Date: 20011127
Docket: A-282-00
Neutral citation: 2001 FCA 365
CORAM: LINDEN J.A.
BETWEEN:
MUNICH REINSURANCE COMPANY
(CANADA BRANCH)
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Heard at Toronto, Ontario, October 22, 2001
Judgment delivered at Ottawa, Ontario, November 27, 2001
REASONS FOR JUDGMENT BY: SHARLOW J.A.
CONCURRED IN BY: LINDEN J.A.
ROTHSTEIN J.A.
Date: 20011127
Docket: A-282-00
Neutral citation: 2001 FCA 365
CORAM: LINDEN J.A.
BETWEEN:
MUNICH REINSURANCE COMPANY
(CANADA BRANCH)
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
[1] The appellant is a German corporation that, for purposes of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, is not a resident of Canada. At all relevant times it carried on an insurance business in Canada and elsewhere, and was subject to tax under Part I of the Income Tax Act on the income from its Canadian insurance business. The appellant was required to make monthly instalments on account of its Part I tax liability. For its taxation years ending December 31, 1990, 1991, 1992 and 1993, the appellant overpaid its instalments in order to avoid the risk of non-deductible interest costs.
[2] For each of those taxation years, the appellant was required to file a tax return on or before June 30 of the following year. The amount of the overpayment of tax for each year was determined when the appellant's tax return for the year was assessed. Pursuant to section 164 of the Income Tax Act, interest was payable on the overpayment from June 30 of the following year until the overpayment was refunded. The amount of interest received by the appellant for 1990 was $95,000, for 1991 was $341,000, for 1992 was $216,000 and for 1993 was $784,000, for a total of $1,436,000.
[3] The Crown assessed the appellant on the basis that interest on its tax overpayments was taxable under Part I of the Income Tax Act. The appellant appealed to the Tax Court. It had two arguments. One was that the interest was not taxable under Part I of the Income Tax Act because it was not part of the appellant's income from carrying on its insurance business in Canada. The other was that the interest was not taxable under Part XIII of the Act because of the exception in clause 212(1)(b)(ii)(C).
[4] The Tax Court Judge concluded that the interest was taxable under Part I and dismissed the appeal: Munich Reinsurance Co. v. Canada, [2000] 2 C.T.C. 2785, 2000 D.T.C. 2009, [2000] T.C. J. No. 195 (T.C.C.). The appellant now appeals that decision. The appellant concedes that the exception in clause 212(1)(b)(ii)(C) had no application, but argues that the interest was taxable under Part XIII instead of Part I.
[5] This appeal was heard on the same day as the hearing of the appeal of the decision of the Tax Court in Irving Oil Limited v. Canada, [2000] 3 C.T.C. 2823, 2000 D.T.C. 2164, [2000] T.C.J. No. 349 (T.C.C.). The appeals deal with similar issues. The judgment of this Court in the Irving Oil case (A-513-00) is being issued concurrently with this one.
The general scheme - Part I and Part XIII of the Income Tax Act
[6] Any person that is not a resident of Canada may be subject to tax under Part XIII on certain payments it receives from a resident of Canada, including interest. For the purposes of this case the relevant provision of Part XIII is paragraph 212(1)(b), which reads as follows:
| 212. (1) Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to the non-resident person as, on account or in lieu of payment of, or in satisfaction of, [...] |
212. (1) Toute personne non-résidente doit payer un impôt sur le revenu de 25_% sur toute somme qu'une personne résidant au Canada lui paie ou porte à son crédit, ou est réputée en vertu de la partie I lui payer ou porter à son crédit, au titre ou en paiement intégral ou partiel_: [...] |
| (b) interest [...] |
b) d'intérêts [...] |
[7] Paragraph 214(13)(c) permits the enactment of regulations that preclude the application of Part XIII in certain circumstances. It reads as follows:
| 214. (13) The Governor in Council may make general or special regulations, for the purposes of this Part, prescribing [...] |
214. (13) Le gouverneur en conseil peut prendre des dispositions réglementaires d'ordre général ou particulier, pour l'application de la présente partie, précisant : [...] |
| (c) where a non-resident person carried on business in Canada, what amounts are taxable under this Part or what portion of the tax under this Part is payable by that person. |
c) lorsqu'une personne non-résidente exploitait une entreprise au Canada, quelles sommes sont imposables en vertu de la présente partie ou quelle fraction de l'impôt prévu par la présente partie est payable par cette personne. |
[8] Income Tax Regulation 802 was enacted under that provision. It 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. |
802. Aux fins de l'alinéa 214(13)c) de la Loi, les sommes imposables en vertu de la partie XIII de la Loi pour une année d'imposition pertinente d'un contribuable sont celles qui ont été versées ou créditées au contribuable pendant l'année d'imposition pertinente, autres que les sommes comprises, en vertu de la partie I de la Loi, dans le calcul du revenu du contribuable découlant d'une entreprise qu'il a exploitée au Canada. |
[9] A non-resident carrying on business in Canada is subject to tax under Part I of the Income Tax Act by virtue of subsection 2(3), which requires a determination to be made, in accordance with Division D, of "taxable income earned in Canada". Division D is part of Part I. For present purposes it is necessary to refer only to one provision of Part D, subparagraph 115(1)(a)(ii), which says that the taxable income of a non-resident includes income from any business it carries on in Canada. Thus, any amount that is included in the income of a non-resident from a business carried on in Canada is not taxed under Part XIII but is taxed under Part I. Conversely, Canadian source interest received by a non-resident that is not taxed under Part I is subject to tax under Part XIII (unless exempted).
