http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/109168/index.do 
Standard Life Assurance Company of Canada v. The Queen (April 20, 2015 – 2015 TCC 97, Pizzitelli J.).
Précis: Prior to 2006 Standard Life Assurance Company of Canada (“Standard”) only carried on a life insurance business in Canada. In 2006 it took steps that it believed resulted in it carrying on a life insurance business in both Canada and Bermuda. Standard took the position that it was entitled to a $1.2 billion asset bump as a result of its activities in Bermuda (subsection 138(11.3) of the
Income Tax Act (the “Act”)). This resulted in substantial tax savings in 2006 and 2007. CRA did not agree that Standard was entitled to an asset bump. The Tax Court agreed with CRA on two bases. First it held that subsection 138(11.3) did not operate in the manner contended by Standard and it was not entitled to a bump even if it were carrying on a life insurance business in Bermuda in 2006 and 2007. Second it held that the activities of Standard in Bermuda did not amount to the carrying on of a life insurance business but was “mere window dressing designed to mislead the Minister” (para. [161]).
Decision: This decision turned on the interpretation of subsection 138(11.3) of the Act:
138(11.3) Deemed disposition. Subject to subsection (11.31), where a property of a life insurer resident in Canada that carries on an insurance business in Canada and in a country other than Canada or of a non-resident insurer is
(a) designated insurance property of the insurer for a taxation year, was owned by the insurer at the end of the preceding taxation year and was not designated insurance property of the insurer for that preceding year, or
(b) not designated insurance property for a taxation year, was owned by the insurer at the end of the preceding taxation year and was designated insurance property of the insurer for that preceding year,
the following rules apply:
(c) the insurer is deemed to have disposed of the property at the beginning of the year for proceeds of disposition equal to its fair market value at that time and to have reacquired the property immediately after that time at a cost equal to that fair market value,
(d) where paragraph (a) applies, any gain or loss arising from the disposition is deemed not to be a gain or loss from designated insurance property of the insurer in the year, and
(e) where paragraph (b) applies, any gain or loss arising from the disposition is deemed to be a gain or loss from designated insurance property of the insurer in the year.
and the meaning of “designated insurance property” in subsection 138(12) of the Act:
“designated insurance property” – “designated insurance property” for a taxation year of an insurer (other than an insurer resident in Canada that at no time in the year carried on a life insurance business) that, at any time in the year, carried on an insurance business in Canada and in a country other than Canada, means property determined in accordance with prescribed rules except that, in its application to any taxation year, “designated insurance property” for the 1998 or a preceding taxation year means property that was, under this subsection as it read in its application to taxation years that ended in 1996, 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;
Standard’s position was clear. In 2005 and prior years it only carried on a life insurance business in Canada. In 2006 and 2007 it carried on a life insurance business in both Canada and Bermuda therefore it was entitled to an asset bump in 2006 under the clear language of subsection 138(11.3):
[8] The Appellant takes the position that it has met all the conditions of the subsection; namely that it is a life insurer corporation resident in Canada that for both 2006 and 2007 carried on an insurance business in both Canada and Bermuda through a branch. It argues that it meets the conditions, as a matter of fact and as deemed under subsection 138(1). Further it argues that it designated property in each of 2006 and 2007 that was owned by it in the preceding year but not designated in the preceding year and hence argues on the basis of statutory interpretation that it qualified for the cost base bump up in question. In the alternative it argues that it was entitled to the cost base bump up on property designated in 2007 only.
The Crown’s position was also clear:
[9] The Respondent argues that the provision does not apply to the Appellant for two reasons, namely:
1) that the Appellant did not carry on business in Bermuda either in 2006 or 2007, but only gave the “illusion” of doing so through transactions that were “window dressing” as set out in its Replies; and
2) that the subsection 138(11.3) did not apply even if it did carry on business in Bermuda in one or both of the years in question, so there could be no bump up in cost base. More specifically the Respondent says that for 2006 the properties in question could not have been “designated” in the preceding year since there is no dispute that in 2005 the Appellant admittedly did not carry on business in Bermuda. In effect, the Respondent is saying that an insurer cannot take a bump up in the first year of its branch operations in another country as an insurer must carry on the business of a multinational life insurer in both the year of designation and the preceding year. For 2007, the Respondent argues that the Appellant could only have taken a bump in cost base had there been a change in investment assets forming part of the designated insurance property in 2007 from those designated in 2006, which in fact there was not since the same such assets were designated in both years.
The Court first conducted a highly detailed analysis of subsection 138(11.3) and concluded that it did not operate as contended by Standard:
[56] What is clear from the above analysis of section 138 is that a Canadian resident life insurer that carried on business in Canada and in another country is mandated to designate a minimum level of certain investment assets it either uses in its Canadian operation or holds (i.e owns) as a reserve and to identify them in a Schedule to its tax return every year while it is a multinational. The purpose of the designation and the associated Schedule is to evidence that the insurer has met the financial requirements of the government in order to meet its insurance policy obligations, which may change from year to year depending on the level of policies in the insurer’s portfolio. In this sense, the designated assets are “used” to meet the insurer’s obligations in Canada, whether factually used in any other manner or not in its Canadian business operations and so it appears to me that the focus on whether there has been a change in “use” or “designation” is somewhat redundant in this context and becomes somewhat interchangeable. In any event subsection 138(2) clearly references that the property must be used or “held” as well and so the Respondent’s contention in paragraph 192 of its Written Representations that, “The concept of designated insurance property goes hand in hand with the concept of taxing only property used or held to earn income taxable in Canada” is a valid one. Once “designated”, section 138 dictates the tax treatment of such investment assets forming part of this list as taxed in Canada when they stop being designated.
