Section 138

Subsection 138(1) - Insurance corporations


Paul Vienneau, "New Profit Accounting for Insurers", Canadian Tax Highlights, Vol. 25, No. 10, October 2017, p. 10

Relevance of accounting income and IFRS 17 (p.10)

[A]n insurer's computation of income for tax purposes is in large part driven by the insurer's accounting income….The new International Financial Reporting Standard (IFRS) 17, "Insurance Contracts," dramatically changes an insurer's accounting for profit in its financial statements. Changes to the current generally accepted accounting principles, effective for fiscal years beginning after calendar 2020, must be considered from a tax perspective….

Deferral rather than immediate recognition when policies issued (p.10)

[T]he new measurement requirement forces an insurer to defer profits on the issuance of insurance policies and to recognize the profits as the insurer provides services under the insurance contracts. Existing accounting rules require an insurer to generally recognize the profit on the insurance contract's issuance at the policy's inception. Assume that an insurer issues a 10-year term life insurance policy in 2016 and calculates profit from that policy to be $1,000: generally, a measure of the positive expected cash flows from the policy (such as premiums), the expected outflows (such as claims and expenses), and a risk margin. Currently, the insurer generally recognizes the $1,000 profit in the year that the policy was issued (2016). Under new IFRS 17, the insurer must defer and amortize the expected profit, and recognize profit of only $100 in year one: the balance is deferred over the 10-year contract The remaining $900 of expected profit on the contract at the end of the first year is included as part of insurance contract liabilities: the CSM….

Potential double taxation (p.10)

As a result of the transitional adjustment to retained earnings, profits previously recognized for tax purposes under current rules are included in profits again in years after the new IFRS 17 standard becomes effective, through the recognition of the CSM in future years' net income. In the example, the $600 retained earnings adjustment that would have been recognized in 2016 is recognized in years 2020 through 2025 under the new model. To avoid double taxation of profits, the tax rules likely require amendment or some other form of administrative accommodation…

Fred F.J. Borgmann, Canadian Insurance Taxation, (Butterworths Canada, 1998).

Paragraph 138(1)(a)


Consolidated-Bathurst Ltd. v. The Queen, 85 DTC 5120, [1985] 1 CTC 142 (FCTD), aff'd on different grounds, 87 DTC 5001, [1987] 1 CTC 55 (FCA)

It was indicated, obiter, that insurance with a captive insurance company, i.e., a company that was an "instrumentality" of the insured, would not truly be insurance, and s. 138(1)(a) accordingly would not apply.

Paragraph 138(1)(d)

Subsection 138(2) - Insurer’s income or loss

See Also

London Life Insurance Co. v. The Queen, 89 DTC 6001 (FCA)

London Life recovered part of the expenses of its computer facility by renting excess capacity to a subsidiary. London Life had to have the extra computer capacity to service its peak demands and would have incurred the expenses whether or not there had been any arrangements with the subsidiary. It was held that these expenses were not incurred in carrying on the taxpayer's life insurance business because "in reality, the respondent engaged in both a life insurance business and, additionally, in dealings related to this excess computer capacity. Not being content to see that capacity lie unused during non-peak periods, the respondents chose, instead, to turn it to account ... ."

Administrative Policy

14 May 2015 CLHIA Roundtable, 2015-0573801C6 - Foreign affiliates - sale of property to taxpayer

exclusion where sale to foreign branch of Cdn insurer

Canco carries on a life insurance business in Canada, and also through a foreign branch with clients in the foreign country. The income of FA, which is wholly-owned by Canco and resident in that county, from its own insurance business carried on that country is solely "income from an active business."

Would s. 95(2)(a.1) deem FA's income from the sale of property (that had been used in its business) to Canco's foreign insurance branch to be income from a business other than an active business if the particular property were subsequently sold by Canco's foreign branch to a person with whom Canco deals at arm's length, so that ss. 138(2) and (9) excluded the resultant income, gain or loss from Canco's income? CRA responded:

[I]f subsections 138(2) and (9) apply to exclude the income, gain or loss arising from the disposition of the property, previously acquired by Canco's foreign insurance branch from FA, from Canco's income from an insurance business for the purposes of Part I… the cost of such property would not be "relevant in computing the income from a business carried on by" Canco for the purposes of paragraph 95(2)(a.1). Accordingly, paragraph 95(2)(a.1) would not apply to FA's income from the sale of the property to Canco.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(a.1) exclusion where sale to foreign branch of Cdn insurer 207