[10] It is not and cannot be disputed that interest is income. Any doubt on that question is resolved for most taxpayers by paragraph 12(1)(c) of the Income Tax Act. Nor can it be disputed that interest on an overpayment of tax is interest: Terra Nova Properties Ltd. v. M.N.R., [1967] Ex.C.R. 46, [1967] C.T.C. 82, 67 D.T.C. 5064 (Ex. Ct.).
[11] But is interest characterized as income from a property or from the carrying on of a business? The answer is that interest is not necessarily business income but it may be business income in certain circumstances. The question to be addressed in this appeal is whether the interest that the appellant received on its tax overpayments was income of the insurance business it carried on in Canada. If not, then this appeal must succeed.
Section 138 of the Income Tax Act - Taxation of insurance corporations
[12] The appellant being an insurer, it is relevant to consider section 138, another provision of Part I. Section 138 of the Income Tax Act deals specifically with insurance corporations. Paragraph 138(1)(d) deals with the computation of the income of an insurance corporation. It reads as follows:
| 138.(1) It is hereby declared that a corporation, whether or not it is a mutual corporation, that has, in a taxation year, been a party to insurance contracts ... shall ... be deemed ... to have been carrying on an insurance business ... and in any such case, for the purpose of computing the income of the corporation, the following rules apply: |
138.(1) Toute société, qu'il s'agisse ou non d'une mutuelle, qui, au cours d'une année d'imposition, a été partie à des contrats d'assurance ... est ... reputée... avoir exploité une entreprise d'assurance ... et, en pareil cas, pour le calcul du revenu de la société, les règles suivantes s'appliquent_: |
| [...] |
[...] |
| (d) the income shall, except as otherwise provided in this section, be computed in accordance with the rules applicable in computing income for the purposes of this Part, |
d ) sauf disposition contraire du présent article, le revenu doit être calculé conformément aux règles applicables au calcul du revenu dans le cadre de la présente partie; |
[13] My interpretation of paragraph 138(1)(d) is that the computation of the income of an insurer under Part I is governed by the general provisions of Part I, except to the extent that they are overridden by section 138. For example, if there is some amount that would be included in income under a general provision of Part I, but the same amount is expressly or by necessary implication excluded from income by section 138, then that amount would be excluded from the Part I income of the insurer.
Subsection 138(9) of the Income Tax Act - income of a non-resident insurer that carries on an insurance business in Canada and elsewhere
[14] For this case the key provision of section 138 is subsection 138(9), which reads as follows:
| 138. (9) Where in a taxation year an insurer (other than a resident of Canada that does not carry on a life insurance business) carried on an insurance business in Canada and in a country other than Canada, there shall be included in computing its income for the year from carrying on its insurance businesses in Canada the total of |
138. (9) L'assureur (sauf une personne résidant au Canada et qui n'exploite pas d'entreprise d'assurance-vie) qui, au cours d'une année d'imposition, exploite une entreprise d'assurance au Canada et à l'étranger doit inclure le total des montants suivants dans le calcul de son revenu pour l'année tiré de l'exploitation de ses entreprises d'assurance au Canada : |
| (a) that part of its gross investment revenue for the year that is gross investment revenue from property used by it in the year in, or held by it in the year in the course of, carrying on those insurance businesses in Canada, and |
a ) la partie de ses revenus bruts de placements pour l'année tirés de biens utilisés ou détenus par lui pendant l'année dans le cadre de l'exploitation de ces entreprises d'assurance au Canada; |
| (b) such additional amount as is prescribed in respect of the insurer for the year by regulation. |
b ) le montant supplémentaire prescrit et applicable à l'assureur pour l'année. |
[15] In subsection 138(12), the term "gross investment revenue" is defined to include various kinds of investment income, including interest.
