STATUTORY INTERPRETATION: Lessons Learned from «Loading»

Transcription

1 STATUTORY INTERPRETATION: Lessons Learned from «Loading» David Douglas Robertson Couzin Taylor LLP

2 What is Insurance Insurance Act, R.S.O. 1990, c. I-8 Insurance means the undertaking by one person to indemnify another person against loss or liability in respect of a certain risk or peril to which the object of the insurance may be exposed, or to pay a sum of money or other thing of value upon the happening of a certain event, and includes life insurance. Page 2

3 Modern Principles of Tax Statutory Interpretation 1. The words of the Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, its object, and the intent of Parliament. 2. Where the words of a tax statute are precise and unequivocal, the words play a dominant role. 3. However, the courts must always undertake a unified textual, contextual, and purposive analysis. 4. If a provision has more than one reasonable meaning, greater emphasis is placed on context, scheme and purposes. 5. Residual presumption in favour of the taxpayer. Page 3

4 Textual / Contextual / Purposive Textual Focus on the words of the particular provision Apply statutory definitions, legal definitions, ordinary dictionary definitions, specialized dictionarys Consider text in both official languages Consider definitions from other relevant statutes Contextual Focus on (a) subject matter of the relevant provision and (b) Related provisions and scheme of the Act Purposive What was the purpose and intent of the provision Department of Finance publications, particularly Technical Notes Page 4

5 STATUTORY INTERPRETATION WHAT IS «LOADING» Page 5

6 Loading - Background Division IV Self Assessment Requirement for Qualifying Taxpayers Based on Qualifying Consideration An outlay or expense incurred outside Canada Permitted as a deduction for ITA purposes Reasonably applicable to a Canadian activity MINUS Permitted Deductions Page 6

7 Loading - Background s.217 permitted deduction (k) consideration (other than interest referred to in paragraph (g), dividends referred to in paragraph (h) or loading) for a specified non-arm s length supply made to the qualifying taxpayer. Page 7

8 s.217 Loading Any part of the value of the consideration for a supply of a financial service that is attributable to administrative expense, an error or profit margin, business handling costs, commissions, communication expenses, claims handling costs, employee compensation or benefits, execution or clearing costs, management fees, marketing or advertising costs, occupancy or equipment expenses, operating expenses, acquisition costs, premium collection costs, processing costs or any other costs or expenses of a person that makes the supply, other than commissions for a specified financial service or the part of the value of the consideration that is equal to (a) If the financial service includes the issuance, renewal, variation or transfer of ownership of an insurance policy but not any other qualifying instrument, the estimate of the net premium of the insurance policy; (b) If the financial service includes the issuance, renewal, variation or transfer of ownership of a qualifying instrument (other than an insurance policy), the estimate of the default risk premium that is directly associated with the qualifying instrument;... Page 8

9 STATUTORY INTERPRETATION TEXTUAL INTERPRETATION Page 9

10 s.217 Loading Any part of the value of the consideration for a supply of a financial service that is attributable to administrative expense, an error or profit margin, business handling costs, commissions, communication expenses, claims handling costs, employee compensation or benefits, execution or clearing costs, management fees, marketing or advertising costs, occupancy or equipment expenses, operating expenses, acquisition costs, premium collection costs, processing costs or any other costs or expenses of a person that makes the supply, other than commissions for a specified financial service or the part of the value of the consideration that is equal to (a) If the financial service includes the issuance, renewal, variation or transfer of ownership of an insurance policy but not any other qualifying instrument, the estimate of the net premium of the insurance policy; (b) If the financial service includes the issuance, renewal, variation or transfer of ownership of a qualifying instrument (other than an insurance policy), the estimate of the default risk premium that is directly associated with the qualifying instrument;... Page 10

