2001 Ruling 2000-0049203 - Offshore Reinsurance

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: Under a proposed arrangement, a non-resident insurance corporation with a branch office in Canada will provide XXXXXXXXXX insurance through a subsidiary in provinces where the insurance does not need to be underwritten by a regulated entity, and directly in provinces where the insurance does. The subsidiary will reinsure XXXXXXXXXX % of its risk with the branch office; the branch office will reinsure XXXXXXXXXX % of its direct risk, and retrocede XXXXXXXXXX % of the subsidiary's risk with a related captive situated in a tax haven. As a result, the only income that will be subject to Canadian taxation is the portion of the premiums retained by the subsidiary and the reinsurance commissions received by the branch office. We are asked to confirm that the subsidiary will be an insurance company within the meaning of section 138 of the Act, that the branch will be entitled to claim a reserve in respect of its reinsurance commissions, and for comments on the application of subsection 18(9) to the outlays and expenses of the branch office and the subsidiary.

Position: The subsidiary will be carrying on an insurance business. The branch office will be entitled to claim a reasonable reserve in respect of unearned reinsurance commissions. The outlays and expenses of the two entities will be subject to subsection 18(9); clause 18(9)(a)(iii)(A) will apply in respect of the reinsurance premiums paid by the subsidiary to the branch and by the branch to the captive.

Reasons: Each ruling was dependent upon a finding of fact that the subject matter of the contracts would be insurance and that each of the subsidiary and the branch office would in fact be directly underwriting the risks they are purporting to insure. The rulings are dependent upon the captive being sufficiently capitalized to underwrite the risks it is undertaking to reinsure - see XXXXXXXXXX

XXXXXXXXXX 2000-004920

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

RE: Advance income tax ruling request
XXXXXXXXXX ("Y Co.") XXXXXXXXXX
XXXXXXXXXX ("X Co.") XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX in which you request an advance tax ruling on behalf of the above named taxpayers. We also acknowledge the information provided in your subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayers 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 center 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 relevant definitions, the facts, proposed transactions and the purpose of the proposed transactions is as follows:

DEFINITIONS

XXXXXXXXXX.

"B Co." means XXXXXXXXXX.

"Customer" means a person who enters into either a XXXXXXXXXX contract with Y Co. or a XXXXXXXXXX contract with X Co.

"XXXXXXXXXX Agreement" means the contracts described in this ruling request made between the XXXXXXXXXX and Y Co. and the XXXXXXXXXX and X Co.

XXXXXXXXXX.

"XXXXXXXXXX" means the contract described in this ruling request providing XXXXXXXXXX to customers of Y Co.

"XXXXXXXXXX" means the contract of insurance described in this ruling request providing XXXXXXXXXX to customers of X Co. XXXXXXXXXX.

"NRI" means XXXXXXXXXX, a non-resident insurance corporation related to X Co.

"Reinsurance Agreement" means the contract described in this ruling request by which X Co. cedes to NRI its XXXXXXXXXX risk obligations and its Y Co. Risk Participation Agreement obligations.

"Service Contract" means the contract that provides for administrative services relating to the warranty program to be supplied by B Co. to Y Co..

"X Co." means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX and carrying on the business of property and casualty insurance in Canada through a permanent establishment.

"Y Co." means XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX.

"Y Co. Risk Participation Agreement" means the contract described in this ruling request which provides for the insurance of Y Co.'s risk under XXXXXXXXXX contracts with X Co. in return for a premium.

"Z Co." means XXXXXXXXXX.

FACTS

1. X Co. is not resident in Canada. Its Business Number is XXXXXXXXXX, its Tax Services Office is the XXXXXXXXXX Tax Services Office and its Tax Centre is the XXXXXXXXXX.

2. Y Co. is a taxable Canadian corporation as defined in subsection 89(1). Its Business Number is XXXXXXXXXX, its Tax Services Office is the XXXXXXXXXX Tax Services Office and its Tax Centre is located in XXXXXXXXXX. All of the issued shares of Y Co. are owned by Z Co.. Y Co.'s sole business will be to offer XXXXXXXXXX warranty coverage.

3. Z Co. is a taxable Canadian corporation as defined in subsection 89(1). The common and preferred shares of Z Co. are owned by X Co.

4. NRI is a corporation incorporated under the laws of XXXXXXXXXX. NRI will not, at any time, be resident in Canada nor will it carry on business in Canada through a permanent establishment.

5. B Co., Y Co., Z Co. and NRI are related to X Co. within the meaning of subsection 251(2) since they are controlled by a common parent company X Co.

6. XXXXXXXXXX and the XXXXXXXXXX are at arm's length with each of Y Co., Z Co., X Co., B Co. and NRI.

7. None of B Co., Y Co., Z Co., NRI or X Co. is related within the meaning of the Act to XXXXXXXXXX.

PROPOSED TRANSACTIONS

XXXXXXXXXX.

