Capitol Life Insurance Company ("Capitol") was incorporated in the U.S.A. in the state of Colorado at the turn of the century. Its head office had always been in Denver, Colorado. Capitol was a subsidiary of Providence Capitol Corporation which in turn was a subsidiary of Gulf & Western Industries Inc. ("Gulf"). Gulf owned approximately 600 subsidiaries, 240 of which were in turn owned by Associates Corporation of North America ("Associates"). Six of these latter corporations were Canadian companies.
Capitol was in the business of writing individual and group life and health insurance policies. Capitol also wrote creditor's group life and health insurance policies for the 240 finance companies which were part of the Gulf group of companies. Under a creditor's group insurance policy, Capitol would pay to the finance company, upon the death or disability of the borrower, the outstanding amount of the loan in the case of death or the required instalment payments in the case of disability. The costs of the insurance were effectively passed on to the borrower, either as a separate charge or as a higher interest rate.
In the late 1960s, Capitol planned to expand into Canada and obtained licences in nearly every province and obtained federal registration under the Foreign Insurance Companies Act ("FICA"). The FICA registration required that Capitol name a chief agent in Canada and that he be given a power of attorney. Capitol was also required to make deposits with the insurance superintendent and maintain assets in Canada. Two bank accounts were opened in Canada. The planned expansion into Canada was cancelled. However, the licences and registration were maintained. This required that Canadian representatives and agents be retained as locations for the licensing authorities to serve legal notices. All reports to the licensing authorities and all inquiries of the licensing authorities were to be passed through the Canadian chief agent. The reports to the licensing authorities were prepared in Denver and all inquiries were passed on to Denver by the chief agent. The chief agent was required to maintain copies of records required by the superintendent of insurance. None of Capitol's representatives or agents ever solicited insurance or were expected or authorized to do any business.
The chief agent countersigned the cheques on Capitol's general bank account on the requirement of the insurance superintendent. He had no means to verify the legitimacy of the cheques; as all books and records were maintained in Denver where the cheques were prepared. The agent later deposited the premiums received in an effort to streamline the former procedure of having the premiums sent to Denver and then sent back to Canada through the bank for deposit into the Canadian general account to meet licensing requirements. All investments were administered and managed in Denver.
Capitol did not have anyone in Canada who solicited insurance business, collected premiums, processed or paid claims, administered investments or countersigned any claim cheques. Capitol had five group insurance contracts under which the lives of Canadian residents were insured. These policies were all issued to affiliated companies without solicitation in Canada. Two of these policies were creditor's group insurance policies with Associates. They were each drafted in accordance with Denver law and signed in Denver by the president of Associates, who was a resident of Indiana. Associates was shown as the insured company and paid all premiums. On the insistence of the Canadian insurance authorities, the wording of the agreements was amended to reflect "a premium collection fee". The original agreement provided for a retroactive adjustment of premiums based upon past claim experience. Capitol and Associates continued to administer, interpret and apply the agreement in the same manner as the original agreement. Blank insurance certificates were also required to be issued so that they could be provided to borrowers whose loans were insured as a way of informing them of the terms of the coverage. The coverage took place independently of the issuance of a certificate to an individual. These certificates listed the Canadian head office of Capitol as being in Don Mills, Ontario, as required by the federal insurance superintendent. This office was never used as a head office. The federal insurance superintendent also required the issuance of a brochure for the information of the Canadian borrowers whose lives and health were insured.
The income that Capitol received from the Canadian insurance and investments represented a very small proportion of its total revenue. Canadian operations were not kept separately from U.S. operations, no Denver personnel were charged with Canadian operations, and there were no special Canadian claim forms or procedures. The only separation of Canadian business from U.S. operations to be found in the accounts of Capitol was to comply with the Canadian insurance authorities. All corporate meetings as well as all levels of management took place in the U.S.A.
REQUIRED
Prepare a memo for the tax person in your firm who will advise Capitol on the income tax consequences of these facts. Evaluate in detail the alternatives in the residence issue as they relate to this fact situation. Discuss each possible degree of residence and its tax consequences. State your conclusions on this case after weighing the relevance of the facts you have considered.