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.
Principal Issues:
1. What is meant by an amount due or accrued to the insurer on account of income from designated insurance property that was "assumed in computing the insurer's Canadian reserve liabilities" for purposes of the definitions of "investment property" and "Canadian investment property" in Part XXIV?
2. Whether an insurer should "scale down" the value of amounts due or accrued when designating Canadian investment property and investment property in circumstances where the insurer's mean Canadian reserve liabilities are less than its mean Canadian investment fund.
3. Whether the formula in paragraph 2411(3)(b) of the Regulations provides the appropriate result in computing the minimum net investment revenue for purposes of paragraph 138(9)(b).
Position:
1. It is our understanding that in the annual return filed with OSFI due or accrued investment income is usually reported separately from the related property. Where due or accrued investment income from designated insurance property supports policy liabilities that are included in the insurer's Canadian reserve liabilities, such income will qualify as Canadian investment property or investment property and may be designated by the insurer as designated insurance property to the extent permitted under section 2401 of the Regulations.
2. There is no legislative requirement for the "scale down". However, due or accrued amounts designated by the insurer must clearly support Canadian policy liabilities to be considered Canadian investment property or investment property.
3. Result appears to be unintended. We will refer the matter to the Department of Finance for consideration.
Reasons:
1. Wording and intent of the legislation.
2. Legislation and question of fact.
3. Under the current rules, due or accrued amounts are included in calculating the average yield on investment property (i.e., B, E and H) but are specifically carved out of the total value of the investment property (i.e., C, F and J) in the formula. This appears to result in the use of an average yield that is less than the actual yield to the insurer in respect of its investment property.
May 8, 2003
TORONTO EAST TSO HEADQUARTERS
Financial Institutions Section
Attention: Bill Tryon J. Leigh
Large Case File Manager (613) 952-1505
2002-016747
Part XXIV of the Regulations - Amounts Due or Accrued to the Insurer
This is in reply to your e-mail of October 7, 2002 concerning the definitions of "investment property" and "Canadian investment property" in subsection 2400(1) of the Income Tax Regulations (the "Regulations") and the formula set out in paragraph 2411(3)(b) of the Regulations.
You advise that for designation purposes some insurers are scaling down the "value" for a taxation year of amounts due or accrued to the insurer by multiplying the ratio of mean Canadian reserve liabilities ("CRL") over mean Canadian investment fund ("CIF") to the "value" where the mean CRL is less than the mean CIF to conform with what they believe is the intent of the legislation. The effect of this scale down is that the insurer would need to designate more investment property in order to fill the mean CIF. If the mean CRL exceeds the mean CIF, no scale down is applied to the "value" otherwise determined. In your view, an insurer could argue against a scale down if it can be shown that all the amounts due or accrued were in respect of designated insurance property ("DIP") designated first to fill the mean CRL. It could further be argued that a scale down is appropriate only where certain Canadian investment property ("CIP") or investment property was designated in order to cover the excess of mean CIF less mean CRL.
You have asked for our comments on the following issues:
1. What is meant by the phrase "assumed in computing the insurer's CRL" in the definitions of CIP and "investment property"?
2. Whether it was intended that this scale down be applied since it is not being applied on a consistent basis by insurers.
3. Whether the formula set out in subsection 2411(3) of the Regulations provides the appropriate result in computing minimum amount of net investment revenue for purposes of paragraph 138(9)(b) of the Act.
Under subsection 138(9) of the Regulations, an insurer (other than an insurer resident in Canada that does not carry on life insurance business) that carries on an insurance business in Canada and in a foreign country must include in its income the total of its gross investment revenue ("GIR") for the year from its DIP for the year and the amount prescribed in respect of the insurer under section 2411 of the Regulations.
DIP is defined in section 2401 of the Regulations as property determined in accordance with the rules in subsections 2401(2) to (7) of the Regulations. In general terms, subsection 2401(2) of the Regulations requires the insurer or the Minister to designate "investment property" with a total value equal to the greater of the amount of the insurer's mean CRL and the amount of the insurer's mean CIF for a taxation year. For purposes of subsection 2401(2) of the Regulations, subsection 2402(3) of the Regulations provides an ordering rule for CIP and other investment property. The terms CIP and "investment property" are defined in subsection 2400(1) of the Regulations. Included in paragraph (e) of the "investment property" definition and paragraph (i) of the CIP definition is an amount due or an amount accrued to the insurer on account of income that is from DIP for the year and was assumed in computing the insurer's CRL for the year.
Regarding the first issue, since it is not clear what is meant by the phrase "assumed in computing the insurer's CRL", we sought clarification from the Department of Finance. In verbal discussions with one of their officials, she noted that it was their understanding that in the annual return prepared for the OSFI due or accrued investment income is reported separately from the related property (e.g., for Canadian life insurers, the accrued investment income is reported as an asset on line 007 on page 30.010 of the non-consolidated financial statements) and that some of this income supports policy liabilities. From a tax policy perspective, it would be appropriate to allow due or accrued amounts on income account from DIP that support Canadian policy liabilities to be treated as investment property which may be designated for purposes of filling the mean CIF or the mean CRL notwithstanding that such amounts do not generate GIR. However, this treatment does not extend to due or accrued amounts supporting foreign policy liabilities.
With respect to the second issue, in our view, there is no authority under the Act to require the scale down of the value of an amount due or accrued when the mean CRL is less than the mean CIF. However, we note that whether an amount due or accrued on account of income from DIP can be considered to be supporting policy liabilities that are included in CRL is a factual determination. Accordingly, it seems to us that where an insurer wishes to designate a due or accrued amount as DIP, the onus is on the insurer to show that such amount clearly falls within paragraph (e) of the "investment property" definition or paragraph (i) of the CIP definition. The scale down may be an attempt at determining the amount that qualifies under paragraphs (e) and (i) of the definitions of "investment property" and CIP respectively but at this point we cannot see any justification for this approach.
In response to the third issue, paragraph 138(9)(b) of the Act requires an insurer to include in computing its income for a taxation year from carrying on its insurance businesses in Canada a minimum amount of net investment revenue as determined under section 2411 of the Regulations. Paragraph 2411(3)(b) of the Regulations provides a formula to determine the required minimum net investment revenue for each of three types of property: "Canadian investment property", "Canadian equity property" and "foreign investment property". As we understand it, the purpose of the minimum revenue test is to ensure that the amount included in investment income in respect of DIP pursuant to subsection 138(9) of the Act is not less than the average yield to the insurer in respect of all of its investment property. As you have noted, the formula currently carves out an amount due or accrued from the total value of DIP (i.e., C, F and J of the formula) but such amount is included in the total value of investment property to be used in computing the average yield (i.e., B, E and H of the formula). As a consequence, the calculation appears to result in the use of an average yield that is less than the actual yield to the insurer in respect of its investment property. Furthermore, the existing calculation would appear to result in a cumulative excess balance under subsection 2411(6) of the Regulations which could be carried forward seven years. We agree that this would appear to be an inappropriate result and we will bring the matter to the attention of the Department of Finance.
We hope that these comments are of assistance.
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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