Lumbers v. The Minister of National Revenue

HUDSON J.-The appellant made a return for the year 1940, showing as income received in that year $1,500 from an annuity paid by the Mutual Life Assurance Company. He claimed an exemption in respect of same to the extent of $1,200. This claim to exemption was disallowed by the Minister on the ground

that under the provisions of Section 3 (b) of the Act, income includes annuities or other annual payments received under the provisions of any IMME.

contract except as in this Act otherwise provided; that the provisions of paragraph (k) of Section 5 of the Act are not applicable as the said annuity contract was not similar to those issued by the Dominion Government and the decision of the Minister in this respect is final and conclusive and that under no other provisions of the Act is the said J. annuity exempt from tax.

An appeal to the Exchequer Court was dismissed. In 1918 the appellant insured his life with the Mutual Life Assurance Company. Under the terms of the policy, upon paying his premiums for twenty years he became entitled at his option to either a lump sum or annual payments for the remainder of his life. In case of his death his representative was entitled to substantial benefits. It was in fact what is commonly called an endowment policy. The appellant completed his annual payments and on the 2nd of December, 1938, he signed what was called a "direction re optional settlement" by which he elected to receive annual payments rather than a lump sum. It is the amount received from this source in the taxation year of 1940 which gives rise to the present controversy. Although the appellant claimed in his return exemption to the extent of $1,200 only, in these proceedings he has claimed alternatively that the whole amount received is exempt under the provisions of the amendment to the statute of 1930, or in the alternative to an exemption to the extent of $1,200 under the provision of 1932. He also claims that the payments were in the nature of a return of capital and, therefore, not taxable under the Act. The relevant statutory provisions are as follows: 3. For the purposes of this Act, "income" means the annual net profit or gain or gratuity

* received by a person from (b) annuities or other annual payments received under the provisions of any contract except as in this Act otherwise provided. The deductions and exemptions allowed are specified in section 5 of the Act as follows:

5. "Income" as hereinbefore defined shall for the purposes of this Act be subject to the following exemptions and deductions.

(k) The income arising from any annuity contract entered into prior to the twenty-fifth day of June, 1940, to the extent provided by section three of chapter twenty-four of the statutes of 1930 and section six of chapter forty-three of the statutes of 1932 * * *

By the Statutes of 1930, chapter 24, section para- . graph (k), it was provided:

By the Statutes of 1932, chapter 43, paragraph (k) above referred to was repealed and the following substituted therefor:

To entitle the appellant to total exemption under the Statutes of 1930 the payment must arise from an annuity contract with a company "effecting like annuity contracts" (that is, annuity contracts like those being issued by the Dominion or a province).

It is fairly clear on the evidence that the contract entered into in 1918 was not like any contract then being issued by the Dominion or by the provinces. It was so held by the Minister and by the learned President in the court below and I agree with them.

But it is contended that the exemption given by the statute extends to annual payments made by companies who in fact sold annuities similar to those issued by the Dominion or a province, even if the particular contract in question was unlike any of those so issued.

The wording of the section lends some colour to this argument, but when Parliament was legislating 'about annuities it gave exemption to some but not all annuities and the purpose seems to have been to extend such exemption to those issued by companies. No reason is suggested for granting a greater privilege in respect of money paid under contracts of private companies than those procurable from the Government. I am of the opinion that this contention fails.

Under the amendment of 1932 this question does not arise. The language is "annuity contracts with the Dominion or like annuity contracts with companies". It is next contended that when the exercise of the option became effective in 1939 the contract had been stripped of all insurance benefits and what remained was in fact only an annuity contract similar to those issued by the Dominion. The rights of the appellant and the obligations of the liudson company upon the exercise of the option were determined by the contract of 1918. The payments made by the company to the appellant were made in fulfilment of its promise made in 1918. What is spoken of as an exercise of an option was properly called in the instrument itself a "direction" and it was a direction as to how the benefits which had accrued to the appellant should be satisfied. I am of the opinion that the appellant fails on this point. The appellant also raised in this Court for the first time a claim that the payment in question was in the nature of a return of capital, citing the decision of this Court in Shaw v. Minister of National Revenue (1).

