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Federal Tax - Canadian Investment Fund. Canada v. Independent Order of Foresters
In Canada v. Independent Order of Foresters (Fed CA, 2026) the Federal Court of Appeal allowed a Crown appeal, this involving the taxation of "life insurance and accident and sickness insurance (accident insurance)" operated by a fraternal benefit society (which themselves are tax-exempt under the ITA).
Here the court considers the definition of 'Canadian investment fund':[4] This appeal is also about the definition of "“Canadian investment fund”", a definition that applies to a Canadian-resident insurer that carries on a life insurance business in Canada and other countries. Such an insurer’s income from carrying on an insurance business is only taxable to the extent it is income from carrying on that business in Canada. To determine that income, the insurer must determine its Canadian investment fund which seeks to distinguish its "“insurance assets”" from its non-insurance assets. An asset is a non-insurance asset only if "“at no time [...] in the year [it] was used or held by the insurer in the course of carrying on an insurance business”". ....
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V. Second Issue: What is the proper interpretation of element I of the definition of Canadian investment fund?
A. What is the issue?
(1) A short recap and introduction
[90] As explained above, a life insurer has a long investment horizon and may hold significant investment property worldwide to support its life insurance obligations. Canada does not tax a multinational life insurer on its worldwide income. Instead, a notional method allocates the insurer’s income from its insurance businesses between Canada and other countries. Canada then taxes only the income attributable to the insurer’s insurance businesses carried on in Canada.
[91] The notional method requires a Canadian-resident multinational life insurer to determine the amount of its Canadian investment fund. The insurer must then designate investment property equal to that amount (the designated insurance property). The gross investment revenue earned from that property—and only from that property—is included in the insurer’s income from carrying on its insurance businesses in Canada: s. 138(9) of the Act and s. 2401(2) of the Regulations.
[92] Thus, the Canadian investment fund acts as the measure of the amount of assets (investment property) comprising the multinational life insurer’s Canadian insurance business. Therefore, it is appropriate to treat income from assets equal to that amount as the income from carrying on its insurance businesses in Canada that is taxable in Canada.
[93] Recall that the Canadian investment fund is comprised of two numbers. The first is the insurer’s net Canadian reserve liabilities. That first number is not in dispute in this appeal.
[94] The second number is based on the amounts reported as the insurer’s assets and liabilities and certain other amounts not relevant to this appeal. Only one component of the second number—element I from clause 2400(1)(a)(ii)(B) of the definition of "“Canadian investment fund”"—is relevant to the second issue in this appeal:I is the total of all amounts each of which is the amount of an item reported as an asset of the insurer as at the end of the year (other than an item that at no time in the year was used or held by the insurer in the course of carrying on an insurance business) [95] The "“amount of an item reported as an asset”" is the amount reported, or that would be reported, in the insurer’s non-consolidated year-end balance sheet accepted by the Superintendent of Financial Institutions: s. 2400(3) of the Regulations: TCC Decision at para. 179. This balance sheet is referred to below as the "“non-consolidated balance sheet”". At paras 105-162 the court walks through a statutory interpretation analysis of "element I of the definition of Canadian investment fund", and continues:(c) Conclusion on the jurisprudence
[159] Element I does not ask whether property is used or held in the course of carrying on an insurance business.
[160] Because the Tax Court approached the issue from the wrong perspective, it misapplied the jurisprudence and lost sight of the context in which the decisions arose. That said, we disagree that that jurisprudence is irrelevant. It is relevant, albeit for a different purpose: undertaking the task required by the exclusion.
[161] For example, the insurer might succeed in excluding assets by demonstrating they were at all times employed and risked in (i.e., used or held in the course of carrying on) another business (Ensite; Marsh &McLennan). On the other hand, neither holding assets in a separate fund, nor failing to report the income on those assets to the regulator as insurance income, will demonstrate that those assets are held or used in a business other than an insurance business (Lutheran Life; ACTRA). Similarly, showing assets are held for an unidentified collateral purpose will not demonstrate they are within the exclusion.
[162] In each case the determination must be based on the facts as revealed by the evidence before the Tax Court.
C. Conclusion on the proper interpretation and statutory framework
[163] From the foregoing analysis, we conclude that element I of the Canadian investment fund definition requires that the following two-step framework be applied:1) First, identify all assets on the multinational insurer’s non-consolidated balance sheet at year end and provisionally include their value in the insurer’s Canadian investment fund.
2) Second, determine which of those assets, if any, were not used or held by the insurer at any time in the year in the course of carrying on an insurance business at any time in the year because they were used or held in another business or activity and deduct their value. The insurer will bear the onus of establishing this where the Minister assumes the assets are included in element I.
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