[16] In the case of a non-resident insurer, the phrase "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 is defined in subsection 138(12) as "property determined in accordance with prescribed rules". The prescribed rules are found in Income Tax Regulation 2400. According to Regulation 2400(1), the phrase "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" means "property that is designated or required to be designated by the insurer in respect of a taxation year."
[17] The Crown argues that the appellant's right to a refund for the tax overpayments falls within Regulation 2400(1)(e). The appellant does not agree. Regulation 2400(1)(e) reads as follows:
| 2400. (1) For the purposes of paragraph138(12)(l) of the Act, "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 (in this Part referred to as the "particular insurance business") means the property (in this Part referred to as "insurance property") of an insurer that is designated or required to be designated by the insurer in respect of a taxation year, and for that purpose the following rules apply: [...] |
2400. (1) Pour l'application de l'alinéa 138(12)l) de la Loi, l'expression « biens utilisés par lui pendant l'année ou détenus par lui pendant l'année dans le cadre de » l'exploitation d'une entreprise d'assurance au Canada (appelée « entreprise donnée » à la présente partie) s'entend des biens d'un assureur (appelés « biens d'assurance » à la présente partie) qu'il désigne ou qu'il doit désigner pour une année d'imposition; à cette fin, les règles suivantes s'appliquent: [...] |
| (e) such non-segregated property or portion thereof (other than investment property) owned by the insurer at any time in the year and used by it in the year in, or held by it in the year in the course of (determined without reference to this subsection), carrying on an insurance business in Canada shall be deemed to have been designated by the insurer for the year; |
e) l'assureur est réputé désigner pour l'année les biens ou parties de bien non réservés (sauf les biens de placement) dont il est propriétaire à un moment de l'année et qui sont des biens utilisés par lui pendant l'année ou détenus par lui pendant l'année dans le cadre de l'exploitation d'une entreprise d'assurance au Canada (déterminés sans tenir compte du présent paragraphe); |
[18] The dispute as to the application of this provision turns on the answers to two questions:
(a) Was the appellant's right to a refund of tax overpayments "investment property"?
(b) If not, was the appellant's right to a refund of tax overpayments property used by the appellant in the year in, or held by it in the year in the course of, carrying on its insurance business Canada?
[19] The answer to the first question is no. The term "investment property" is defined in Regulation 2405(3). The definition is long but for present purposes it is enough to note that the appellant's right to a refund is "investment property" if the appellant overpaid its tax instalments for the purpose of earning interest. There is nothing in the pleadings or in the record to suggest that either party has taken the position that the appellant paid excess tax instalments for the purpose of earning interest. The Crown contends and the Tax Court Judge accepted that the appellant paid excess income tax instalments for the purpose of discharging its statutory obligation to pay instalments and avoid any negative consequences of a tax deficiency. There can be no doubt of the truth of that conclusion and it is not contradicted by the appellant. It is conceivable that a taxpayer might pay excess income tax instalments for both purposes, that is, for the purpose of earning interest and for the purpose of avoiding the negative consequences of paying insufficient instalments. However, neither party alleges that this is such a case, and I see no reason to reach a conclusion on that point that would contradict the position of both parties.
[20] The Tax Court Judge answered the second question in the negative, but nonetheless found against the appellant. His reasons for doing are set out in paragraph 48 of his reasons: :
[para48] I think that quite apart from paragraph 12(1)(c) and subsection 138(9) the interest income earned on overpayments of tax to the Government of Canada is income from a business carried on in Canada. Its genesis is the income earned from the appellant's business in Canada upon which the appellant has an obligation to pay tax and in respect of which it must make instalment payments. It is not from casual investments made independently of its business. The reason for instalment payments is that the appellant has a business here which requires it to make such payments even though for business reasons the appellant decided to make larger instalment payments than were necessary.
