Date: 19980206
File: A-612-95
OTTAWA, ONTARIO, FRIDAY, FEBRUARY 6, 1998
PRESENT: DENAULT J.A.
DESJARDINS J.A.
LÉTOURNEAU J.A.
BETWEEN:
HER MAJESTY THE QUEEN,
Appellant,
AND:
LA CAPITALE, COMPAGNIE D'ASSURANCE GÉNÉRALE,
Respondent.
JUDGMENT
The appeal is allowed with costs and the respondent's action against an income tax assessment made by the Minister of National Revenue for the 1986 taxation year is dismissed with costs.
"Pierre Denault"
J.A.
Certified true translation
C. Delon, LL.L.
Date: 19980206
File: A-612-95
CORAM: DENAULT J.A.
DESJARDINS J.A.
LÉTOURNEAU J.A.
BETWEEN:
HER MAJESTY THE QUEEN,
Appellant,
AND:
LA CAPITALE, COMPAGNIE D'ASSURANCE GÉNÉRALE,
Respondent.
Hearing held at Montréal, Quebec, on Thursday, December 11, 1997
Judgment delivered at Ottawa, Ontario, on Friday, February 6, 1998
REASONS FOR JUDGMENT BY: LÉTOURNEAU J.A.
CONCURRING REASONS BY: DENAULT J.A.
DESJARDINS J.A.
Date: 19980206
File: A-612-95
CORAM: DENAULT J.A.
DESJARDINS J.A.
LÉTOURNEAU J.A.
BETWEEN:
HER MAJESTY THE QUEEN,
Appellant,
AND:
LA CAPITALE, COMPAGNIE D'ASSURANCE GÉNÉRALE,
Respondent.
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
Facts and pleadings
[1] This is an appeal from a decision of the judge of the Trial Division dated August 7, 1995, in which he upheld the respondent's action against an income tax assessment made by the Minister of National Revenue (the Minister) for the 1986 taxation year.
[2] The issue is whether the respondent should have included, in computing his income for the 1986 taxation year, the unreceived portion of annual premiums for insurance policies taken out which were payable by salary deduction and which, in part, covered a subsequent fiscal year. In other words, were the payments made by salary deduction in 1987 amounts receivable for the 1986 taxation year under the provisions of sections 9 and 12 of the Income Tax Act (the Act) and must those amounts be included in the respondent's income for the 1986 taxation year?
[3] The respondent, La Capitale, is a subsidiary of the Mutuelle des fonctionnaires du Québec, and specializes in general insurance. The issue in the instant case relates to property insurance sold by the respondent. Its policies are issued on an annual basis to its government employee clients. However, it offers each client a choice of paying the premium by any one of the following methods:
(a) in cash;
(b) in three instalments, but within a 90-day period;
| (c) by pre-authorized payments taken directly from the client's account at a financial institution; or |
(d) by deductions from the client's salary under an agreement between the parties.
[4] Where payment was made in cash or by instalment, the respondent sent an invoice to the client when the insurance contract was sent out. On the other hand, where payment was by salary deduction, the respondent produced an invoice at the end of the term agreed to by the parties for payment of the premium. The insured's employer then deducted the amount shown from the insured's salary and forwarded it to the respondent.
[5] The insurance policies taken out by the insured persons could be cancelled at any time and the insured could request a refund of any overpayment of the premium for the period of time when risk coverage was not in effect because of cancellation.
[6] The respondent's accounting was done on a fiscal year basis and its taxation year ends on December 31 of each year. In determining its net profit, for both fiscal and accounting purposes, the respondent included in its income the premiums paid in cash, by instalment and by pre-authorized payment. Under paragraph 20(7)(c) of the Act, the respondent could claim a reserve of up to 82% of the unearned premiums at December 31, 1986. The respondent took advantage of that provision and in fact claimed a reserve of 82% of unearned premiums on policies collected in cash, by pre-authorized payment or in three instalments, amounting to $3,594,122.00. However, the respondent did not include in its income and in the reserve it claimed the unreceived portion of annual premiums for policies taken out where the payment method was deduction from earnings.
[7] In his notice of assessment dated April 26, 1989, for the 1986 taxation year, the Minister added $20,208,168.00 to the respondent's income for premiums for which payment was made by salary deduction, and allowed a reserve of $16,450,749.00, an unearned fraction of net premiums amounting to 82% of those premiums.
Is the amount of the premiums for which payment was made by deduction from an insured's salary in 1987 a profit to the respondent within the meaning of subsection 9(1) of the Act for its 1986 taxation year?
[8] A taxpayer's business income for a taxation year is defined in subsection 9(1) of the Act as its profit therefrom for the year.
