Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1. Will paragraph 139.1(16) apply in respect of the distribution of Demutualization Proceeds by a paragraph 149(1)(l) organization to its members?
2. Will an organization exempt from taxation pursuant to paragraph 149(1)(l) lose its exempt status as a consequence of distributing Demutualization Proceeds received by the organization under group policies for the benefit of its members, to those members?
Position:
1. Yes, based on the facts provided.
2. Provided the amount distributed to the members does not exceed the Demutualization Proceeds (the taxable conversion benefit) received by the organization and provided the conditions in paragraph 139.1(16) are satisfied, the organization's status under paragraph 149(1)(l) should not be affected by the distribution.
Reasons:
1. Based on the facts in this case, the conditions for the application of subsection 139.1(16), without the requirement to file an election, have been satisfied. Consequently, paragraphs 139.1(16)(g) to (k) apply in this case.
2. Based on the facts in this particular case, paragraph 139.1(16) applies and pursuant to paragraph 139.1(16)(i), the payments will be deemed for purposes other than subsection 139.1(16), not to have been received by or made payable to the members.
XXXXXXXXXX 2000-004865
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance Tax Ruling - XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, as amended by your letter of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above named taxpayer. We also acknowledge the information provided during our various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in the ruling request
(i) is in an earlier return of the taxpayer or a related person,
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
(iii) is under objection by the taxpayer or a related person,
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
(v) is the subject of a ruling previously issued by the Directorate;
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed transaction and the purpose of the proposed transaction is as follows:
DEFINITIONS
For the purposes of this ruling request, the following terms are defined as follows:
"Demutualization Proceeds" means $XXXXXXXXXX as more particularly defined in paragraph 16;
"Demutualization Income" means the income earned on the Demutualization Proceeds as more particularly defined in paragraph 17;
"Distribution Amount" means the total of all the payments made to the Participating Individuals by XXXXXXXXXX ("Company X"), in respect of the Demutualization Proceeds received from Company A, and as defined in paragraph 19;
"Insurance Program" means XXXXXXXXXX which is more specifically defined in paragraph 2;
"Life Surplus Trust" means the Company X Life Insurance Plan Trust (tax identification number XXXXXXXXXX);
"Order" means the order of the court described in paragraph 18;
"Participating Individuals" means individual members of Company X or of XXXXXXXXXX who participated in the XXXXXXXXXX ("Company A Plans") at any time during the years XXXXXXXXXX;
"Company A" means XXXXXXXXXX;
"Company B" means XXXXXXXXXX;
"Company A Plans" means the basic life insurance plan for XXXXXXXXXX offered by Company A where the policyholder is Company X and more specifically described in paragraph 3;
"Company C" means XXXXXXXXXX; and
"Company D" means XXXXXXXXXX.
FACTS
1. Company X is a non-profit corporation for the purposes of paragraph 149(1)(l) and was incorporated under the Canada Corporations Act, R.S.C. 1970 c.C-32. XXXXXXXXXX. Its membership comprises corporate members (XXXXXXXXXX) as well as individual members. Its tax identification number is XXXXXXXXXX.
2. Company X offers its individual members various service programs including the Insurance Program which includes group life, disability and other insurance plans for individual members of Company X and/or the provincial co-sponsors (as described below), their employees and their dependants. To participate in the Insurance Program, one must be a member of Company X or of a XXXXXXXXXX that has agreed to co-sponsor the relevant insurance plan XXXXXXXXXX.
3. From XXXXXXXXXX, Company X was the policyholder for three group life insurance policies under the Insurance Program which had been issued by Company A (the "Company A Plans"). The Company A Plans comprised a XXXXXXXXXX basic life insurance plan, a XXXXXXXXXX dependants' life insurance plan and a XXXXXXXXXX staff life insurance plan. The basic life plan was evidenced by a master agreement between Company X and Company A, while each of the dependants' and staff life plans was evidenced by a group policy between Company X and Company A. Pursuant to such documents, Company X was the policyholder under all three plans (as of XXXXXXXXXX, Company X transferred the Company A Plans to a different insurance carrier, Company C).