Subsequent to that decision, paragraph (b) of section 3 of the Act as considered in the Shaw case was repealed and there was substituted therefor the following:

It was argued on behalf of the Minister that this amendment no longer left room for the argument which was successful in the Shaw case (1) and with this I agree.

Another argument pressed upon us was that by the final clause of paragraph (k) of section 5 the decision of the Minister was final -and conclusive.

Having come to the same conclusion as the decision of the Minister that there was no like annuity contract in the present case, it becomes unnecessary to decide whether or not the decision of the Minister is conclusive.

I would dismiss the appeal with costs.

J.-This is an appeal from the Exchequer Court which upheld a ruling by the Minister of National Revenue that a payment of $1,500 received by the appellant during the year 1940 was not income arising from an annuity contract within the exemption provisions of the Income War Tax Act.

The contract, under which monthly payments of $125 were made, was entered into in the year 1918. In general, its terms provided for the payment of annual premiums for twenty years, upon the completion of which the insurance company, subject to a lump sum commuted value option, would pay to the appellant, the insured, the sum mentioned during his lifetime, and, at his death, to his wife for her lifetime. Underlying both these life interests was a guaranteed period of twenty years. During the payment of the premiums the contract constituted a policy of insurance and, on the death of the insured, the monthly sums would become payable to his wife, if then living, for her lifetime, with the same guarantee of twenty years. There was provision also for the payment of dividends both during the endowment period and thereafter, and as well for cash surrender values, loan values and paid-up term insurance options. Both the assured and his wife were living on January 1st, 1939, when the policy matured and when the monthly instalments became payable.

In 1930 the Income War Tax Act was amended to the effect that income to -the extent of $5,000 derived from annuity contracts with the dominion or provincial governments or with a properly licensed incorporated company "effecting like annuity contracts" should be exempt from taxation.

In 1932 this was in turn amended by reducing the amount of exemption to $1,200 but preserving the exemption of the 1930 legislation to all contracts entered into prior to May 26th, 1932, when the 1932 Act came into force. In 1940 a further amendment was made by which the exemption was limited to the income arising from an annuity contract entered into before the 25th day of June, 1940, to the extent provided by the legislation of 1930 and 1932.

No question arises as to whether these annual sums are or are not income within the definition of that term in the Income War Tax Act. The amount received during 1940 was included in the return of the appellant and it is only on the question of the right to the exemption claimed that this appeal turns.

The amendment of 1930 provided that -the decision of the Minister in respect of any question arising under the paragraph dealing with annuities should be final and conclusive. Such a question did arise under that paragraph, section 5, par. (k), and it was whether the contract of the appellant was one "like" an annuity contract of the governments mentioned.

Some point was made that the language of the 1930 amendment, "income derived from annuity contracts with *

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* any com- J. pany incorporated or licensed to do business in Canada effecting like annuity contracts", characterized only -the company and not the actual contract and it was argued that, as admittedly the insurance company in question did both in 1918 and 1939 issue contracts of the same sort as those made by the dominion and provincial governments, the contract in the case, being an annuity contract issued by such -a company, was, therefore, within the exempting legislation. On its true construction,- however, the language used in 1930 must be taken to refer not only to the company but to the contract out of which the payments arise, and the question remains whether or not the contract upon which the appellant stands is an annuity contract like those 'at the time issued by the two governments.

Whether, at the time it was made, the contract could properly be described as an "annuity contract" is extremely doubtful. It was argued to be a contract of insurance plus annuity. But it is also contended that, whether or not it was so before 1939, on January 1st of that year all insurance features had dropped and that at that moment it had become both 'an annuity contract and one with the characteristics of government contracts: it is then urged that in each case the question to be 'asked under the Income War Tax Act is this: what is the nature of the obligation under which the income is paid at the moment when it is paid? and from these premises the conclusion of exemption is drawn.

In the amendments made in 1930, 1932 and 1940, what is dealt with is an "annuity contract entered into" prior to certain dates. That language is plain and well understood. The contract here was entered into in 1918 and the payments arising in 1939 flow from the obligations then created. What is contemplated is an annuity contract as of the time of its being made and not as of any moment thereafter which may mark the beginning of some stage of performance under it.