[9] The concept of income referred to in section 9 of the Act includes both receipts and receivables.1 In addition, section 12 of the Act, which was enacted for greater certainty, confirms the obligation to include receivables in determining income under section 9.2
[10] The courts have made up for the absence of any definition of a receivable, as follows:
| As "amount receivable" or "receivable" is not defined in the Act, I think one should endeavour to find its ordinary meaning in the field in which it is employed. If recourse is had to a dictionary meaning, we find in the Shorter Oxford, Third Edition, the word "receivable" defined as something "capable of being received". This definition is so wide that it contributes little towards a solution. It envisages a receivable as anything that can be transmitted to anyone capable of receiving it. It might be said to apply to a legacy bestowed in the will of a living testator, but nobody would regard such a legacy as an amount receivable in the hands of a potential legatee. In the absence of a statutory definition to the contrary, I think it is not enough that the so-called recipient have a precarious right to receive the amount in question, but he must have a clearly legal, thought not necessarily immediate, right to receive it. A second meaning, as mentioned by Cameron J., is "to be received," and Eric L. Kohler, in A Dictionary for Accountants, 1957 edition, p. 408, defines it as "collectible, whether or not due." These two definitions, I think, connote entitlement.3 |
[11] This concept of a right that is certain or unconditional, although not yet immediate, was approved and applied by the Supreme Court of Canada in Maple Leaf Mills v. M.N.R.4 In that decision, it also appears that the amount due must be determined. In that case, the Court decided that not all of the amount due was determined, but that a minimum income was guaranteed so that the guaranteed minimum amount was a receivable.
[12] If we apply this test to the facts of the instant case, I must conclude that the respondent has a certain and unconditional right, in respect of the policies taken out but for which payment of the premium is made by salary deduction, to the premium in the amount that has been predetermined and agreed by the parties. Articles 2570 and 2571 of the Civil Code of Lower Canada set out unequivocally that an insurer is entitled to the premium when the risk begins, and can then sue for payment of the premium:
| Art. 2570. The insurer is entitled to the premium only from the time the risk begins, and only for its duration if the risk disappears completely as a result of an event that is not covered by the insurance. |
| Art. 2571. The insurer may sue for payment of the premium or deduct it from the indemnity payable. |
[13] Since the policies in question were taken out and the amount of the premium determined in 1986, and the risk began in 1986, the respondent became entitled to those premiums in 1986; accordingly, the total amount of those premiums was a receivable under in the 1986 taxation year, under subsection 9(1) of the Act. The Trial Division judge reached the same conclusion on this point and this aspect of his decision is not open to criticism.
[14] To avoid the application of this rule, the respondent submitted four arguments that are, to my mind, devoid of merit.
[15] First, the respondent asserts that the amount of the premiums in issue cannot be a receivable in that those premiums are not due and immediately payable until the subsequent year, 1987, and not the 1986 taxation year.
[16] First, this argument ignores the fact that the test for defining a receivable does not require that the amount be immediately payable. It is sufficient that the creditor have a certain and unconditional right to a determined amount. The possibility that the contract might be cancelled does not mean that the right of the insurer is uncertain or conditional. For one thing, the right exists from the time the risk begins. For another, cancellation is effective only prospectively and the insurer has a right, at least, to the portion of the premium earned for the period when the risk was covered, including the period that runs into the subsequent year. In fact the principle is the same, whether the termination of the contract results from cancellation by one of the parties to the contract or from the complete disappearance of the risk as a result of an event that is not covered by the insurance.
[17] In addition, this argument also ignores the provisions of article 2571 of the Civil Code of Lower Canada which, as I mentioned earlier, gives the insurer the right to sue for payment. As Prof. Bergeron points out, [translation] "unless the insurer grants credit, the premium is payable in full from the time the risk begins."5 The fact that an insurer such as the respondent may grant its insureds more favourable payment terms, in a competitive market and a field in which premiums are rising, cannot alter the nature of the right it acquires. Such an agreement between the parties cannot in any way change the legal nature of a receivable under section 9 of the Act.
[18] Second, the respondent argued that the amounts were neither due nor immediately payable in 1986 because the amounts in question were billed only in 1987, as the insureds received their earnings. On the other hand, it admits that in cases where, for example, an insurance policy is taken out on December 1, 1986, and the premium is paid in three instalments, the January and February 1987 payments are receivables for taxation purposes in 1986. It justifies this different treatment by the fact that a single bill is sent to the client in 1986, and accordingly the three instalments are merely methods of paying the premium.
[19] I must say that I find it difficult to follow the logic of this argument. It seems to me that whether an annual insurance policy taken out on December 1, 1986, for a price of $1,500, is payable in three instalments or in 26 instalments because the insured's salary scheme consists of 26 pay periods, both cases refer to an obligation contracted by the insured that simply involves different payment terms for one total premium, which is determined when the contract is signed based on the risk to be covered, and is payable by the insured from the time the risk begins.
[20] It is not the billing that generates the debt, and contrary to what the respondent is arguing, billing is not a determining factor in the definition of a receivable under subsection 9(1) of the Act. It is merely the process by which the creditor informs the debtor of the amount owing pursuant to the obligation already contracted, and claims that amount from the debtor. An agreement between a creditor and debtor, in this case the insurer and the insured, with respect to the terms of billing and payment as they relate to time and place does not alter the concept of receivable as it is used in subsection 9(1) of the Act.
[21] As our colleague Mr. Justice Hugessen wrote in R. v. Derbecker,6 "the words "due to him"look only to the taxpayer's entitlement to enforce payment and not to whether or not he has actually done so". A fortiori , the expression does not look to the question of when the taxpayer enforced payment by billing.
