Tax Court of Canada Judgments

Date: 19980916

Docket: 96-77-GST-G

BETWEEN:

MITCHELL VERIFICATION SERVICES GROUP INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bowie, J.T.C.C.

[1] This is an appeal from an assessment made under the provisions of the Excise Tax Act (the Act) relating to the Goods and Services Tax (GST). The assessment is dated January 26, 1995, and it is in respect of services provided by the Appellant company to various clients in the insurance industry between 1990 and 1994. The exact amount of the assessment was not established before me, nor is it essential to the decision of the appeal, but I was advised that approximately $150,000.00 in tax, interest and penalty is at stake. At issue is whether the services provided by the Appellant fall, in whole or in part, within the definition of “financial services” found in subsection 123(1) of the Act, and therefore are exempt from the charging provisions by reason of the inclusion of “financial services” in Schedule V, Part VII. If the services do not come within that definition then they are subject to tax, and the appeal fails.

[2] At the outset, I was advised by counsel during a telephone conference that the Appellant company has been inactive for about two years, and that the records of the company were not available except through compulsion by the Court, either by way of an Order for production under Rule 86, or by way of subpoena. The result of this, I was told, is that it would be very time consuming and expensive to obtain all of the investigation files of the Appellant for the relevant time period, and to go through each of them at the trial to examine the exact nature of the service rendered in each case, to see whether or not it falls within the definition of a financial service. I therefore agreed that the trial should be conducted in two stages. The first stage will determine whether the services provided by the Appellant to an insurer fall within the exemption claimed if the Appellant, in the particular case, made a recommendation to the insurer as part of the services rendered. If the answer to that question is negative, then the appeal will be dismissed. If the answer is affirmative, then the trial will be resumed, and a further determination made on a case-by-case examination as to the extent to which the services provided by the Appellant during the period of the assessment were within the exempt category. In that event I will make an Order under Rule 86, to be followed by further examination for discovery, prior to the resumption of the trial.

[3] The definition in question, so far as it is relevant here,[1] and at the relevant time, read as follows:

123(1) In section 121, this Part and Schedules V, VI and VII, ...	123(1) Les définitions qui suivent s’appliquent à l’article 121, à la présente partie et aux annexes V, VI et VII. ...
financial service means ...	service financier ...
(j) the service of investigating and recommending the compensation in satisfaction of a claim under an insurance policy where the service is supplied by an insurer or by another person who, except in the case of a claim under a marine insurance policy, is licenced under the laws of a province to provide such service,	j) le service consistant à faire des enquêtes et des recommandations concernant l’indemnité accordée en règlement d’une réclamation faite aux termes d’une police d’assurance, qui est fourni par un assureur ou par une autre personne qui, sauf s’il s’agit d’une réclamation faite aux termes d’une police d’assurance maritime, est autorisée par permis obtenu en application de la législation provinciale à rendre un tel service.

[4] In the first phase of the trial, I heard evidence from Mr. Robert Gutwein, the retired claims manager of a large insurance company which had been a client of the Appellant during the relevant period, and from Mr. Kenneth Mitchell, who was the founder and president of the company, as to the nature of the services which the Appellant provided to insurers. I also heard the evidence of Mr. Reginald Riddles, a retired claims manager of considerable experience, as to the nature of the services which, in his experience, insurers purchase from firms of private investigators, and from independent insurance adjusters working under contracts for services.

[5] The advent of what is called no-fault automobile accident insurance in the province of Ontario brought considerable change to the insurance industry, as to both the types of claims brought against insurers, and the way in which insurers dealt with those claims. Mr. Mitchell spent some time in the state of Michigan, where there had been a no-fault regime for some years. He studied the practices of the industry there, and of the investigators and adjusters who provided services to it. He then returned to Ontario, where he sought to put his new knowledge to use by marketing to general insurance companies in Ontario an investigation service tailored to fit their needs, particularly the new needs arising out of the no-fault system.