11 s.217 Loading Any part of the value of the consideration for a supply of a financial service that is attributable to administrative expense, an error or profit margin, business handling costs, commissions, communication expenses, claims handling costs, employee compensation or benefits, execution or clearing costs, management fees, marketing or advertising costs, occupancy or equipment expenses, operating expenses, acquisition costs, premium collection costs, processing costs or any other costs or expenses of a person that makes the supply, other than commissions for a specified financial service or the part of the value of the consideration that is equal to (a) If the financial service includes the issuance, renewal, variation or transfer of ownership of an insurance policy but not any other qualifying instrument, the estimate of the net premium of the insurance policy; (b) If the financial service includes the issuance, renewal, variation or transfer of ownership of a qualifying instrument (other than an insurance policy), the estimate of the default risk premium that is directly associated with the qualifying instrument;... Page 11

12 s.217 Loading Any part of the value of the consideration for a supply of a financial service that is attributable to administrative expense, an error or profit margin, business handling costs, commissions, communication expenses, claims handling costs, employee compensation or benefits, execution or clearing costs, management fees, marketing or advertising costs, occupancy or equipment expenses, operating expenses, acquisition costs, premium collection costs, processing costs or any other costs or expenses of a person that makes the supply, other than commissions for a specified financial service or the part of the value of the consideration that is equal to (a) If the financial service includes the issuance, renewal, variation or transfer of ownership of an insurance policy but not any other qualifying instrument, the estimate of the net premium of the insurance policy; (b) If the financial service includes the issuance, renewal, variation or transfer of ownership of a qualifying instrument (other than an insurance policy), the estimate of the default risk premium that is directly associated with the qualifying instrument;... Page 12

13 s.217 Loading Any part of the value of the consideration for a supply of a financial service that is attributable to administrative expense, an error or profit margin, business handling costs, commissions, communication expenses, claims handling costs, employee compensation or benefits, execution or clearing costs, management fees, marketing or advertising costs, occupancy or equipment expenses, operating expenses, acquisition costs, premium collection costs, processing costs or any other costs or expenses of a person that makes the supply, other than commissions for a specified financial service or the part of the value of the consideration that is equal to (a) If the financial service includes the issuance, renewal, variation or transfer of ownership of an insurance policy but not any other qualifying instrument, the estimate of the net premium of the insurance policy; (b) If the financial service includes the issuance, renewal, variation or transfer of ownership of a qualifying instrument (other than an insurance policy), the estimate of the default risk premium that is directly associated with the qualifying instrument;... Page 13

14 s.217 Loading Any part of the value of the consideration for a supply of a financial service that is attributable to administrative expense, an error or profit margin, business handling costs, commissions, communication expenses, claims handling costs, employee compensation or benefits, execution or clearing costs, management fees, marketing or advertising costs, occupancy or equipment expenses, operating expenses, acquisition costs, premium collection costs, processing costs or any other costs or expenses of a person that makes the supply, other than commissions for a specified financial service or the part of the value of the consideration that is equal to (a) If the financial service includes the issuance, renewal, variation or transfer of ownership of an insurance policy but not any other qualifying instrument, the estimate of the net premium of the insurance policy; (b) If the financial service includes the issuance, renewal, variation or transfer of ownership of a qualifying instrument (other than an insurance policy), the estimate of the default risk premium that is directly associated with the qualifying instrument;... Page 14

15 s.217 Loading Any part of the value of the consideration for a supply of a financial service that is attributable to administrative expense, an error or profit margin, business handling costs, commissions, communication expenses, claims handling costs, employee compensation or benefits, execution or clearing costs, management fees, marketing or advertising costs, occupancy or equipment expenses, operating expenses, acquisition costs, premium collection costs, processing costs or any other costs or expenses of a person that makes the supply, other than commissions for a specified financial service or the part of the value of the consideration that is equal to (a) If the financial service includes the issuance, renewal, variation or transfer of ownership of an insurance policy but not any other qualifying instrument, the estimate of the net premium of the insurance policy; (b) If the financial service includes the issuance, renewal, variation or transfer of ownership of a qualifying instrument (other than an insurance policy), the estimate of the default risk premium that is directly associated with the qualifying instrument;... Page 15

