15 February 2000 External T.I. 1999-0007735 - POLITICAL RISK INSURANCE

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: Political Risk Insurance on Loans

Position: Not possible to take general position - case by case basis only

Reasons: fees for political risk loan insurance may qualify in some instances and not in others - depends on particular facts

XXXXXXXXXX 						1999-000773
B. Kerr
Attention: XXXXXXXXXX 

February 15, 2000

Dear Sirs:

Re: Paragraph 20(1)(e) - Political Risk Insurance

This is in response to your letter of October 18, 1999, wherein you requested our views on whether the cost of purchasing political risk insurance would be deductible under paragraph 20(1)(e) of the Income Tax Act (the "Act") as an expense incurred in the course of borrowing money.

You describe political risk insurance as insurance against specified political changes which have a detrimental impact on an insured's assets. In general political risks covered fall into three categories: Transfer and inconvertibility of funds. If local earnings cannot be converted into hard currency, or hard currency cannot be transferred out of the country, an otherwise financially viable transaction may be unable to service associated debt. Expropriation. Governments can change, as can government priorities. When this happens, loan losses may occur as a result of direct or indirect expropriatory actions on the part of the host government. Political violence. The eruption of political violence has the potential to affect, even shut down, projects or transactions, impacting on the ability to repay loans.

You have stated that the primary provider of political risk insurance in Canada is the Export Development Corporation (EDC), a crown corporation that promotes Canadian exports.

In the situation you are considering, a Canadian corporation borrows funds for the purpose of earning income from a business or property in a foreign country. As a condition for advancing the funds, the lenders require the corporation to purchase political risk insurance. In your view, the cost of the political risk insurance should be deductible under paragraph 20(1)(e) of the Act.

Our Comments

Based on our discussions with officers of the EDC, we are not in a position to give general comments with respect to whether the cost of political risk insurance on a loan would be deductible under the Income Tax Act. In our view, each situation would have to be judged on its particular facts including, among others, the residency of the company primarily liable under the loans, the residency of the company that actually pays the fees, the beneficiary of the insurance policy, the use of the borrowed funds, etc.

Accordingly, if the situation relates to a completed transaction, we suggest that you contact your local taxation services office for their views. On the other hand, if it relates to a proposed transaction we would be willing to consider the matter in the context of an advance income tax ruling request as outlined in Information Circular 70-6R3 dated December 30, 1996.

We trust that these comments will be of assistance.

Yours truly,

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