[6] At the core of Mr. Mitchell’s service was a document which he created, entitled Investigation of First Party Claim. This document was described in the evidence as being a protocol to be used in the investigation and settlement of claims under Ontario’s new no-fault insurance system. It is a book about one inch thick, and divided into 24 sections, which might be described as a blueprint for the investigation of insurance claims. It includes templates to guide the interviews of claimants, witnesses, and others from whom information is to be obtained. It gives directions for making diagrams of accident scenes, for taking photographs, and for the inspection of damaged property. It has sections dealing with the detection of malingering and other forms of fraud. This protocol was offered by Mr. Mitchell’s company to the industry, both as a tool for the use of insurance companies in directing the work of their adjusters and claims personnel, and as a demonstration of the way in which the Appellant’s investigative staff would go about their work on behalf of those insurers who retained the company’s services. It is a very thorough document, and I have no doubt that investigations done by the company, in accordance with that protocol, would be very complete and reliable.

[7] At the peak of its operations, the Appellant company had a staff of about 30, including investigators, at least one kinesiologist and one accountant. The Appellant’s contention is that this staff, in the course of its work for insurers, investigated the factual aspects of claims, and in addition made recommendations to the insurers as to the compensation to be paid to settle them. I have no doubt that the Appellant furnished a wide variety of investigative services to the industry, and that those services were very valuable to insurers. As it was put by Mr. Gutwein, a retired claims manager of a major general insurance company, the Appellant’s services were very valuable to his company, and became a critical part of determining the value of claims made against it. The accountant provided assessments of loss of income claims of self-employed insureds. The kinesiologist was able to analyse video surveillance tapes, and thereby determine the range of motion which personal injury claimants could be expected to achieve. This, in turn, permitted her to detect malingerers, to recommend a course of rehabilitative treatment, or to determine, on the basis of that range of motion, which occupations an injured person could perform.

[8] There was, however, very little direct evidence to establish that recommendations as to compensation formed a part of the service provided by the Appellant to its clients in the insurance industry. The evidence of Mr. Gutwein was that, in his experience, his company did from time to time get recommendations from investigators in the course of their investigations. He did not, however, cite any example of an instance in which an investigator made a recommendation to his company of an amount to be paid to settle a compensation claim. The kinds of recommendations that he referred to as having been received from investigators were that further investigative work be done, that a claim was excessive, or that an individual was malingering. In one specific case, video surveillance of a claimant who was collecting income replacement payments from the insurance company revealed that in fact he was working, and not disclosing his income to the insurer. As a result of this investigation his benefits were terminated, at the recommendation of the Appellant.

[9] Mr. Mitchell did not refer in his evidence to any instance in which his company had given an insurance company specific advice in the form of a recommendation that a particular claim be settled for a specific amount of compensation. He did testify that on a number of occasions his company, having uncovered evidence that a claim being advanced was fraudulent, recommended that nothing be paid to the claimant. He also testified that on specific occasions the kinesiologist made recommendations to insurers as to the kind of work that a claimant could undertake following an accident, and also as to the kind of treatment that the insurer should provide to the insured pursuant to its statutory obligation to provide rehabilitative treatment. Counsel for the Appellant argued that in these two classes of cases, at least, there was a specific recommendation made as to compensation; in the first category of cases it was that there should be no compensation, and in the second it was that the compensation should include specific treatment or therapy.

[10] I conclude from the evidence of these witnesses that the services provided by the Appellant company to its clients in the insurance industry did, at least on some occasions, include the provision of both information and recommendations as to a future course of action. Those recommendations did not include specific advice as to the appropriate amount to be paid in final settlement of a claim, but did, in some cases, touch on the question of compensation, but in a limited way only. This is consistent with what is found in Exhibit R-1, which is a copy of a brochure prepared by the Appellant for distribution to potential clients. It sets out in some detail the services which are offered to various potential client groups. Nowhere in the description of services offered to the insurance industry is there mention of recommendations as to the appropriate amount at which claims might be settled.