16 s.217 Loading Any part of the value of the consideration for a supply of a financial service that is attributable to administrative expense, an error or profit margin, business handling costs, commissions, communication expenses, claims handling costs, employee compensation or benefits, execution or clearing costs, management fees, marketing or advertising costs, occupancy or equipment expenses, operating expenses, acquisition costs, premium collection costs, processing costs or any other costs or expenses of a person that makes the supply, other than commissions for a specified financial service or the part of the value of the consideration that is equal to (a) If the financial service includes the issuance, renewal, variation or transfer of ownership of an insurance policy but not any other qualifying instrument, the estimate of the net premium of the insurance policy; (b) If the financial service includes the issuance, renewal, variation or transfer of ownership of a qualifying instrument (other than an insurance policy), the estimate of the default risk premium that is directly associated with the qualifying instrument;... Page 16

17 Estimate of the Net Premium Black s Law Dictionary Gross Premium The net premium plus expenses (i.e. the loading), less the interest factor Loading Insurance. An amount added to a life-insurance premium to cover the insurer s business expenses and contingencies Net Premium The portion of the premium that covers the estimated cost of claims... The net premium in a life-insurance policy is calculated using an assumed interest and mortality-table rate; it does not include additional expense amounts that will be charged to the policyholder. Barron s Dictionary of Insurance Terms Net Single Premium pure cost of protection, or the premium covering the present value of future claims (not including loadings for the various expenses). Page 17

18 Estimate of the Net Premium ETA Part I Insurance Premiums other than Marine s. 3. Definitions In this Part [Part I of the ETA], net premiums means the gross premiums paid or payable under a contract of insurance, less dividends received or receivable in respect of the contract and less premiums returned on cancellation of the contract. Page 18

19 Estimate of the Net Premium Three possible definitions net premium means that portion of the gross premium that covers the insurer s estimated cost of claims. net premium means the gross premium excluding the insurer s expenses (sales commissions and other expenses) net premium means gross premiums received by the insurer less dividends paid and premiums refunded. Page 19

20 STATUTORY INTERPRETATION CONTEXTUAL INTERPRETATION Page 20

21 Pricing A Financial Services Product Derivative Present value of a future payment or stream of payments No risk premium as no assets lent or pledged Loan / Guarantee Assets lent or pledged Accordingly pricing includes a risk premium Insurance Hybrid Present value of a future stream of payments Assets pledged as capital & reserves Page 21

22 Pricing Insurance / Reinsurance Pure Premium (Expected Loss Cost) Rate = + Fixed Expenses + Variable Expenses + Profit & Contingencies = No GST = GST = No GST = No GST Page 22

23 Pricing Insurance / Reinsurance [Cost of Claims] [Expenses] [Gross Premium] = [Commissions] [Cost of Capital] Page 23

24 Estimate of the Net Premium Three possible definitions net premium means that portion of the gross premium that covers the insurer s estimated cost of claims. net premium means the gross premium excluding the insurer s expenses (sales commissions and other expenses) net premium means gross premiums received by the insurer less dividends paid and premiums refunded. Page 24

25 Insurance / Reinsurance & Loading [Cost of Claims] [Expenses] [Gross Premium] = [Commissions] [Cost of Capital] = Net Premium = Loading = Not Loading =?? Page 25

26 s.217 Loading Loans & Guarantees Any part of the value of the consideration for a supply of a financial service that is attributable to administrative expense, an error or profit margin, business handling costs, commissions, communication expenses, claims handling costs, employee compensation or benefits, execution or clearing costs, management fees, marketing or advertising costs, occupancy or equipment expenses, operating expenses, acquisition costs, premium collection costs, processing costs or any other costs or expenses of a person that makes the supply, other than commissions for a specified financial service or the part of the value of the consideration that is equal to (a) If the financial service includes the issuance, renewal, variation or transfer of ownership of an insurance policy but not any other qualifying instrument, the estimate of the net premium of the insurance policy; (b) If the financial service includes the issuance, renewal, variation or transfer of ownership of a qualifying instrument (other than an insurance policy), the estimate of the default risk premium that is directly associated with the qualifying instrument;... Page 26