[22] Third, the respondent contends that an insurance contract is, under Quebec civil law, a contract for continuous services, and accordingly that the amounts fall due only as the services are rendered. In support of its argument, the respondent takes refuge in the concepts of resiliation and reimbursement which, it says, establish that this is a continuous service in that the service ceases to be provided if payment is not made.
[23] To my mind, the argument that the respondent is making here is merely a variant of the earlier one, except that it adds that the amounts are not receivables because they are not overdue.
[24] I have already considered the question of the term or due date of the payments and concluded that the provisions establishing when the debt is due do not affect the existence of the debt and the right of the creditor to payment of the debt. The nature of an insurance contract does nothing to change this aspect of the legal situation.
[25] Fourth, the respondent, again based on the principle that an insurance contract is, under Quebec civil law, a contract for continuous services or of continuous performance, argued in urging that the appeal be dismissed that paragraph 12(1)(b) of the Act established that amounts received in 1987 by salary deduction were not amounts receivable for the 1986 taxation year since the services provided for those amounts were performed not in 1986 but in 1987. It argued that this is the interpretation that must be applied to that section, which I reproduce below with the relevant words underlined:
| 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: |
| (b) any amount receivable by the taxpayer in respect of property sold or services rendered in the course of a business in the year, notwithstanding that the amount or any part thereof is not due until a subsequent year, unless the method adopted by the taxpayer for computing income from the business and accepted for the purpose of this Part does not require him to include any amount receivable in computing his income for a taxation year unless it has been received in the year, and for the purposes of this paragraph, an amount shall be deemed to have become receivable in respect of services rendered in the course of a business on the day that is the earlier of |
| (i) the day upon which the account in respect of services was rendered, and |
| (ii) the day upon which the account in respect of those services would have been rendered had there been no undue delay in rendering the account in respect of the services; |
[26] In short, the respondent is arguing that an amount owing cannot be a receivable for a taxation year unless the services were rendered in that taxation year. There are a number of reasons why this argument should be rejected.
[27] First, this Court has already established that receivables are included in a taxpayer's business income under subsection 9(1) of the Act and that the purpose of subsection 12(1) is to expand and not to limit the scope of the inclusion set out in subsection 9(1), so that what is included under section 9 cannot then be excluded:
| The determinative provision for the definition of income is section 9, which equates income for a year with profit for a year. It was common ground that the purpose of section 12 of the Act was only to specify what should be included in income, but there was no agreement between the parties as to whether exclusions from income were created in the course of the delineating of inclusions in subsection 12(1). |
| In my view, the statutory language and structure support the respondent's position. That is particularly true of subsection 12(2), which explains that the purpose of subsection 12(1) is only to provide greater certainty, obviously by specifying with more exactitude what is to be included in income, and which clearly forbids any construction that would have the effect of excluding income that would otherwise be included. This interpretation is also confirmed by subsection 12(1) itself, which begins with the words "there shall be included in computing the income of a taxpayer for a taxation year ...". [Emphasis added.]. |
| In my opinion, subsection 12(1) operates so as to expand subsection 9(1)'s ambit of inclusion. Obviously, at the boundary line of inclusion there may logically be some exclusions, but the joint thrust of section 9 and subsection 12(1) is to include, not exclude, and subsection 12(2) has the effect of ensuring, at the very least, that nothing clearly included in section 9 is henceforth excluded.7 |
[28] Because the amounts in issue are in fact receivables under subsection 9(1), paragraph 12(1)(b) is of no assistance to the respondent.
[29] Second, I agree with the appellant that in fiscal law no distinction should be made between premiums received in the year in respect of an insurance contract that continues in the following year and premiums receivable in respect of a contract that continues in the following year. The decision in Robertson Ltd. v. Minister of National Revenue establishes that a taxpayer may not exclude from its income amounts received but not earned in the year on the ground that the contract could be cancelled and a partial refund be required.8 When applied to the insurance industry, this principle means that an insurer cannot exclude from its income premiums received but not earned on the ground that the contract could be cancelled. Thus when the total amount of the premium is paid in November of one year for annual insurance protection, that amount must be included in the year of payment, even if a majority of the protection will be provided in the subsequent year. Moreover, the respondent has acknowledged that when the premium was paid in three instalments, one of which was made in 1986, the two 1987 payments are receivables in 1986 even though the protection was extended in 1987.
[30] Third, the fact that a contract for non-maritime insurance may be described as a contract of successive performance in no way affects the definition of business income set out in section 9 of the Act.
[31] In fact, articles 1377 and 1378 of the Civil Code of Québec provide that contracts may have a number of characteristics. They may be contracts of adhesion or by mutual agreement, synallagmatic or unilateral, onerous or gratuitous and commutative or aleatory, and may be contracts of instantaneous performance or of successive performance. They may also be consumer contracts. With only a few slight differences, these characteristics were the same under the Civil Code of Lower Canada, which applies in the instant case.
