Prior to the introduction of mark-to-market rules in 2007, the taxpayer (which to that point only carried on its life insurance business in Canada) attempted to achieve a step-up to fair market value in the cost amount of its assets by purporting to commence carrying on business in Bermuda in December 2006. It relied on the s. 138(11.3) rule, which provides that where a Canadian life insurer also carried on business in another country and "designated insurance property of the insurer for a taxation year [2006], was owned by the insurer at the end of the preceding taxation year [2005] and was not designated insurance property of the insurer of the insurer for that preceding year," such property could be bumped in the 2006 return.
Pizzitelli J found that the taxpayer did not commence to carry on business in Bermuda 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." 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).
See summary under s. 138(11.3).