27 Estimate of the Default Risk Premium Barron s Dictionary of Finance & Investment Terms Default Risk Risk that a debtholder will not receive interest and principal when due. Risk Premium In portfolio theory, the difference between the riskfree return and the total return from a risky investment.... Risk-Free Return Yield on a risk-free investment.... The capital asset pricing model (CAPM) used in modern portfolio theory has the premise that the return on a security is equal to the risk-free return plus a risk premium. Page 27

28 Insurance / Reinsurance & Loading [Cost of Claims] [Expenses] [Gross Premium] = [Commissions] [Cost of Capital] = Net Premium = Loading = Not Loading = Net Premium Page 28

29 Estimate of the Net Premium Two Remaining possible definitions net premium means that portion of the gross premium that covers the insurer s estimated cost of claims. net premium means the gross premium excluding the insurer s expenses (sales commissions and other expenses) Page 29

30 Division IV & Derivatives s. 217 Permitted Deduction (l) consideration... for a specified derivative supply... s. 217 Specified Derivative Supply (a) that is a supply of a financial service of issuing, renewing, varying or transferring the ownership of a financial instrument that is a derivative, or that is a supply made by an agent, salesperson or broker of arranging for the issuance, renewal, variance or transfer of ownership of a financial instrument that is a derivative; and (b) for which all or substantially all of the value of the consideration is attributable to (i) any error or profit margin, or employee compensation or benefits, reasonably attributable to the supply, and (ii) amounts that are not loading. Page 30

31 An Error or Profit Margin Any part of the value of the consideration for a supply of a financial service that is attributable to administrative expense, an error or profit margin, business handling costs, commissions, communication expenses, claims handling costs, employee compensation or benefits, execution or clearing costs, management fees, marketing or advertising costs, occupancy or equipment expenses, operating expenses, acquisition costs, premium collection costs, processing costs or any other costs or expenses of a person that makes the supply, other than commissions for a specified financial service or the part of the value of the consideration that is equal to (a) If the financial service includes the issuance, renewal, variation or transfer of ownership of an insurance policy but not any other qualifying instrument, the estimate of the net premium of the insurance policy; (b) If the financial service includes the issuance, renewal, variation or transfer of ownership of a qualifying instrument (other than an insurance policy), the estimate of the default risk premium that is directly associated with the qualifying instrument;... Page 31

32 STATUTORY INTERPRETATION PURPOSIVE INTERPRETATION Page 32

33 Purposive Interpretation Loading Department of Finance Backgrounder - November 17, 2005 While this interpretation is an issue for both supplies made in Canada and imported supplies, additional concerns arise in the case of imported supplies. Exempt financial services supplied in Canada are not entirely free of GST/HST, as suppliers in Canada incur unrecoverable GST/HST on the inputs into their supplies. However, exempt financial services imported into Canada could effectively be free of all GST/HST as there is no unrecoverable tax on inputs. Under the current rules, recipients of imported exempt financial services are not required to self-assess any GST/HST and suppliers outside Canada either do not pay any tax on their inputs or do not incur any unrecoverable value-added tax (VAT) since most VAT jurisdictions, including Canada, remove embedded taxes from exports of financial services. The differential treatment of exempt financial services imported into Canada vis-à-vis those supplied in Canada is inequitable. Page 33

34 Purposive Interpretation Loading Department of Finance Backgrounder - November 17, The other exclusions include items such as certain interest payments, dividends, consideration for a supply of a financial service supplied as part of a transaction or series of transactions in which all participants deal at arm s length with the FI and, in the case where the participant does not deal at arm s length with the FI, the portion of the consideration that represents the inherent financial element of the transaction or series (e.g., the pure risk premium). Page 34