[32] However, in this case, the range of characteristics illustrating the diversity of contracts has no impact on the determination of business income for income tax purposes, because business income includes amounts receivable, which are determined by the amount of the premiums established when the contract is entered into. As Didier Lluelles states, [translation] "the fact that a contract of insurance is an onerous contract in no way means that the premium must be paid in order for the contract to be formed or to take effect, as insurance is a consensual and not a real contract. Like the price in a sale, it is sufficient that the premium be determined or at least capable of determination. Payment of the premium is therefore not a condition for the contract to be entered into or take effect, subject to the specific case of life insurance in which, as an exception, the risk is not covered until the premium is paid".9
[33] As well, the characteristic of "successive performance" merely indicates and determines the sanction for non-performance of the contract, which for that contract consists of resiliation rather than resolution, where the rule is the reverse for contracts of instantaneous performance.
[34] Because the total of the amounts receivable is already determined and the respondent already has a certain and unconditional right to those amounts, cancellation of the contract based on this characteristic of the contract is of no assistance to it, since, as in the decision of the Supreme Court in Maple Leaf Mills v. M.N.R., where the guaranteed minimum income was characterized as a receivable (supra), it is entitled to a minimum income corresponding to the period during which the risk was in effect.
[35] Fourth, the insurance contracts in question are not for the services rendered within the meaning of paragraph 12(1)(b) of the Income Tax Act, but are rather for property sold.
[36] Paragraph 12(1)(b) deals with property sold or services rendered. The respondent argued by analogy with examples taken from rentals of services or property that are supplied periodically (for example, day to day or month to month) and invoiced at fixed intervals.
[37] In my view, that analogy is clumsy and misleading, because an insurance contract is not, in Quebec civil law, a contract for the rental of property or services. It is a contract of sale sui generis pursuant to which the insured purchases an indemnity payable if the event that is the object of the risk covered by the damage insurance in issue here occurs:
| Art. 2468 (C.C.L.C.) A contract of insurance is that whereby the insurer undertakes, for a premium or assessment, to make a payment to a policy-holder or third person if an event that is the object of a risk occurs. |
| Art. 2475 (C.C.L.C.) Damage insurance protects the insured from the consequences of an event that may adversely affect his patrimony. |
| It includes property insurance, the object of which is to indemnify the insured for material loss sustained by him, and liability insurance, the object of which is to protect him from the pecuniary consequences of an act for which he may be liable in damages. |
[38] Actually, Prof. Roger Bout refers to the sale of security by the insurer, for which the insured must pay the price.10
[39] The contract is formed once the insurer accepts the application by the policy-holder and the policy is merely the document evidencing the existence of the contract.
| Art. 2476 (C.C.L.C.) An insurance contract is formed upon the insurer's acceptance of the policy-holder's application. |
| Art. 2477 (C.C.L.C.) The policy is the document evidencing the insurance contract. |
[40] What the respondent sold to its insureds in the 1986 taxation year, with payments partially deferred until 1987, whether we characterize it for the moment as a service or property, is the right to an indemnity in the event of loss, the precise amount of which remains to be determined, up to the ceiling of that indemnity. Since the sales in question took place in the 1986 taxation year, the amounts receivable should also be included in that year, by virtue of paragraph 12(1)(b).
[41] In addition, in my view, the right to an indemnity sold by the respondent in 1986 is property within the meaning of the Income Tax Act. The word "property" is defined in subsection 248(1) in a very broad and comprehensive manner, and accordingly includes the sale of a right of any nature:
| "Property" " property means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes |
| (a) a right of any kind whatever, a share or a chose in action, |
| (b) unless a contrary intention is evident, money, |
| (c) a timber resource property, and |
| (d) the work in progress of a business that is a profession; |
[42] The expression "property" in the Act includes practically any type of economic interest, and covers practically any sort of interest that a person may have.11 The generality of the expression may be understood in the context of this Act, which deals with the taxation of any form of business income to a taxpayer, whatever its source.
[43] In Vaillancourt v. The Queen, our colleague Mr. Justice Décary, writing for the Court, said the following with respect to the definition of the word "property" in the Act:
| This definition could hardly be more inclusive and seems quite broad enough to me to take in a portion or fraction of property.12 |
[44] In Sani Sport Inc. v. Canada,13 in which it was necessary to interpret the meaning of subparagraph (iv) of paragraph 54(h) relating to the proceeds of disposition of property, which includes compensation for property taken under statutory authority, our colleague Madam Justice Desjardins concluded that because of the broad definition of the word "property", it not only covered the land expropriated, but extended also to the right of the expropriated owner to enjoy a source of income of which it had been deprived by the expropriation, and for which it was compensated.
[45] Given that the definition of "property" in subsection 248(1) of the Act refers to property of any kind whatever whether corporeal or incorporeal, and includes a right of any kind whatever, the right to an indemnity sold by the respondent under the insurance contract and acquired by the insured upon payment of the premium is, in my view, property within the meaning of that expression as it is used in paragraph 12(1)(b) of the Act.
