The taxpayer, a Canadian life insurance corporation which carried on its life insurance business exclusively in Canada, purportedly started carrying on a life insurance business in Bermuda in 2006, and prepared its returns for its 2006 and 2007 (calendar) taxation years on the basis that it had a s. 138(11.3) bump effective January 1, 2006 of $1.16B to the cost amount of the property which it reported as designated insurance property in its return for 2006 (the first year in which it reported designated insurance property) and which it had owned at the end of 2005.
Pizzitelli J found that in order for s. 138(11.3)(a) to apply, it was necessary for the taxpayer to qualify as an "insurer" in the preceding taxation year (2005), i.e., as a "life insurer resident in Canada that carries on an insurance business in Canada and in a country other than Canada" in that year, so that it was not sufficient for the taxpayer to have qualified as an insurer in the year of the bump claim (2006). The taxpayer, which admittedly had no non-Canadian business in 2005, thus was not eligible for the bump in 2006 (paras. 23-5). Consequently, its property in 2005 was neither "designated" nor "not designated" (para. 23). The taxpayer's appeal for 2007 also failed because there had been no change in designated status between 2006 and 2007. Paragraphs 138(11.3)(a) and (b) apply only where insurance property changes from "designated" to "not designated" or vice-versa (para. 28).
Furthermore, the purpose of the rule was not "to avoid taxation of property held before the Appellant became a multinational life insurer," and instead to" tax only changes in value during the time the property is held as designated insurance property, or, in other words, tax… gains that accrued in Canada" (para. 63).
In any event, the taxpayer did not carry on business in Bermuda in 2006 or 2007. After citing inter alia Caballero, Pizzitelli J stated (at para. 88):
[O]ne must determine whether it took serious and continuous steps to put in place the "essential elements" to carry on that intended [insurance] business or in other words to carry out its plan.
The intended Bermuda business did not commence until 2008 when it "started serious efforts to be able to carry out a life reinsurance business, including the essential elements of sales, marketing, and hiring qualified staff, all of which in fact led to the Appellant applying for and receiving changes to its licence which allowed it to do business with unrelated persons… result[ing] in the execution of at least 5 life reinsurance contracts with unrelated parties from 2009 to 2011" (para. 155). Conversely, desultory and isolated acts before then including hiring a bookkeeper (purportedly the general manager but with no underwriting experience and very little to do) and entering into two reinsurance treaties with affiliates in March 2007 (but with one of them backdated to December 2006) and obtaining a licence whose scope was inconsistent with that of the purported business "were designed to give the appearance the Appellant was carrying on such business for profit, when in fact, its only supportable purpose was to obtain a tax benefit" (para. 160), namely, to mitigate "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 value" (para. 161). Accordingly, "its actions were nothing more than ‘window dressing'" (para. 156), i.e., "a deception that is not about the legal validity of a transaction, as in sham, but about the taxpayers intention for entering into the transaction" (para. 158).