35 Purposive Interpretation Loading Department of Finance Detailed Proposals - November 17, 2005 [After describing what loading includes]... By way of example, if the amount of an outlay or expenses included in A is the premium for an insurance policy supplied to a qualifying taxpayer by a related party, then the portion of the insurance premium covering the related party s expenses of doing business and margins will represent loading. However, the portion of that insurance premium covering an estimate of the quantum for expected future claims under that insurance policy would generally not represent loading and, therefore, would be allowed as a deduction under B. Page 35

36 Purpose Interpretation Loading Draft Legislation January 2007 Any part of the value of the consideration for a specified non-arm s length supply that is attributable to administrative expense, an error or profit margin, business handling costs, commissions (other than commissions for a specified financial service), communication expenses, claims handling costs, employee compensation or benefits, execution or clearing costs, management fees, marketing or advertising costs, occupancy or equipment expenses, operating expenses, acquisition costs, premium collection costs, processing costs and any other costs or expenses of a person that makes the specified non-arm s length supply, other than the part of the value of the consideration that is (a) In the case of a specified non-arm s length supply in respect of which the financial service includes the issuance, renewal, variation or transfer of ownership of an insurance policy but not any other financial instrument, the estimate of the quantum that an insured is expected to claim under the insurance policy; (b) In the case of a specific non-arm s length supply in respect of which the financial service includes the issuance, renewal, variation or transfer of ownership of a financial instrument (other than an insurance policy), the estimate of the default risk premium that is directly associated with the qualifying instrument;... Page 36

37 Purpose Interpretation Loading Revised Draft Legislation September 2009 Any part of the value of the consideration for a supply of a financial service that is attributable to administrative expense, an error or profit margin, business handling costs, commissions, communication expenses, claims handling costs, employee compensation or benefits, execution or clearing costs, management fees, marketing or advertising costs, occupancy or equipment expenses, operating expenses, acquisition costs, premium collection costs, processing costs or any other costs or expenses of a person that makes the supply, other than commissions for a specified financial service or the part of the value of the consideration that is equal to (a) If the financial service includes the issuance, renewal, variation or transfer of ownership of an insurance policy but not any other qualifying instrument, the estimate of the net premium of the insurance policy; (b) If the financial service includes the issuance, renewal, variation or transfer of ownership of a qualifying instrument (other than an insurance policy), the estimate of the default risk premium that is directly associated with the qualifying instrument;... Page 37

38 Purpose Interpretation Loading Technical Notes April 2010 However, there are certain risk estimates that may form part of the value of the consideration for a supply of a financial service. If these estimates are part of the value for the consideration for the supply, they are specifically excluded from the definition loading. For example, if the financial service supplied includes... an insurance policy... the estimate of the net premium of that insurance policy does not represent loading. A net premium generally corresponds to the average cost of a claim, multiplied by the probability that the event being covered will occur. Page 38

39 Purpose Interpretation Loading Technical Notes April 2010 Inputs for a supply of a financial service, which are largely administrative in nature, fall within the definition loading and, therefore, form part of the tax base that is subject to the self-assessment provisions in section and subsection 218.1(1.2). However, the part of the consideration for a supply of a financial service that is clearly and fundamentally financial in nature, like the specific estimates described above, generally do not form part of the tax base that is subject to the selfassessment provisions in section and subsection 218.1(1.2). Page 39

40 STATUTORY INTERPRETATION TEXTUAL, CONTEXTUAL, PURPOSIVE INTERPRETATION Page 40

41 Insurance / Reinsurance & Loading [Cost of Claims] [Expenses] [Gross Premium] = [Commissions] [Cost of Capital] = Net Premium = Loading = Not Loading =?? Page 41