The reserve provided for in paragraph 20(7)(c)
[46] This paragraph authorizes an insurance company to deduct from its income for a taxation year from an insurance business other than a life insurance business certain amounts prescribed by regulation as policy reserves.14 Sections 1400 and 1404 of the Income Tax Regulations (Part XIV - Insurance Business Policy Reserves) determine the maximum amount and the method of computing these amounts. The combined effect of paragraph 20(7)(c) and sections 1400 and 1404 of the Regulations is to allow the respondent, in determining its net profit for both tax and accounting purposes, to deduct from the net premiums for policies taken out in 1986 a provision for premiums that were in fact not earned as at December 31 of that year, that is, for the unearned fraction of the net premium on the policy at the end of the year.
[47] These provisions, which allow for a deduction, in fact confirm that the respondent must include in its 1986 income the total amount of the premiums paid in that year, even if the risk coverage extends into the subsequent year.
[48] In fact, these provisions reflect the fact that the total amount of the premium is due upon signing of the contract, and is accordingly part of the respondent's income. They also reflect the facts of life in the insurance industry: a certain number of the annual policies that are taken out may be cancelled by one of the parties, or lose their subject-matter when the property insured is destroyed, lost or sold, so that the risk ceases to exist and the original amount owing by the insured must be reduced. They allow the insurer to more accurately reflect its profit for a given taxation year, by recognizing that insurance contracts are affected by changing circumstances.
[49] The specific reserve for insurance contracts other than life insurance contracts is part of the reserve provided for in paragraph 20(1)(m) of the Act, relating to certain goods sold that are delivered, or certain services that are rendered, in the subsequent year, when the amounts contemplated by paragraph 12(1)(a) have been included in computing the taxpayer's business income for the previous year. In fact, the Act contains a number of other provisions of this nature, which apply to various fields (20(1)(m) Reserve in respect of certain goods and services, 20(1)(m.1) Manufacturer's warranty reserve, 20(1)(m.2) Repayment of amount previously included in income, 20(1)(n) Reserve for amount not due until later year, 20(6) Special reserves), the purpose of which is to better reflect a taxpayer's net profit for a year by excluding what it did not earn or anticipated future obligations.15
[50] In short, even if we were to accept the respondent's argument that an insurance contract is a contract for services of successive performance, the combined effect of section 9 and paragraph 20(7)(c) of the Act is, first, to require that the insurer include in its income all amounts owing in relation to policies taken out in 1986 and, second, to allow it to deduct up to 82% of income corresponding to the unearned portion of those premiums. This is what the respondent should have done for the 1986 taxation year, and it is what the Minister did for it in his notice of assessment.
[51] For these reasons, I would allow the appeal with costs and dismiss the respondent's action with costs.
"Gilles Létourneau"
J.A.
Certified true translation
C. Delon, LL.L.
Date: 19980206
File: A-612-95
CORAM: DENAULT J.A.
DESJARDINS J.A.
LÉTOURNEAU J.A.
BETWEEN: HER MAJESTY THE QUEEN,
Appellant,
AND: LA CAPITALE, COMPAGNIE D'ASSURANCE GÉNÉRALE,
Respondent.
REASONS FOR JUDGMENT
DENAULT J.A.
[1] Like my colleague Létourneau J.A., I believe that the respondent must include in computing its income for the 1986 taxation year the unreceived portion of annual premiums for policies taken out by insured persons who chose to pay their premium by salary deduction and who accordingly paid part of their premiums during the 1987 taxation year. I have come to this conclusion by a different route from the one taken by him.
[2] I would first note that in this instance what is before the Court is not a contractual dispute between an insurer and its insured, but rather a tax dispute between an insurance company and the Department of National Revenue. It therefore seems to me to be unnecessary to comment on the characteristics of the contract between the insurer and the insured, since a careful reading of the relevant sections of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1 (the Act) is sufficient to satisfy me that the appeal must be allowed.
[3] Section 916 of the Act sets out the principle that a taxpayer must include, in computing its income from a business, the profit therefrom for the year. Section 1217 sets out the amounts to be included in the taxpayer's income: amounts received in the year in the course of a business (12(1)(a)), and amounts receivable as payment for property sold or services rendered in the year, notwithstanding that the amount or any part thereof is not due until a subsequent year (12(1)(b)). In paragraph 12(2) Parliament has also provided a specific rule of interpretation for paragraphs 12(1)(a) and (b): "[They] are enacted for greater certainty and shall not be construed as implying that any amount not referred to therein is not to be included in computing income from a business for a taxation year whether it is received or receivable in the year or not".
[4] In the present case, the trial judge believed, rightly in my view, that the annual premium, the amount of which is determined and known to the insured when an insurance policy is issued, is an amount receivable by the insurance company. He also recognized, correctly, that the
insurer's right to the premium in full was "a clear legal right, since the insured has taken out an insurance policy giving him the desired protection for a year, and this is true even though only part of the annual premium is due and payable in the fiscal year of the plaintiff during which the policy was issued". Given that these statements are consistent with the rules relating to insurance in the Civil Code of Lower Canada,18 which was in force at the material time, and with the case law,19 I see no point in going into the subject any further.