[21] Both parties argue that the Tax Court Judge should not have gone outside subsection 138(9) to determine whether the interest in question was required to be included in the appellant's Part I income. They rely on the rule of statutory interpretation that requires a specific provision to be applied in preference to a more general provision that conflicts with it (R. Sullivan, Driedger on the Construction of Statutes, 3rd ed. (Toronto: Butterworths, 1994)). The Tax Court Judge did not accept that argument because he saw no conflict. I respectfully disagree with him on that point, for the following reasons.
[22] Subsection 138(9) and the related regulations comprise a lengthy, complex and detailed statutory scheme dealing with a small category of taxpayers - insurers who are not residents of Canada but who carry on an insurance business in Canada and also carry on an insurance business elsewhere - to provide rules for the reasonable allocation of certain investment income between the Canadian insurance business and other businesses (F. Borgman, Canadian Insurance Taxation (Markham, Ont.: Butterworths, 1998) and R.C. Knechtel, "Taxation of the Life Insurance Industry: The 1978 Tax Reform", Canadian Tax Journal, Vol. 28, No.1 at 17).
[23] A non-resident insurer who is subject to subsection 138(9) is required by that provision to determine what part of its investment income is from "property used by it in the year in, or held by it in the year in the course of, carrying on" its Canadian insurance business. To require a non-resident insurer to look beyond subsection 138(9) to determine the tax character of its investment income would render the scheme of subsection 138(9) largely redundant with respect to the very question it is intended to address, or it would result in the Canadian allocation of the investment income being larger or smaller than the allocation dictated by subsection 138(9). There is no reason to believe that Parliament intended such a redundancy, or such inconsistency.
[24] I therefore accept the argument of both parties that interest on the appellant's tax overpayments must be excluded from its Part I income unless it is within the scope of subsection 138(9). It follows that this appeal must succeed if the appellant's right to a refund of its tax overpayments was not used by the appellant in the year in, or held by it in the course of, carrying on its insurance business in Canada. I return now to that key question
[25] In Regulation 2400(1)(e) the phrase "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 bears its ordinary meaning. The appellant argues that the right to a refund of a tax overpayment can never be property used in the year in, or held in the course of, carrying on a business because the overpayment arises from compliance or intended compliance with the income tax laws, not from business activities.
[26] In support of that proposition, the appellant cites the well established principle that the payment of income tax is not an expenditure made for the purpose of earning income because it is an expenditure of income already earned: Roenisch v. M.N.R., [1931] Ex.C.R. 1, [1931] 2 D.L.R. 90, 1 D.T.C. 199, First Pioneer Petroleums Ltd. v. M.N.R. [1974] C.T.C. 108, 74 D.T.C. 6109, 43 D.L.R. (3d) 722 (F.C.T.D.). The validity of this principle cannot be challenged, but in my view, it does not apply to this case. The question in Roenisch was whether an expenditure on account of an income tax liability is an expenditure made for an income earning purpose. Here the question is a different one: whether interest received because of the overpayment of an income tax liability related to a particular business is an amount received in the course of carrying on that business.
[27] The appellant also relies on more recent jurisprudence that stands for the proposition that, for income tax purposes, an advantage that flows exclusively from the provisions of the tax statute is not a profit, and a business cannot consist of a transaction whose sole purpose is to reduce the tax that would otherwise be payable: Moloney v. Canada, [1992] F.C.J. No. 95, [1992] 2 C.T.C. 227, 92 D.T.C. 6570 (F.C.A.); Loewen v. Canada, [1994] 2 C.T.C. 75, 94 D.T.C. 6265 (F.C.A.). I am unable to draw any analogy between those cases and this one. The appellant was not engaging in tax avoidance transactions, nor was it attempting to derive a profit from tax deductions or tax credits in the Income Tax Act. It simply adopted a practice of overpaying its instalments in order to comply with its income tax obligations at the least possible cost.
[28] The cases cited by the appellant do not establish the proposition that the right to a refund can never be property used or held in the course of carrying on a business. The question, then, is whether in this particular case, the appellant's right to the refunds was property that the appellant used in or held in the course of carrying on its insurance business. I agree with the Tax Court Judge that in the circumstances of this case, the analysis should focus on the "holding" of the property.