42 Estimate of the Net Premium Three possible definitions net premium means that portion of the gross premium that covers the insurer s estimated cost of claims. net premium means the gross premium excluding the insurer s expenses (sales commissions and other expenses) net premium means gross premiums received by the insurer less dividends paid and premiums refunded. Page 42

43 s.217 Loading Loans & Guarantees Any part of the value of the consideration for a supply of a financial service that is attributable to administrative expense, an error or profit margin, business handling costs, commissions, communication expenses, claims handling costs, employee compensation or benefits, execution or clearing costs, management fees, marketing or advertising costs, occupancy or equipment expenses, operating expenses, acquisition costs, premium collection costs, processing costs or any other costs or expenses of a person that makes the supply, other than commissions for a specified financial service or the part of the value of the consideration that is equal to (a) If the financial service includes the issuance, renewal, variation or transfer of ownership of an insurance policy but not any other qualifying instrument, the estimate of the net premium of the insurance policy; (b) If the financial service includes the issuance, renewal, variation or transfer of ownership of a qualifying instrument (other than an insurance policy), the estimate of the default risk premium that is directly associated with the qualifying instrument;... Page 43

44 Pricing Insurance / Reinsurance Pure Premium (Expected Loss Cost) Rate = + Fixed Expenses + Variable Expenses + Profit & Contingencies = No GST = GST = No GST (Generally) = No GST Page 44

45 Purpose Interpretation Loading Technical Notes April 2010 Risk estimates are excluded from loading. A net premium generally corresponds to the average cost of a claim, multiplied by the probability that the event being covered will occur. Inputs for a supply of a financial service, which are largely administrative in nature, fall within the definition loading. However, the part of the consideration for a supply of a financial service that is clearly and fundamentally financial in nature, like the specific estimates described above, generally do not form part of the tax base. Page 45

46 Purposive Interpretation Loading Exempt financial services supplied in Canada are not entirely free of GST/HST, as suppliers in Canada incur unrecoverable GST/HST on the inputs into their supplies. However, exempt financial services imported into Canada could effectively be free of all GST/HST as there is no unrecoverable tax on inputs. Under the current rules, recipients of imported exempt financial services are not required to selfassess any GST/HST and suppliers outside Canada either do not pay any tax on their inputs or do not incur any unrecoverable value-added tax (VAT) since most VAT jurisdictions, including Canada, remove embedded taxes from exports of financial services. The differential treatment of exempt financial services imported into Canada vis-àvis those supplied in Canada is inequitable. Page 46

47 Estimate of the Net Premium Three possible definitions net premium means that portion of the gross premium that covers the insurer s estimated cost of claims. net premium means the gross premium excluding the insurer s expenses (sales commissions and other expenses) net premium means gross premiums received by the insurer less dividends paid and premiums refunded. Page 47

48 Insurance / Reinsurance & Loading [Cost of Claims] [Expenses] [Gross Premium] = [Commissions] [Cost of Capital] = Net Premium = Loading = Not Loading = Net Premium Page 48

49 STATUTORY INTERPRETATION RESIDUAL PRESUMPTION Page 49

50 Placer Dome Canada v Ontario Residual Presumption Although there is a residual presumption in favour of the taxpayer, it is residual only and applies in the exceptional case where application of the ordinary principles of interpretation do not resolve the issue.... Any doubt about the meaning of a taxation statute must be reasonable, and no recourse to the presumption lies unless the usual rules of interpretation have been applied, to no avail, in an attempt to discern the meaning of the provision at issue. Page 50

51 What is Insurance Insurance Act, R.S.O. 1990, c. I-8 Insurance means the undertaking by one person to indemnify another person against loss or liability in respect of a certain risk or peril to which the object of the insurance may be exposed, or to pay a sum of money or other thing of value upon the happening of a certain event, and includes life insurance. Page 51

52 STATUTORY INTERPRETATION QUESTIONS / DISCUSSION Page 52