[5] However, believing that paragraph 12(1)(b) imposed an additional requirement on whether an amount is receivable by the taxpayer, that is, that the amount must relate to the sale of goods or rendering of services "in the year", that being the taxation year in question, he concluded that amounts from deductions from earnings made in 1987, where they related to insurance protection conferred "outside the taxation year in question", could not amount to a profit to the insurance company, within the meaning of subsection 9(1) of the Act, for its 1986 taxation year.
[6] I believe that in so doing the trial judge erred in law.
[7] The manner in which the trial judge interpreted section 9 and paragraph 12(1)(b) of the Act is not consistent with the letter and spirit of the Act or with the way it has been interpreted by this Court. In Maritime Telegraph and Telephone Company of Canada, [1992] 1 F.C. 753 (F.C.A.), Mr. Justice MacGuigan, writing for the Court, summarized the meaning of those sections as follows:
| The determinative provision for the definition of income is section 9, which equates income for a year with profit for a year. It was common ground that the purpose of section 12 of the Act was only to specify what should be included in income, but there was no agreement between the parties as to whether exclusions from income were created in the course of the delineating of inclusions in subsection 12(1). |
| In my view, the statutory language and structure support the respondent's position. That is particularly true of subsection 12(2), which explains that the purpose of subsection 12(1) is only to provide greater certainty, obviously by specifying with more exactitude what is to be included in income, and which clearly forbids any construction that would have the effect of excluding income that would otherwise be included. This interpretation is also confirmed by subsection 12(1) itself, which begins with the words "there shall be included in computing the income of a taxpayer for a taxation year ...". [Emphasis added.]. |
| In my opinion, subsection 12(1) operates so as to expand subsection 9(1)'s ambit of inclusion. Obviously, at the boundary line of inclusion there may logically be some exclusions, but the joint thrust of section 9 and subsection 12(1) is to include, not exclude, and subsection 12(2) has the effect of ensuring, at the very least, that nothing clearly included in section 9 is henceforth excluded. |
[8] I believe that in the present case the trial judge did what the Act and that judgment of the Court clearly prohibited him from doing: interpreting paragraph 12(1)(a) of the Act as having the effect of excluding from income something that would normally have been included in it. Limiting the application of paragraph 12(1)(b) and accordingly the taxpayer's profit from its business, within the meaning of section 9 of the Act, was an error. The wording and structure of these statutory provisions did not justify excluding the amounts received in 1987 for a policy taken out in 1986. Even if we assume that the manner in which the judge interpreted paragraph 12(1)(b) was not in error, I believe that by virtue of the rule of interpretation in subsection 12(2), the amounts that are not contemplated by paragraphs 12(1)(a) and (b) had to be included in computing income, having regard to the very broad scope of that rule: it covers an amount "whether it is received or receivable in the year or not".
[9] In addition, by disregarding the principle set out in section 9, which provides that amounts receivable must be included in computing income, the trial judge did not consider an important element of the evidence: the record shows that the respondent was allowed a reserve of 82% of unearned premiums, in respect of premiums for policies taken out, as paragraph 20(7)(c) of the Act allows an insurer to do.
[10] I would add only one comment concerning the method that the insurance company offered its insureds for paying their premiums by 26 monthly salary deductions: at most, this is a method of payment, doubtless different from the three other methods used - cash, 3 instalments within a 90-day period, pre-authorized payments deducted directly from an account at a financial institution - but this in no way changes the nature of the contract20 and especially does not change the relationship between the insurance company and the Department of National Revenue.
[11] For these reasons, I would allow the appeal as my colleague Létourneau J.A. suggests.
"Pierre Denault"
J.A.
Certified true translation
C. Delon, LL.L.
Date: 19980206
File: A-612-95
Coram:
DENAULT J.A.
DESJARDINS J.A.
LÉTOURNEAU J.A.
BETWEEN:
HER MAJESTY THE QUEEN,
Appellant,
AND:
LA CAPITALE, COMPAGNIE D'ASSURANCE GÉNÉRALE,
Respondent.
REASONS FOR JUDGMENT
DESJARDINS J.A.
[1] I have reached the same conclusion as the one suggested by my colleague Mr. Justice Létourneau.
[2] Were it not for articles 2570 and 2571 C.C.L.C., it would have been possible to say that payment of the premium by salary deduction, like payment of the premium when the insurance policy was put into effect, was in both cases a consensual method of payment, by which the parties agreed that the premium would be payable in one manner rather than another. Articles 2570 and 2571 C.C.L.C. (and thus article 2469 C.C.Q.),21 however, defeat that argument.
[3] These articles entitle the insurer to demand payment of the premium in full from the time the risk begins. Thus the provisions of the former and the new Civil Code that are in force in Quebec buttress the insurer's position, which otherwise would have been merely consensual. They give it the legal authority to secure payment in advance for a premium that is earned on a day by day basis.22
[4] It follows that articles 2570 and 2571 C.C.L.C. (2469 C.C.Q.) make the premium an "amount receivable" or a "receivable" within the legal meaning of that expression, from the time the policy is put in place. The system of paying the premium by monthly deductions cannot then be characterized as anything but a method of paying the premium, as opposed to a consensual method of paying the premium. An amount is said to be "receivable" in tax law when it is an amount to which someone "has a clear legal right",23 of which the person may demand payment, and the amount of which is determined.24 These are the characteristics of the premium when the policy is put into effect. At that moment, the insurer is entitled to the premium and may sue for payment. While under article 2500 para. 2 C.C.L.C. (2414 C.C.Q.) the parties may derogate from article 2570 C.C.L.C. (2569 C.C.Q.) where the derogation is more favourable to the insured, these special agreements do not in any way alter the insurer's legal right to receive the premium and do not affect its position with the tax authorities.