Subsection 138(3) - Deductions allowed in computing income

Paragraph 138(3)(a)


Lutheran Life Insurance Society of Canada v. The Queen, 91 DTC 5553 (FCTD)

The Society, which carried on a life insurance business in addition to other fraternal activities undertaken for the benefit of its members, declared (in addition to its usual policy dividends) extra dividends based on policies held by members and, at the same time, assessed against the same members "fraternal assessments" against which the extra dividends were applied in payment.

As the fraternal assessments were exempt income, the effect of the arrangements was to reduce the Society's tax. After finding that the transactions were legally effective and dealing with extensive submissions on the Stubart guidelines, MacKay J. stated (pp. 5570-5571):

"I am not persuaded that when considered together the steps adopted by the Society were in substance to synthesize a deduction, to create bookkeeping entries to reduce income for tax purposes ... The application of fraternal dividends paid to the fraternal assessment levied, provided for by decision of the Board, was not unlawful, nor in the absence of any objection from a policyholder can it be said to be contrary to the interests of the policyholder. Each of the steps was acceptable. Together ... they resulted in the deduction from income otherwise subject to tax, by dividends paid to policyholders, a purpose within the participating life insurance program of the Society, and also they result in income not subject to tax, by assessments paid by policy holders to foster fraternal purposes, a matter clearly within the general purposes of the Society and its members ... I conclude that the step transaction was effected for other legitimate purposes in addition to reducing income otherwise subject to tax." (p. 5571)

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 149 - Subsection 149(4) 136

Subsection 138(9) - Computation of income


London Life Insurance Co. v. The Queen, 87 DTC 5312, [1987] 2 CTC 90 (FCTD), aff'd 90 DTC 6001 (FCA)

The taxpayer commenced in May 1976 to make preparations to conduct an insurance business in Bermuda, including the appointment and training of a Bermudan agent, and the solicitation of Bermudan residents, and at the end of December two policies were issued on the lives of two Bermudan residents.

The taxpayer was carrying on business in Bermuda in 1976: (1) the taxpayer made its contracts of insurance on Bermudan lives in Bermuda; (2) the "operations which the plaintiff carried on through its agent in Bermuda during 1976 were the beginning of a proposed or systematic type of operation out of which the plaintiff could reasonably expect to derive a profit"; and (3) "the inducement of persons to enter into contracts of insurance fairly describes the business of an insurance company".

Stone J.A. went on to find that in the event that the test in Smidth v. Greenwood, as to the place in which operations took place from which profits in substance arose, was applicable, that such test was satisfied:

"Although, as the appellant has demonstrated, many things had to be and were in fact done in Canada in order to bring insurance policies on the lives of residents of Bermuda into existence, it remains that other acts of overriding importance and significance had to be done and could only be done in Bermuda. The initial solicitation of business was but one of these. There must be added to it the other activities of the agents identified in the judgment below, the absence of at least two of which would have meant that no policies could have come into force in Bermuda. I have in mind that the requirement that policies be delivered there in order for them to be legally effective and the further requirement that the agents, in effect, make a subjective but fundamentally important assessment prior to such delivery that no changes had occurred in the insurability of the lives of the applicants ... ."


Pennal, "Canadian Taxation of Non-Resident Insurers", 1989 Canadian Tax Journal, July-August issue, p. 1035

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 2400 0

Subsection 138(11.3) - Deemed disposition


SCDA (2005) Inc. v. Canada, 2017 FCA 177

no deemed disposition under s. 138(11.3) in the 1st year a Canadian insurer carries on business in another country, so that no basis bump of $1.2B occurred

Prior to the introduction of mark-to-market rules in 2007, the taxpayer, a Canadian life insurance corporation which carried on its life insurance business exclusively in Canada, purportedly started carrying on a life insurance business in Bermuda in 2006, and prepared its returns for its 2006 and 2007 (calendar) taxation years on the basis that it had a s. 138(11.3) bump effective January 1, 2006 of $1.16B to the cost amount of the property which it reported as designated insurance property in its return for 2006 (the first year in which it reported designated insurance property) and which it had owned at the end of 2005. Pizzitelli J found (2015 TCC 97) that s. 138(11.3) did not apply in the first year that a Canadian resident life insurance company commences to carry on business in another country (argued to be 2006) - and that since that corporation would not be carrying on business in another country in the previous year (2005) the designated insurance property definition did not apply for the previous year and hence there was no deemed disposition of assets added to the list of designated insurance property in the first year that the Canadian resident company commenced to carry on an insurance business in another country (2006).

In affirming this finding, Webb JA stated (at paras. 22-23):

…Since Parliament addressed the deemed disposition of assets issue for non-resident insurers who commence to carry on an insurance business in Canada in subsection 138(11.91) of the Act, in my view this would mean that Parliament did not intend that subsection 138(11.3) of the Act would trigger tax-free dispositions of assets for a Canadian resident insurer in its first year of carrying on an insurance business in another country.

For SCDA, for whatever year it commenced to carry on business in Bermuda, the definition of designated insurance property was simply inapplicable in relation to its previous year (when it was carrying on business only in Canada). Therefore, the rules in subsection 138(11.3) of the Act related to the addition of property to the designated insurance property list will only commence to apply in the second year that SCDA is carrying on business in another country. There would be no deemed disposition under subsection 138(11.3) of the Act in the first year that the Canadian insurer carries on business in another country and first designates assets as designated insurance property.

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Tax Court of Canada Rules (General Procedure) - Section 147 - Subsection 147(3) a settlement offer without an element of current monetary compromise can be reasonable 160

See Also

Standard Life Assurance Company of Canada v. The Queen, 2015 DTC 1113 [at 687], 2015 TCC 97

property of a newly multinational insurer is neither "designated" nor "not designated" in the preceding year, but rather outside the scope of s. 138

The taxpayer, a Canadian life insurance corporation which carried on its life insurance business exclusively in Canada, purportedly started carrying on a life insurance business in Bermuda in 2006, and prepared its returns for its 2006 and 2007 (calendar) taxation years on the basis that it had a s. 138(11.3) bump effective January 1, 2006 of $1.16B to the cost amount of the property which it reported as designated insurance property in its return for 2006 (the first year in which it reported designated insurance property) and which it had owned at the end of 2005.

Pizzitelli J found that in order for s. 138(11.3)(a) to apply, it was necessary for the taxpayer to qualify as an "insurer" in the preceding taxation year (2005), i.e., as a "life insurer resident in Canada that carries on an insurance business in Canada and in a country other than Canada" in that year, so that it was not sufficient for the taxpayer to have qualified as an insurer in the year of the bump claim (2006). The taxpayer, which admittedly had no non-Canadian business in 2005, thus was not eligible for the bump in 2006 (paras. 23-5). Consequently, its property in 2005 was neither "designated" nor "not designated" (para. 23). The taxpayer's appeal for 2007 also failed because there had been no change in designated status between 2006 and 2007. Paragraphs 138(11.3)(a) and (b) apply only where insurance property changes from "designated" to "not designated" or vice-versa (para. 28).

Furthermore, the purpose of the rule was not "to avoid taxation of property held before the Appellant became a multinational life insurer," and instead to" tax only changes in value during the time the property is held as designated insurance property, or, in other words, tax… gains that accrued in Canada" (para. 63).

In any event, the taxpayer did not carry on business in Bermuda in 2006 or 2007. After citing inter alia Caballero, Pizzitelli J stated (at para. 88):

[O]ne must determine whether it took serious and continuous steps to put in place the "essential elements" to carry on that intended [insurance] business or in other words to carry out its plan.

