segregated fund, other than gross revenue that is a dividend (other than a taxable dividend) received by the insurer on a share of the capital stock of any corporation, and

(ii) such portion of any taxable capital gain for a taxation year of the insurer as is deemed by subsection 142(2) to be a taxable capital gain of the policyholder.

148.(8) Where

(a) a policyholder owned an interest in a life insurance policy on October 22, 1968 and has not disposed of it on or before the policy’s tax anniversary date,

and

(b) the value of the interest on the policy’s tax anniversary date (computed without regard to any premium that became payable on that date) exceeds the adjusted cost basis of the policy as of that date (computed without reference to this subsection and without regard to any premium that became payable on that date, but after deducting all policy dividends that became payable on that date),

the policyholder shall, for the purposes of paragraph 9(a), be deemed

(c) to have acquired the interest on the policy’s tax anniversary date at a cost equal to its value referred to in paragraph (b),

(d) to have not, on or before that date, been entitled to receive any proceeds of disposition of an interest in the policy, and

(e) to have not, before that date, paid or had paid on his behalf any amount as or on account of premiums payable under the policy.

148.(9) In this section,

(f) “tax anniversary date” in relation to a life insurance policy means the second anniversay date of the policy to occur after October 22, 1968;

The appellant relied on subsection 48(3) of the Act, claiming that the policy was a deemed acquisition and therefore a capital asset having that value on coming into Canada. It is our view, however, that subparagraph 39(1)(a)(iii) of the Act precludes that interpretation on the part of the appellant. The appellant clearly comes within the ambit of subsections 148(1) and (2) thereof provides that the proceeds of disposition include dividends and accumulated policy dividends are taxable in the hands of a policyholder upon disposition of the proceeds of the insurance contract.

For the above reasons, the appeal is dismissed.

Appeal dismissed.