[11] Reginald Riddles gave evidence as to the respective roles played by insurance adjusters and private investigators in the settlement of claims by accident insurers. He has more than 40 years of experience dealing with insurance claims, 38 of them as an employee of a large general insurance company, where he held the position of claims manager from 1980 until he retired in 1992. Since that time, he has acted as a consultant for two other general insurance companies. He is well qualified to testify as to the practice of general insurance companies in handling claims. His evidence as to the respective roles of adjusters and private investigators is contained in three paragraphs of the written statement of his evidence, which read as follows:

In my experience companies employ their own insurance claims adjusters operating under the company licence in different capacities, often distinguishing between them as telephone adjusters who generally handle smaller claims dealing directly with the insured person and road adjusters, who go out to visit the insured, inspect damaged property, and take statements. In either case, when these company adjusters receive a report of a claim they gather information, they ensure that the loss being reported is covered by the policy, they establish a value of the claim and negotiate a settlement. Telephone adjusters usually have a low dollar authority, and within that authority may dispose of claims. Road adjusters often deal with larger claims than telephone adjusters and may be dealing with lawyers on the claim. Normally the road adjusters who have their own settlement authority would be reporting to a company claims examiner who generally has a higher settlement authority and more experience. That examiner would give direction and settlement authority to the road adjuster when required.

Some insurance companies have a large staff of company adjusters, others do not. Independent insurance adjusters, who must be licenced, are hired by companies to perform a role similar to that of the staff adjuster. Independent adjusters must take courses relating to insurance and be examined before they are licenced. They investigate, report, recommend further investigation by specialists such as appraisers or engineers, recommend surveillance by private investigators, recommend that the file be turned over the a lawyer, or they may recommend settlement and the compensation to be paid, making such recommendation to the company examiner to whom they report who would then give authority to negotiate settlement. Usually an independent adjuster has no settlement authority until he obtains it on a specific file from the company claims examiner.

In my experience private investigators are used by insurance companies to carry out surveillance on individuals, usually in claims relating to bodily injury. They are also used to investigate accident scenes, take statements and do financial or background checks particularly in suspicious circumstances. The investigators then report, either to the staff or independent adjuster, examiner or lawyer who has hired them. In my experience investigators are not asked for recommendations as to the compensation to be paid in satisfaction of a claim under an insurance policy. It is the job of the adjuster or the claims examiner to decide on the course of action to take, including the compensation to be paid, based on the information provided in the investigators’ report.

[12] This opinion was not in any way shaken in cross-examination, and I accept it as accurately depicting the usual functions of insurance adjusters and private investigators in the relevant context.

[13] It is not in dispute that the Appellant company was, at all relevant times, licenced pursuant to the Private Investigators and Security Guards Act[2] of Ontario (PISG Act). Nor is it disputed that it was not licenced to provide the services of an insurance adjuster under the Insurance Act[3] of Ontario.

[14] Counsel for the Appellant argued that in considering whether the Appellant’s services, or some of them, are included within that defined by the words of paragraph (j) of the definition, I should consider both the nature of the services which the Appellant performs, and the services which it is licenced to perform. The actual licence issued to the Appellant is not before me, but the extent of the services which it is licenced to perform may be ascertained from the words of the statute. Its licence is issued under the PISG Act, which in section 1 defines a “private investigator” in the following terms:

“private investigator” means a person who investigates and furnishes information for hire or reward, including a person who,

(a) searches for and furnishes information as to the personal character or actions of a person, or the character or kind of business or occupation of a person,

(b) searches for offenders against the law, or

(c) searches for missing persons or property;

[15] In her submission, the functions of investigating and furnishing information include the provision of advice, and in the context of this appeal the provision of advice as to the compensation to be paid in respect of a claim. She supports the argument by reference to a number of authorities dealing with the principles of statutory interpretation.

