Foresters – FCA finds that a multinational life insurer could not make allocations relating to its exempt accident insurance business to reduce its life taxable income

The taxpayer was a Canadian resident fraternal benefit society and a life insurer providing accident and sickness insurance (“accident insurance”), and individual life insurance to its members. Ss. 149(1)(k) and (3) exempted it regarding its taxable income other than from carrying on its life insurance business, and s. 149(4) provided that its taxable income from carrying on a life insurance business was to be computed “on the assumption that it had no income or loss from any other source.”

Given that the taxpayer carried on its insurance businesses both in Canada and abroad, it included the assets and liabilities of its accident insurance business in determining its Canadian investment fund (“CIF”) (i.e., the notional fund used as part of the basis for determining how much of its investment income should be allocated to its two Canadian insurance businesses). As the liabilities of that business exceeded its assets, it purportedly reduced its CIF by that difference. Second, as its CIF (of $717 million exceeded the net Canadian reserve liabilities in respect of its life insurance business (of $517 million), it was required by Reg. 2402(2)(d) to designate additional investment property equal to that excess (of around $200 million) in respect of one of its businesses. It designated the excess as being in respect of its accident insurance business and reported the gross investment revenue from this excess investment property as non-taxable income from that business. A third adjustment is discussed below.

In rejecting these two adjustments, Monaghan and Goyette JJA noted that the above-quoted requirement in s. 149(4) meant that “the Order could not include the amount of the assets that it used in its accident insurance business in the computation of its Canadian investment fund” as “[a]t no time in the year were those assets used or held in the course of carrying on the Order’s life insurance business,” and that similarly, “the Order could not reduce its Canadian investment fund by the amount of the liabilities related to these assets.” They then stated :

[T]he text of subsection 149(4) reveals that in computing the gross investment revenue under subsection 138(9) from its life insurance business, a fraternal benefit society cannot reduce its Canadian investment fund by the net liabilities (in this case, $3,299,000) connected to its accident insurance assets, nor can it designate an excess from its Canadian investment fund (here, $199,462,344) to its accident insurance business. Put simply, the text of subsection 149(4) does not permit a fraternal benefit society to blend its life and accident insurance businesses when computing its taxable income from its life insurance business. Instead, subsection 149(4) requires the society to exclude items from its other insurance businesses when computing its income and taxable income from its life insurance business carried on in Canada, including its gross investment revenue from that business. …

The third adjustment at issue related to the portion of the Order's total surpluses (the excess of assets over liabilities) that the Order did not allocate to any specific operation (the “World Surplus”). Element I of Reg. 2400(1)(a)(2)(b) of the CIF definition referred to:

… 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)"

The Order accepted that the World Surplus assets were so reported (on the basis of being included in its OSFI-required balance sheet as per Reg. 2400(3)), but maintained that they came within the parenthetical exclusion, so that they were excluded from its CIF.

The Court stated:

The text leads to the following interpretation: every asset reported on the insurer’s non-consolidated balance sheet is presumptively included by element I. Only if the evidence establishes that an asset was neither used nor held in the course of carrying on an insurance business at any time in the year is that presumption rebutted.

In commenting on the exclusion, the Court stated:

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 … .

The Tax Court had instead got the test backwards, i.e., by asking “what assets were used or held in the course of carrying on the insurance business”. As the Tax Court had applied the wrong test, the matter was remitted to the Tax Court for a fresh determination.

Neal Armstrong. Summaries of Canada v. Independent Order of Foresters, 2026 FCA 146 under s. 149(4) and Reg. 2400(1) – CIF – (a)(ii)(B)-I.