[5] Accordingly, in a fiscal accounting method, the total amount of the annual premium for a contract that took effect in 1986 must be included in the respondent's income during its 1986 fiscal year, under the provisions of section 9 of the Income Tax Act25 (the "Act"), whether or not payment of the total amount was demanded during that period.
[6] The trial judge could therefore not have excluded it as he did.26 Paragraph 12(1)(b) of the Act does not apply. The restrictive nature of the expression "in the year" in that paragraph, on which the trial judge relied,27 cannot defeat the general meaning of section 9 of the Act, having regard to the provisions of subsection 12(2) of the same Act.28
[7] As there was no dispute in respect of the reserve for which paragraph 20(7)(c) of the Act makes provision, I would dispose of this appeal as suggested by my colleague Létourneau J.A.
"Alice Desjardins"
J.A.
Certified true translation
C. Delon, LL.L.
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
COURT FILE NO: A-612-95
| STYLE OF CAUSE: Her Majesty the Queen v. La Capitale, Compagnie d'assurance générale |
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: December 11, 1997
REASONS FOR JUDGMENT BY: Létourneau J.A.
CONCURRING REASONS BY: Denault J.A.
Desjardins J.A.
DATED: February 6, 1998
APPEARANCES:
Paul Plourde, Q.C. for the appellant
Jacques Côté for the respondent
SOLICITORS OF RECORD:
George Thomson
Deputy Attorney General of Canada
Ottawa, Ontario for the appellant
Hickson, Martin, Blanchard
Sillery, Quebec for the respondent
__________________
1 Maritime Telegraph and Telephone Co. v. Canada, [1972] 1 F.C. 753, at 761 (F.C.A.).
2 Id.
3 West Kootenay Power and Light Co. v. Canada, [1992] 1 F.C. 732, at 749, quoting a passage from the reasons of Kearney J. in Minister of National Revenue v. John Colford Contracting Co. Ltd., [1960] Ex. C.R. 433, at 440 and 441.
4 [1977] 1 S.C.R. 558, at 566.
5 J.G. Bergeron, Les contrats d'assurance, vol. 2, Les Éditions SEM Inc., Sherbrooke, 1992, pp. 306-07. See also, in French law, Roger Bout, Le contrat d'assurance en droit comparé français et québécois, Quebec Centre for Private and Comparative Law Research, McGill University, 1988, p. 87: [translation] "Sometimes the premium is divided into semi-annual or even quarterly payments, for an additional charge. This is generally a method agreed to in order to satisfy the insured."
6 [1985] 1 F.C. 160, at 161.
7 Maritime Telegraph and Telephone Co. v. Canada, [1992] 1 F.C. 753, at 759 and 760.
8 [1944] Ex. C.R. 170.
9 Didier Lluelles, Précis des assurances terrestres, Les Éditions Thémis, Montréal, 1994, p. 22.
10 Roger Bout, Le contrat d'assurance en droit comparé français et québécois, Quebec Centre for Private and Comparative Law Research, McGill University, 1988, p. 10.
11 The expression also has a very broad meaning in common law. See Re Lunness (1919), 46 O.L.R. 320 (Ont. C.A.); The Dictionary of Canadian Law, Thomson Professional Publishing, Canada, 1991, pp. 833-34. See also Jones v. Skinner (1836), 5 L.J. Ch. 87, at 90, where the Master of the Roles, Lord Langdale, wrote:
It is well known that the word "property" is the most comprehensive of all the terms which can be used, inasmuch as it is indicative and descriptive of every possible interest which the party can have.
12 91 D.T.C. 5408, at 5413 (F.C.A.).
13 [1990] F.C.J. no. 250.
14 Paragraphs 20(1)(m) and 20(7)c) read as follows:
20.(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:
( m) subject to subsection (6), where amounts described in paragraph 12(1)(a) have been included in computing the taxpayer's income from a business for the year or a previous year, a reasonable amount as a reserve in respect of (i) goods that it is reasonably anticipated will have to be delivered after the end of the year; (ii) services that it is reasonably anticipated will have to be rendered after the end of the year; (iii) periods for which rent or other amounts for the possession or use of land or chattels have been paid in advance, or (iv) repayments under arrangements or understandings of the class described in subparagraph 12(1)(a)(ii) that it is reasonably anticipated will have to be made after the end of the year on the return or resale to the taxpayer of articles other than bottles;
(7) Paragraph (1)(m) does not apply to allow a deduction
( a) as a reserve in respect of guarantees, indemnities or warranties,
( b) in computing the income of a taxpayer for a taxation year from a business in any case where the taxpayer's income for the year from that business is computed in accordance with the method authorized by subsection 28(1), or
( c) as a reserve in respect of insurance, except that an insurance corporation may, in computing its income for a taxation year from an insurance business, other than a life insurance business, carried on by it, deduct as policy reserves such amounts as are prescribed for the purposes of this paragraph.