[16] In my view, it is not necessary to resort to interpretative principles. The verbs used in this definition are “to investigate”, “to furnish” and “to search”. These are clear words, of reasonably certain meaning, and I am bound not to ignore or depart from their meaning and embark upon a search for some supposed intention of Parliament.[4]

[17] In considering paragraph (j) of the definition, a number of things should be kept in mind. First, it exempts only one service, “the service of investigating and recommending the compensation in satisfaction of a claim ...”. It follows that the reference to “a person ... who is licenced under the laws of a province to provide such service” must require that the provincial licence specifically apply to both “investigating” and “recommending”. What section 8 of the PISG Act authorizes is the issuing of a licence to act as a private investigator, a function which, as the definition of private investigator shows, does not involve the making of recommendations. Consequently, any recommendation made by a licenced private investigator in Ontario does not form any part of the function which the licence authorizes.

[18] It is not by chance that Parliament used the form of words that it did to define the function that is described in paragraph (j) of the definition. The roles of the private investigator and the insurance adjuster are distinct ones, notwithstanding that there may be some degree of overlap in what they do in practice. What separates one from the other is the element of negotiating and recommending the settlement of claims, which is part of the function of the adjuster, but not of the private investigator. This is made clear by the evidence of Mr. Riddles to which I referred earlier. See also The Atlas Assurance Company v.Brownell.[5]

[19] The provincial legislation does not use the verb “recommend”. It does, however, recognize the different functions of the private investigator and the insurance adjuster, and provide for two separate licencing systems for them. This is so not only in Ontario, where the present case arises, but in all ten provinces.[6] Parliament chose its words carefully, to ensure that the services of provincially licenced insurance adjusters, and not those of provincially licenced private investigators, would be exempt from the charging provisions of the Act.

[20] As I have noted above, there was some evidence that the Appellant firm from time to time made recommendations to its insurer clients. On at least one occasion, the recommendation was as to at least an element of the compensation to be provided to a claimant under a no-fault automobile insurance policy, in the form of rehabilitative therapy. To the extent that it did so, it was providing a service beyond the scope of its licence. However, it is not simply the scope of the service provided, but the scope of both the service provided and the licence permitting it to be provided, which determine whether or not the service falls within paragraph (j) of the definition.

[21] Accordingly, even in those cases where the Appellant made a recommendation as to the compensation, its services do not fall within the words of paragraph (j), and they are therefore not exempt.

[22] The appeal is dismissed, with costs.

Signed at Ottawa, this 16th day of September, 1998.

"E.A. Bowie"

J.T.C.C.

APPENDIX ‘A’

Insurance Adjusters Act, R.S.N. 1990, c.I-8.

Private Investigation and Security Services Act, R.S.N. 1990, c.P-24.

Insurance Act, R.S.P.E.I, 1988, c.I-4, s.s. 1, 369-375.

Private Investigators and Security Guards Act, R.S.P.E.I 1988, c.P-20.

Insurance Act, R.S.N.S. 1989, c.231, s.s. 3, 53-63.

Private Investigators and Private Guards Act, R.S.N.S. 1989, c.356.

Insurance Act, R.S.N.B. 1973, c.I-12, s.s. 1, 358.

Private Investigators and Security Guards Act, R.S.N.B. 1973, c.P-16.

Loi sur les Intermédiaires de Marché, R.S.Q., c.I-15.1, s.1, 7-28.

Loi sur les Agences d’investigation ou de sécurité R.S.Q., c.A-8.

The Insurance Act, R.S.M. 1987, c.140, s. 1, 385-392.

The Private Investigators and Security Guards Act, R.S.M. 1987, c.P-132.

The Saskatchewan Insurance Act, R.S.S. 1978, c.S-26, s.s. 2, 447-462.

The Private Investigators and Security Guards Act, R.S.S. 1978, c.P-26.

The Insurance Act, R.S.A. 1980, c.I-5, s.s. 1, 512, 530-535.

The Private Investigators and Security Guards Act, R.S.A. 1980, c.P-16.

Financial Institutions Act, R.S.B.C. 1996, c.141, s.s. 161, 179-185.

The Private Investigators and Security Agencies Act, R.S.B.C. 1996, c.374.

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