4. Participants in the Company A Plans participated as life insureds through Company X under the above-noted master agreement or group policies. The participants paid all of the premiums for the insurance which they purchased through the Company A Plans. Company X did not pay any portion of the premiums.
5. No interest in the life insurance policy was held by a trust governed by a registered retirement savings plan, registered retirement income fund, deferred profit sharing plan or superannuation or pension fund or plan.
6. The Company A Plans were experience rated. Any positive balance of the premiums remaining after Company A's retention of amounts to cover its underwriting and claims costs, payment of claims, and funding of reserves pursuant to an Underwriting Agreement with Company X represented surplus funds. Any such surplus funds were paid by Company A to Company X following the end of each calendar year. In addition, the Underwriting Agreement provided that upon termination of the Company A Plans, Company A would be required to remit to Company X, over a XXXXXXXXXX period, any positive balances remaining in various retention reserve accounts.
7. The insurance retention, surplus and reserve funds which may arise under the Insurance Program plans are held in the Life Surplus Trust.
8. Surplus funds received by Company X under the Insurance Program plans are received qua trustee and Company X has no beneficial interest in the funds. XXXXXXXXXX.
9. Since the Demutualization Proceeds are not considered to be "insurance retention, surplus and reserve funds" and they conceptually have a different source than such funds, the Demutualization Proceeds are not regarded as trust assets of the Life Surplus Trust.
10. In XXXXXXXXXX, Company A commenced a process of demutualization, by which it caused itself to be converted from a mutual insurance company owned by its participating policyholders to a public company owned by shareholders.
11. As part of the demutualization process certain ownership rights of policyholders in Company A terminated, and in exchange policyholders became entitled to receive either shares of the new corporation, Company B, or cash in lieu of shares.
12. The demutualization of Company A was approved by eligible Company A policyholders at the Special Meeting held on XXXXXXXXXX. As a result, Company X became entitled to receive the "demutualization benefits", being either shares in Company B or the cash equivalents of such shares.
13. Company A allocated XXXXXXXXXX Company B shares to Company X. This number of shares consisted of two components - a fixed component and a variable component:
a) The fixed component consisted of a fixed number of XXXXXXXXXX shares which were allocated to each policyholder. The fixed component was intended to recognize the loss of voting control in Company A by eligible policyholders upon the demutualization.
b) The variable component consisted of a number of shares which varied among Company A policyholders and was calculated pursuant to a prescribed formula. The variable component was based on a formula which, for group insurance policies (such as the Insurance Program life insurance plans), took into account the length of time that the policyholders had held an eligible policy (the "time factor") and the amount of premium dollars which were paid under that group policy during the year XXXXXXXXXX (the "premium factor").
14. With respect to the time factor, Company X became a policyholder of the Company A Plans on XXXXXXXXXX (when Company A acquired Company D's life insurance portfolio) and Company X remained a policyholder until the specified date for the calculation as set out in the information circular issued in connection with the demutualization (XXXXXXXXXX). Under the formula, the number XXXXXXXXXX was then added to that number of years, and that sum was the "time factor" used in the formula.
15. The time factor was then multiplied by the premium factor. Under Company A's formula, the premium factor was the annual amount of premiums paid to Company A in XXXXXXXXXX in respect of life insurance coverage under the three Company A Plans. The product of this multiplication is called the "time weighted annual premium measure". Company A's formula allotted XXXXXXXXXX shares of Company B for each $XXXXXXXXXX of time-weighted annual premium measure, rounded up to the next whole of Company B share. In the case of the Company A Plans issued under the Insurance Program, this amounted to XXXXXXXXXX Company B shares.
16. In offering its policyholders an option to elect to receive either shares or cash in lieu of shares on the demutualization, Company A applied the price of $XXXXXXXXXX per share. For Company X, this meant that it was entitled to elect to receive either XXXXXXXXXX shares of Company B or the sum of $XXXXXXXXXX. Company X elected to receive the cash (the "Demutualization Proceeds").