15 Interpretation Bulletin, IT-154R, Special Reserves, February 19, 1988: "Under specified conditions, the Act provides for special reserves which enable a taxpayer to deduct, in computing income from a business for a taxation year, amounts included in such income that, in very general terms, may be regarded either as unearned income or anticipated future liabilities."
16 9.(1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year.
17 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: (a) any amount received by the taxpayer in the year in the course of a business (i) that is on account of services not rendered or goods not delivered before the end of the year or that, for any other reason, may be regarded as not having been earned in the year or a previous year, or (ii) under an arrangement or understanding that it is repayable in whole or in part on the return or resale to the taxpayer of articles in or by means of which goods were delivered to a customer; (b) any amount receivable by the taxpayer in respect of property sold or services rendered in the course of a business in the year, notwithstanding that the amount or any part thereof is not due until a subsequent year, unless the method adopted by the taxpayer for computing income from the business and accepted for the purpose of this Part does not require him to include any amount receivable in computing his income for a taxation year unless it has been received in the year, and for the purposes of this paragraph, an amount shall be deemed to have become receivable in respect of services rendered in the course of a business on the day that is the earlier of (i) the day upon which the account in respect of services was rendered, and (ii) the day upon which the account in respect of those services would have been rendered had there been no undue delay in rendering the account in respect of the services;
...
18 Articles 2570 and 2571 C.C.L.C. concerning payment of the premium (art. 2469 C.C.Q.).
19 The judge relied on West Kootenay Power & Light Company Limited v. Canada, [1992] 1 F.C. 732 (F.C.A.), which held that in order to be a receivable, an amount must be one to which the recipient clearly has a legal right, although not necessarily an immediate right.
20 See Jean-Guy Bergeron, Les contrats d'assurance, vol. 2, Les Editions SEM Inc., Sherbrooke, 1992, p. 306: [translation] "The time of payment [of the premium] is the time when the risk begins for the insurer: that time is when the contract is put into effect, which often coincides with the time the contract is formed.
...
Unless the insurer grants credit, the premium is payable in full from the time the risk begins."
21 The appellant argued that the insurance contracts in question in the instant appeal were issued in 1986 and took full effect before the Civil Code of Québec (hereinafter "C.C.Q.") came into force, and accordingly that the articles of the Civil Code of Lower Canada (hereinafter "C.C.L.C.") and not of the Civil Code of Québec governed those contracts. That assertion is correct. It must be noted, however, that the provisions of the new Code are not necessarily new. They reiterate the provisions of the preceding Code that came into force on October 20, 1976, using new numbers and with consequential amendments; the latter provisions were in fact new law (D. Lluelles, Précis des assurances terrestres, 2nd ed., Les Éditions Thémis, Montréal, 1995, at p. 12). The present Code thus reiterates the essence of the provisions of the C.C.L.C., and accordingly the essence of the 1976 reform. There is no reform, properly speaking, of non-maritime insurance in the new Civil Code (C. Dubreuil, "Le droit des assurances dans le nouveau Code civil du Québec: pas de réforme mais des ajustements", (1992) 14 R.P.F.S. 395). The provisions of the new Civil Code of Québec may therefore be used in the present context without difficulty.
22 Article 2569 of the C.C.L.C. (2479 C.C.Q.) provides:
When the insurance is cancelled, the insurer is entitled only to the earned portion of the premium, computed from day to day if the cancellation proceeds from him, or at the short-term rate if it proceeds from the insured, and the insurer must repay any overpayment.
As well, where the risk completely disappears as a result of an event that is not covered by the insurance, the insurer must return the unearned premium to the insured (article 2570 C.C.L.C. (2469 C.C.Q.)).
23 Minister of National Revenue v. John Colford Contracting Company Limited, [1960] Ex. C.R. 433, at 440-41, cited with approval in West Kootenay Power and Light Co. v. Canada, [1992] 1 F.C. 732, at 749 (C.A.); P. Dussault and N. Ratti, L'impôt sur le revenu au Canada, Éléments fondamentaux, Les Éditions Revue de Droit, Université de Sherbrooke, 1990, at p. 7-5; V. Krishna, Income Tax Law, CGA Tax Research Centre, University of Ottawa, 1997, at p. 117.
24 Maple Leaf Mills Ltd. v. M.N.R., [1977] 1 S.C.R. 558, at 566.
25 R.S.C. 1985 (5th Supp.) c. 1, as amended.
26 La Capital, Compagnie d'assurance générale v. Her Majesty the Queen (1995), 95 D.T.C.5535 and 5587.
27 The trial judge based his decision on the provisions of paragraph 12(1)(b) of the Act, "de la fourniture de service au cours de l'année" ("in respect of ... services rendered in the course of a business in the year"), in declining to include the premiums received by the respondent after December 31, 1986, in the computation of 1986 income.
28 Maritime Telegraph and Telephone Co. v. Canada, [1992] 1 F.C. 753, at 759-60 (C.A.).