[29] To resolve this question, the Tax Court Judge cited Ensite Limited v. R., [1986] 2 S.C.R. 509, [1986] S.C.J. No. 62, [1986] 2 C.T.C. 459, 86 D.T.C. 6521. Ensite was an automobile manufacturer. The issue in the case was whether certain dividends earned by Ensite were "foreign investment income" within the meaning of subsection 129(4) of the Income Tax Act. It would be foreign investment income if the shares that were the source of the dividends were not "used or held by the corporation in the year in the course of carrying on a business". Wilson J., for the Court, adopted the following test from the decision of Le Dain J. in The Queen v. Marsh & McLennan, Ltd., [1984] 1 F.C. 609, [1983] C.T.C. 231, 83 D.T.C. 5180 (F.C.A.), at page 517:
Was the fund employed and risked in the business? In my opinion it was, because an amount equivalent to this notional fund was committed to the carrying on of the business in order to meet the company's obligations to the insurers.
That general statement is further explained by Wilson J. at page 520-1:
[...] But "risked" means more than a remote risk. A business purpose for the use of the property is not enough. The threshold of the test is met when the withdrawal of the property would "have a decidedly destabilizing effect on the corporate operations themselves" [...] This would distinguish the investment of profits from trade in order to achieve some collateral purpose such as the replacement of a capital asset in the long term [...] from an investment made in order to fulfil a mandatory condition precedent to trade [...]. Only in the latter case would the withdrawal of the property from that use significantly affect the operation of the business. The same can be said for a condition that is not mandatory but is nevertheless vitally associated with that trade such as the need to meet certain recurring claims from that trade [...].
[...] The test is not whether the taxpayer was forced to use a particular property to do business; the test is whether the property was used to fulfil a requirement which had to be met in order to do business. Such property is then truly employed and risked in the business. Here the property was used to fulfil a mandatory condition precedent to trade; it is not collateral, but is employed and risked in the business of the taxpayer in the most intimate way. It is property used or held in the business.
[30] The Tax Court Judge, after citing this passage, held that the appellant's right to a refund of tax overpayments was not property employed or risked in the appellant's insurance business in Canada in the sense used by Wilson J. On that basis he concluded that the right to the refund was not property used or held by the appellant in the course of carrying on its insurance business in Canada.
[31] I must respectfully disagree with the Tax Court Judge's reliance on Ensite in this case. In Ensite, the taxpayer was a manufacturer and was trying to establish that its investment activities were not part of its manufacturing business, while the Crown was attempting to tie the two activities together. In this case, the appellant is an insurer. The appellant does not argue that the practice of overpaying tax instalments is an investment or a business apart from its insurance business. What the appellant is arguing is that overpaying one's tax instalments is never a business activity at all. On the facts, that is the only argument open to it.
[32] The Crown argues that in this case the overpayment of tax was a business activity because the right to a refund of the overpayment was an income earning property, and income earning property of an insurer is always property used by the insurer in, or held in the course of, carrying on its insurance business. In support of that proposition, the Crown cites The Liverpool and London and Globe Insurance Co. v. Bennett (Surveyor of Taxes), [1913] A.C. 610 (H.L.) and Marsh & McLennan Ltd.. I do not read those cases as establishing such a categorical principle. The judgment of Clement D.J. in Marsh & McLennan Ltd. says that the determination depends on the facts of the case, and that was also the approach taken in the Liverpool case. While I accept that an insurer must engage in investment activities as an essential aspect of its insurance business, it is nevertheless possible for an insurer to have investments that are not part of its insurance business.
[33] However, in this case there is no factual basis for concluding that the appellant's right to tax refunds did not arise as part of its insurance business. The appellant's obligation to pay its Part I tax flowed from the fact that the appellant derived profit from carrying on an insurance business in Canada. The asset management decisions made by the appellant to comply with its tax obligations in the most advantageous way were decisions as to the use of the assets of its insurance business, and in that sense were decisions made in the course of its business. It follows that the right of the appellant to be paid its tax overpayments was a right acquired in the course of carrying on its business. Therefore it was property held in the course of carrying on that business and was property within the scope of subsection 138(9).
[34] This appeal should be dismissed with costs.
"K. Sharlow"
J.A.
"I agree
A.M. Linden J.A."
"I agree
Marshall Rothstein"