17. Pursuant to Company X's direction, the Demutualization Proceeds are being held by Company C in an interest-bearing account and have earned interest income ("Demutualization Income") from the time that they were so invested.
18. As it was uncertain on what basis the Participating Individuals should share in the Demutualization Proceeds, Company X proceeded with an application seeking direction from the XXXXXXXXXX issued an order (the "Order"), which provides as follows:
a) Company X is lawfully entitled to distribute the Demutualization Proceeds and Demutualization Income, net of any Charges (fees, costs and other expenses incurred or to be incurred by Company X in preparing for and conducting the court application proceeding and in receiving and administering the distribution of the Demutualization Proceeds) and Taxes (any and all taxes which may be payable by Company X on any Demutualization Income), to all individuals who were participants in one or more of the Company A Plans at any time in certain specified calendar years. The Order also sets out a formula ("The Formula") for the allocation of the Demutualization Proceeds and the Demutualization Income (net of any Charges and Taxes), among the Participating Individuals.
b) Company X shall be entitled to deposit and treat as surplus funds of the Insurance Program, any and all amounts, calculated pursuant to The Formula, which may be unclaimed by any Participating Individual more than XXXXXXXXXX days following the day that Company X sends to such Participating Individual his/her portion of the Demutualization Proceeds.
c) Company X is entitled to deduct any and all Charges and Taxes from either or both of the Demutualization Proceeds and/or Demutualization Income, at Company X's sole discretion, prior to calculating the amount of the Participating Individuals' entitlements pursuant to The Formula.
19. The Distribution Amount will equal the excess of the Demutualization Proceeds and Demutualization Income over the costs and expenses incurred and to be incurred by Company X in connection with the receipt, administration and distribution of the Demutualization Proceeds. You have advised that the Distribution Amount will not exceed the Demutualization Proceeds.
PROPOSED TRANSACTIONS
20. In accordance with the Order, Company X proposes to distribute an amount equal to the Distribution Amount, as defined in paragraph 19, to the Participating Individuals. Company X's records will reflect the deduction of the costs and expenses relating to the receipt, administration and distribution of the Demutualization Proceeds, first from the Demutualization Income, and then to the extent necessary, from the Demutualization Proceeds.
PURPOSE OF THE PROPOSED TRANSACTIONS
21. The Demutualization Proceeds are a benefit arising from insurance policies which were maintained for the benefit of the Participating Individuals and the Participating Individuals paid all of the premiums on these policies. Company A determined the amount of Demutualization Proceeds to be received under each policy in reference to the premiums paid under the policy during specific years that the policy was in-force. Company X therefore, intends to distribute the Distribution Amount to the Participating Individuals in amounts which reflect the premiums paid by them individually for coverage in the years XXXXXXXXXX, in relation to the premiums paid by all the Participating Individuals under the policies which resulted in the Demutualization Proceeds, for those years.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our rulings are as follows:
A. We confirm that, provided Company X is a non-profit organization as defined in paragraph 149(1)(l), it will not be required to pay tax under Part I on the Demutualization Income or any portion of the Demutualization Proceeds not distributed to the Participating Individuals.
B. We confirm that either subparagraph 139.1(16)(f)(i) or (iv) will apply to the payment of the Distribution Amount to Participating Individuals as described in paragraph 20.
C. We confirm that,
i) the Distribution Amount will be deemed not to have been received by or made payable to the Participating Individuals pursuant to paragraph 139.1(16)(h), and
ii) the amount of any payment received by a Participating Individual, will be deemed to be a taxable dividend received by that Participating Individual from Company A pursuant to paragraph 139.1(16)(i).
Accordingly, Company X will not be considered to have made any of its income payable to or otherwise made available for the personal benefit of any of its members for the purposes of paragraph 149(1)(l).
The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Manager
Financial Institutions Section
Income Tax Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000
Email this Content