24 May 2002 Internal T.I. 2002-0136407 - Excess funds foreign Insurance Company

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: 2002 National Banking Meeting Question 6 "How do you determine if earnings are from excess funds to the needs of a business in a foreign insurance company?" - CCRA's comments.

Position: See below.

Reasons: See below.

Question 6

How do you determine if earnings are from funds that are excess to the needs of an active business in a foreign affiliate insurance company?

Agency's Position

The income from an active business of a foreign affiliate excludes income from assets not at risk in or essential to that business. This view is consistent with the Technical Notes issued by the Department of Finance on the release of the 1995 amendments to the foreign affiliate legislation.

The CCRA considers the Supreme Court of Canada decision, Ensite Limited v. The Queen 86 DTC 6521 instructive in establishing whether funds held by a foreign affiliate are in excess of the needs of its active business. The taxpayer in Ensite entered into arrangements that complied with Philippine foreign exchange controls and enabled it to invest in a stamping plant there without risk of it being unable to repatriate the funds invested. The taxpayer made US dollar deposits with a commercial bank which then loaned it the funds required to invest in the plant. The distinction to be drawn is whether the income from the deposits was from the taxpayer's active business or from other sources. The court held that the threshold test is whether the withdrawal of property would have "a decidedly destabilizing effect on the corporate operations themselves".

In Actra Fraternal Benefit Society v. The Queen 2000 DTC 6491, the Federal Court of Appeal endorsed the test espoused in Ensite in the context of an insurance business and held that neither the relevant provisions of the Insurance Act nor the decision of the taxpayer not to withdraw assets out of the life fund is determinative of what assets are necessary for purposes of carrying on a life insurance business. Generally, the fact that the taxpayer submitted financial documents to the regulator allocating all of the investment income to the life fund and that surplus assets were not removed from the fund are "best factors that support the inference that all of the assets held in the life fund were necessary for the life insurance operations". Such an inference, however, can be displaced by the adducing persuasive evidence to the contrary". In that case, the actuary provided a formula that showed only a portion of the investment income was attributable to the taxpayer's insurance business. This formula was not found to be flawed and was accepted by the court. The implications of this case in the foreign affiliate context is that reserves in excess of what is required in the insurance business as determined by valid actuarial formulas would prima facie be considered "excess funds" and income derived therefrom considered passive income i.e., income from "investment business" or income from property.

CCRA will examine each case regarding excess funds based on its own facts and consideration may be given to factors that include but are not limited to foreign regulatory authority's requirements, the nature of insurance business conducted in the foreign jurisdiction, industry standards and actuarial formulas.

Prepared by: Suzanie Chua
May 24, 2002
2002 National Banking Conference
File Number: 2002-013640
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