8. X Co. will sell XXXXXXXXXX in provinces XXXXXXXXXX . Under the terms of the XXXXXXXXXX policy:

a) X Co. will be the principal to the contract.

b) The Customer will select the desired level of XXXXXXXXXX coverage and term of coverage.

c) XXXXXXXXXX.

d) XXXXXXXXXX.

e) Customers may be required to pay a deductible depending on the coverage selected and the location of the repair.

f) XXXXXXXXXX.

g) Customers may cancel a policy and receive a refund of a portion of the policy purchase price.

9. X Co. will enter into a Service Contract with B Co. to obtain administrative services as may be necessary to conduct its warranty business. The services that B Co. will provide, which will not duplicate the services of XXXXXXXXXX as described in 18, include but are not limited to:

a) supervising the underwriting of contracts,

b) validating actuarial data to support product pricing,

c) advising on the necessary forms of contracts and applications,

d) providing claims administration services and training services,

e) supporting product development needs,

f) integrating processes, supporting claims and policies systems, and

g) performing all services incidental or related to the foregoing.

10. If necessary, X Co. will acquire ancillary management administrative services from Z Co.. X Co. will also hire the employees necessary to carry on the XXXXXXXXXX business or otherwise contract for the services.

11. XXXXXXXXXX will offer XXXXXXXXXX coverage to Customers and will receive the lump sum payment including all applicable provincial sales tax and goods and services tax from the Customer. This arrangement will be governed by a Dealers Agreement the terms of which are set out in 17, below:

XXXXXXXXXX.

12. Y Co. will enter into the business of providing XXXXXXXXXX warranty coverage in the provinces XXXXXXXXXX.

13. All of the terms of the XXXXXXXXXX contract will be identical to those of the XXXXXXXXXX policy described in 1 above, except that:

a) Y Co. will be the principal to the contract, and

b) The contract will provide that the risk is reinsured by X Co. and that claims under the contract may be made by a Customer directly to X Co. in the event that Y Co. fails to satisfy the Customer's claim within 60 days.

14. Y Co. will enter into a Service Contract with B Co. to obtain administrative services as may be necessary to conduct its warranty business. The services that B Co. will provide, which will not duplicate the services of XXXXXXXXXX as described in 18, include but are not limited to

a) supervising the underwriting of contracts,

b) validating actuarial data to support product pricing,

c) advising on the necessary forms of contracts and applications,

d) providing claims administration services and training services,

e) supporting product development needs,

f) integrating processes, supporting claims and policies systems, and

g) performing all services incidental or related to the foregoing.

15. If necessary, Y Co. will acquire ancillary management administrative services from Z Co.. Y Co. will also hire the employees necessary to carry on the warranty business or otherwise contract for the services.

16. XXXXXXXXXX will offer XXXXXXXXXX coverage to customers and will receive the lump sum payment including all applicable provincial sales tax and goods and services tax from the customer. This arrangement will be governed by a XXXXXXXXXX Agreement the terms of which are set out in 17, below.

XXXXXXXXXX Agreement

17. The XXXXXXXXXX Agreement is the contract made between the XXXXXXXXXX and X Co, in the case of XXXXXXXXXX contracts, and Y Co. in the case of XXXXXXXXXX contracts. Its material terms are as follows:

a) XXXXXXXXXX.

b) XXXXXXXXXX are independent contractors and are responsible for obtaining any business authorizations required in the province they operate. XXXXXXXXXX are not employees or in a partnership with X Co. or Y Co..

c) XXXXXXXXXX will keep records of all contracts sold and will hold funds of X Co. or Y Co., as the case may be, as a fiduciary, and remit the appropriate amount with supporting details. XXXXXXXXXX has been designated by X Co. and by Y Co. to receive all cash and information transmittals from the XXXXXXXXXX on behalf of X Co. and Y Co..

d) XXXXXXXXXX.

e) XXXXXXXXXX will provide refunds to customers terminating their coverage.

f) XXXXXXXXXX.

g) XXXXXXXXXX will receive compensation for their services in respect of each contract equal to difference between the purchase price of the contract and the amount required to be remitted to XXXXXXXXXX in respect of the contract.

XXXXXXXXXX.

18. XXXXXXXXXX will provide training and sales support to the XXXXXXXXXX in respect of the XXXXXXXXXX programs and post sales administration, pursuant to an agreement having the following material terms:

a) The relationship between XXXXXXXXXX, Y Co. and X Co. will be as independent contractors. No employee and employer relationship or partnership relationship exists.

b) X Co. will have the obligation to adjust XXXXXXXXXX claims and to authorize XXXXXXXXXX as licensed agents in specific provinces where XXXXXXXXXX is offered.

c) Y Co. will have the obligation to adjust XXXXXXXXXX claims and to authorize XXXXXXXXXX as licensed agents in specific provinces where XXXXXXXXXX is offered. Y Co. will be required to maintain in force insurance to cover its liabilities associated with XXXXXXXXXX.

d) Y Co. and X Co. will have the following obligations:

i. to install, maintain and administer approved policies for the XXXXXXXXXX program.