The intended Bermuda business did not commence until 2008 when it "started serious efforts to be able to carry out a life reinsurance business, including the essential elements of sales, marketing, and hiring qualified staff, all of which in fact led to the Appellant applying for and receiving changes to its licence which allowed it to do business with unrelated persons… result[ing] in the execution of at least 5 life reinsurance contracts with unrelated parties from 2009 to 2011" (para. 155). Conversely, desultory and isolated acts before then including hiring a bookkeeper (purportedly the general manager but with no underwriting experience and very little to do) and entering into two reinsurance treaties with affiliates in March 2007 (but with one of them backdated to December 2006) and obtaining a licence whose scope was inconsistent with that of the purported business "were designed to give the appearance the Appellant was carrying on such business for profit, when in fact, its only supportable purpose was to obtain a tax benefit" (para. 160), namely, to mitigate "the pending changes to the Act as a result of mark to market rules effective January 1, 2007 that would have required it to realize a capital gain on its investment assets up to their fair market value" (para. 161). Accordingly, "its actions were nothing more than ‘window dressing'" (para. 156), i.e., "a deception that is not about the legal validity of a transaction, as in sham, but about the taxpayers intention for entering into the transaction" (para. 158).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Window Dressing acts purporting to evidence a Bermuda business were window dressing 185
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs starting a business entails taking "serious and continuous steps" to implement the "essential elements" of the business's goals 371

Subsection 138(11.5)

Paragraph 138(11.5)(m)

Administrative Policy

15 November 2016 External T.I. 2015-0597921E5 - Subsection 138(11.94) election

insurance assets transferred to a subsidiary in consideration for assuming obligations of the insurance business could qualify as “reinsurance premiums”

In the context of a tax-deferred transfer of an insurance business carried on in Canada under s. 138(11.94), how are the terms “reinsurance premium” and “reinsurance commission” in s. 138(11.5)(m) interpreted? After noting that the rules applicable to the transfer of a discontinued business under s. 138(11.94) are set out in ss. 138(11.5)(e) to (m), and 138(11.7) to (11.9), CRA responded:

Pursuant to subparagraph 138(11.5)(m)(i) of the Act, a reinsurance premium paid or payable by the transferor to the transferee in respect of the assumed or reinsured obligations will be included or deducted, as the case may be, only to the extent that may reasonably be regarded as necessary to determine the appropriate amount of income of both the transferor and the transferee. A similar limitation, under subparagraph 138(11.5)(m)(ii) of the Act, applies to a reinsurance commission paid or payable by the transferee to the transferor. …

Whether an amount paid or payable by the transferor to the transferee constitutes a “reinsurance premium” depends on the legal manner by which the insurance business is transferred and whether it is done under a reinsurance arrangement. If this is the case, then the assets transferred by the transferor to the transferee in exchange for assuming the transferred obligations may be a “reinsurance premium”. We note, however, that the term would not be limited to such assets and that it may apply more broadly to any amounts paid or payable to the transferee as consideration for the assumed obligations in respect of the transferred insurance business. ...

[Respecting whether] the term “reinsurance commission” … carries the meaning [in Reg.] 1408(1)…[w]e note that there is no explicit reference in the definition to subsection 138(11.5) or (11.94) of the Act. Further, paragraph 138(11.5)(m) of the Act refers to an amount that is paid or payable by the transferee to the transferor, whereas the definition under subsection 1408(1) of the Regulations generally refers to the excess of the premium paid by the policyholder for the policy over the consideration payable by the insurer in respect of the reinsurance or assumption of the risk.

Subsection 138(12) - Definitions

Life Insurance Policy

See Also

Higgins v. The Queen, 2013 DTC 1163 [at 889], 2013 TCC 194 (Informal Procedure)

The taxpayer's father died intestate, and the taxpayer received 1/2 of his "London Life non-registered freedom fund segregated fund investment." In concluding (at para. 34) that this was a life insurance policy, Rowe DJ stated that "the right to confer a death benefit to the named beneficiaries was an integral and indivisible component of the policy/plan in force."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 160.2 112

Administrative Policy

10 October 2014 APFF Roundtable Q. 7, 2014-0538281C6 F - 2014 APFF Roundtable, Q. 7 - Insured annuity

whether an annuity is assimilated to a life insurance policy

Does CRA consider that when a taxpayer subscribes to an annuity contract and a life-insurance policy with the same insurer, are both contracts non-exempt life-insurance policies on the basis that they are separate policies? CRA responded (TaxInterpretations translation):

When an annuity contract and a life insurance policy are independent of each other, they will not be considered as one and the same contract…[even] if they were subscribed for with the same insurance company.

The fact that two contracts were not subscribed for simultaneously is an element which is taken into consideration…but this element does not by itself guarantee a conclusion that the two contracts are independent of each other.

IT-87R2 "Policyholders' Income from Life Insurance Policies".