Regulation 2401

The taxpayer was a Canadian resident fraternal benefit society and a life insurer providing fraternal benefits, e.g., accident and sickness (“A&S”) benefits, and individual life insurance to its members. The A&S business was in the process of being wound down and accounted for less than 0.1% of the taxpayer’s premium income. Notwithstanding that ss. 149(1)(k) and (3) exempted it regarding its taxable income other than from carrying on its life insurance business, and that 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 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 Canadian insurance businesses). Furthermore, in addition to designating under Reg. 2401(2)(a) a portion of its investment property to be in respect of its Canadian life insurance business, it made a designation under Reg. 2401(2)(b) of a portion of its investment property to be in respect of its A&S business and made a further designation under Reg. 2401(2)(d) of that portion of its CIF, that was not required to be designated under Regs. 2401(2)(a) and (b) (the “Excess CIF”), to be in respect of its A&S business. From the CRA perspective, this Reg. 2401(2)(d) designation represented a substantial investment-assets diversion (of $199.5 million) to the 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 (a point which also supported the Reg. 2401(2)(b) designation.)

Regarding the Reg. 2401(2)(d) designation, the text and legislative history supported the view that the insurer had the discretion to designate Excess CIF in respect of any of its insurance businesses – even an insurance business (here, the A&S business) that was exempted from tax.