[57] Contextually then, having regard to the provisions of section 138 in its entirety and the Regulations, subsection 138(11.3) applies in respect of property of a multinational life insurer that becomes designated insurance property or ceases to be designated insurance property or in a more general sense, that moves into or out of the designated insurance property list from year to year. This is consistent with the textual wording of paragraph (a) thereof that speaks of property that is “designated insurance property for a taxation year…..was not designated insurance property for that preceding year” and with the textual wording of paragraph (b) that speaks of property that is “not designated insurance property for a taxation year …was designated for that preceding year”. In this sense it is a transitional rule but one that only applies when property is transitioned into and off of the list or from off the list and onto the list.
[58] Simply put, the property must get on the list while the insurer is already a multinational life insurer and was for the previous year before it can be taken off, or “designated” by a multinational insurer before it can be “not designated” by one, for the deemed bump in cost base to apply. As the Appellant itself states in paragraph 112 of its argument in dealing with the instructions on page 1 of Form 150 itself, “only an insurer that carries on an insurance business in Canada and in a country other than Canada in the taxation year is required to designate investments and identify the designated investments in the Schedule.”
[59] Additionally, it is not enough to trigger tax treatment under this subsection that the property simply got on the list. The tax consequence is triggered by it coming off the list, which is consistent with the purpose of the provision in taxing only gains or losses that accrued while the property was “designated”. For the purpose of calculating such gain or loss when it comes off the list, the subsection deems the cost base of the property to be its fair market value when it came on the list only if the requirements of the subsection are met; namely that the taxpayer was already a multinational insurer resident in Canada and that it is an addition to the list that existed and was required to exist at the time.
[60] Accordingly, the Appellant’s contention that the subsection is a transitional rule that applies upon a change in the designated status of the investment property is correct. The Appellant however is not correct in suggesting a change in designated status pursuant to subsection 138(11.3) can occur between years where a life insurer is not a multinational in both years and hence not required to file the list or have it mandated by the Minister for both years. Likewise there can be no change in designated status of the investment property while the same property remains on the list as it has between the Appellant’s 2006 and 2007 Form filing.
The Court was critical of Standard’s approach:
[71] In my opinion the Appellant is simply trying to manipulate the clear and precise wording of the provision, supported by a contextual and purposive analysis, to create a windfall or benefit to which it is not entitled. I find that subsection 138(11.3) does not operate to bump the cost base of the Appellant’s property to its fair market value in either 2006 or 2007 for the purpose of calculating its income in those years, regardless of whether the Appellant factually carried on business in 2006 and/or 2007 in Bermuda and that its appeal for both years must be dismissed.
Standard was also unsuccessful in persuading the Court that it was in fact carrying on a life insurance business in Bermuda in 2006 and 2007:
[156] On the evidence before me I cannot find that the Appellant was factually carrying on business in Bermuda in 2006 or 2007 as during those years the Appellant did not meet the essential elements test referred to in Caballero or the other cases above. The Appellant did not have qualified and experienced employees or staff to enable it to market or obtain life reinsurance business through activities in Bermuda in either year, nor did it have the proper office space from which to do so and made no continuous efforts to obtain same. In fact, failing to hire an appropriate and qualified general manager in Ms. Rouse, when it had the opportunity to do so but for its own self-imposed and unrealistic timetable, suggests the Appellant had no intention to hire same or had abandoned any such intention. Moreover, the contracts for reinsurance entered into and described as Treaties 1 and 2 throughout the trial were not consistent with furthering the goals and objectives of the Appellant to mitigate longevity risk through the reissuance of life insurance despite what was clearly and emphatically stated on many occasions in the evidence. I cannot regard these activities or other ancillary activities in support of these agreements as carrying out essential elements in furtherance of the Appellant’s stated intention. Moreover, notwithstanding the stated goal of accessing the larger U.S. market and the need to have a physical presence there within 5 years, absolutely no evidence was tendered to suggest this essential element was acted upon in any other way. Unlike in London Life where the taxpayer’s activities were in furtherance of its stated plan, the Appellant’s here were not nor were they sufficient. The Appellant has quite frankly in my opinion overwhelmingly failed the test and in my view its actions were nothing more than “window dressing”, as the Respondent has argued, to give the illusion it was doing so, or more appropriately, to be able to argue it was when it really was not.
Again the Court was critical of Standard’s approach:
[161] In my view the evidence is clear that the Appellant was aware of 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 values and that the Appellant embarked on a rushed and unbusiness like scheme, taking actions contrary to its own stated intention, to put itself in a position to argue it was carrying on a business outside of Canada in 2006 and thus argue the application of subsection 138(11.3) would bump up its cost base to fair market value on a tax free basis, which of course I have concluded did not apply to it regardless. I find that its actions as such were mere window dressing designed to mislead the Minister into believing that it was carrying on a business in Bermuda for profit, when its true objective was only to obtain a tax benefit.
As a result the appeal was dismissed, with costs.
Comment: The taxation of life insurance businesses is a highly rarified area of tax law and we see few cases of this nature coming before the courts. In light of the very large amounts involved one assumes that this case will be reviewed by the Federal Court of Appeal and, perhaps, the Supreme Court of Canada. The interpretative issues are complex and interesting. The factual findings related to carrying on business in Bermuda will undoubtedly be a thorny issue on any appeal.
Tax Court of Canada: Standard Life’s Bermuda tax scheme ‘designed to mislead’ | Financial Post