ii. to supply the XXXXXXXXXX and XXXXXXXXXX with forms, advertising and promotional material, manuals and other information required.

iii. to supply the rate schedule governing pricing and remittances and consequently, XXXXXXXXXX compensation under the agreement.

iv. to provide refunds for cancelled contracts.

e) XXXXXXXXXX will have the following obligations:

i. to endorse the XXXXXXXXXX product offerings and solicit XXXXXXXXXX to participate in the program whereby XXXXXXXXXX are offered to Customers, assist in obtaining compliance by XXXXXXXXXX with the terms of the XXXXXXXXXX Agreement.

ii. to ensure XXXXXXXXXX are appropriately licensed.

iii. to ensure XXXXXXXXXX have and use the current forms and rate schedules.

iv. to verify accuracy of data submitted from XXXXXXXXXX , reconcile business volumes, data input into XXXXXXXXXX internet-based software application.

v. to collect amounts from XXXXXXXXXX and transmit remittances to Y Co. or X Co. pursuant to the rate schedule described in (d)(iii), holding such funds in a fiduciary capacity. The difference between the amounts collected and remitted represent XXXXXXXXXX compensation under the agreement.

vi. to assist in training XXXXXXXXXX employees.

vii. to assist Y Co. and X Co. as necessary in improving XXXXXXXXXX performance and market penetration.

viii. to notify Y Co. and X Co. of changes to the network of XXXXXXXXXX.

ix. to ensure XXXXXXXXXX return to its customer any refunds with applicable taxes on cancellation or refusal to accept contracts.

Reinsurance of XXXXXXXXXX

19. Y Co. will enter into a Y Co. Risk Participation Agreement with X . pursuant to which XXXXXXXXXX% of the warranty coverage risk will be reinsured with X Co.. The terms of this arrangement will specify that:

a) X Co. will reimburse Y Co. all of the loss which Y Co. becomes obligated to pay according to Y Co.'s contractual obligations arising out of the issuance or sale of approved XXXXXXXXXX contracts where the relevant premium has been paid to X Co..

b) Y Co. will be required to verify that losses are valid and submit proof of claim and supporting documentation within XXXXXXXXXX days of repair.

c) Y Co. will be required to report the issuance of XXXXXXXXXX contracts and remit the appropriate premium to X Co.. Y Co. will warrant that XXXXXXXXXX contracts involving XXXXXXXXXX

20. X Co. will reinsure its obligations in connection with the XXXXXXXXXX and the Y Co. Risk Participation Agreement with NRI pursuant to the Reinsurance Agreement. The terms of this agreement will specify that:

a) XXXXXXXXXX.

b) X Co. will receive a ceding commission from NRI for the XXXXXXXXXX related contracts.

c) X Co. will pay a reinsurance premium to NRI equal to the premiums received on XXXXXXXXXX less applicable taxes.

d) The parties insured by X Co. have no right of recourse against NRI.

e) X Co. will give notice of any loss occurrence to NRI and will co-operate with NRI in the defence or control of any claim.

f) NRI will pay within XXXXXXXXXX days of receipt of X Co.'s documented losses and expenses related to the investigation and settlement of claims.

g) NRI will maintain with X Co. a deposit fund to satisfy NRI's liability under the Reinsurance Agreement.

h) NRI will also deposit collateral into a trust account with a Canadian Chartered Bank in an amount and in a format acceptable to the Office of the Superintendent of Financial Institutions. The duty to provide collateral will extend until the NRI's obligations under the Reinsurance Agreement have been met. The amount of collateral will increase or decrease so that an amount sufficient to secure the reinsurer's obligation is maintained.

PURPOSE OF THE TRANSACTIONS

XXXXXXXXXX.

RULINGS

Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions, and provided further that NRI will have sufficient capital to underwrite the risk in respect of the Reinsurance Agreement, we confirm the following:

A. For the purpose of the Act, Y Co. by issuing XXXXXXXXXX agreements will be carrying on an insurance business and section 138 of the Act will apply in determining Y Co's income;

B. Pursuant to paragraph 20(7)(c) of the Act, X Co. may claim a reserve for unearned reinsurance commissions in accordance with the description of C in subsection 1400(3) of the Income Tax Regulations, in respect of amounts described above in 20(b); and

C. In computing the income of X Co. and Y Co. clause 18(9)(a)(iii)(A) will apply in respect of amounts described above in 19(c) and 20(c).

OPINIONS

Based on the information provided, it is our view that, for purposes of proposed subsection 18(9.02), the expense incurred by X Co. or by Y Co. in respect of the agreements described above in 18 would, to the extent such amount is otherwise deductible in computing income, constitute an outlay or expense made or incurred by X Co. or Y Co. on account of the acquisition of an insurance policy.

Nothing in this advance income tax rulings should be construed as implying that we are ruling on the reasonableness of the amount of premiums or commissions described above in 19(c), 20(b) or 20(c).

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
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch