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) Is an insurer's "Reserves for Reinsurance Ceded to Unregistered Insurer's" to be included in the computation of CRL?
2) Is an insurer's "Due to Reinsurer" to be included in the computation of CRL?
Position: 1) Yes.
2) Yes, to the extent the components of the "Due to Reinsurer" account have at least an indirect link to the insurer's insurance policies in Canada.
Reasons: 1) Victory Reinsurance Company Limited v. MNR (92 DTC 1869)
2) Court's analysis in Victory Re and Munich Reinsurance Company (Canada Branch) v. MNR (91 DTC 1137), as to the link required between the liability or reserve of the insurer and the insurer's insurance policies in Canada, our understanding of tax policy behind the definition of CRL and computation of a non-resident insurer's income for tax purposes.
November 24, 2005
TORONTO EAST TSO HEADQUARTERS
Insurance Industry Specialist Services Income Tax Rulings
Insurance Industry Specialist Directorate
Alison Campbell
Attention: Soon Yee 613-957-3496
2004-008257
CRL Inclusions - Due to Reinsurers & Reserves for Reinsurance
Ceded to Unregistered Insurers
This memorandum is in reply to your memorandum of June 21, 2004, wherein you requested that we consider the current validity of CRA's Reserve Liabilities listing dated October 23, 1991. As was discussed (Soon Yee/Alison Campbell), it was agreed that we would provide our views on whether two specific items are to be included in the computation of CRL. We understand that the issue as to whether and insurer's amount for "Reserves for Reinsurance Ceded to Unregistered Insurers" and "Due to Reinsurers" are to be included in CRL, arose in the context of the audit of a particular Property & Casualty (P&C) insurer. We were provided with copies of some of the Reinsurance Agreements which the P&C insurer had entered into as well as excerpts from the insurer's financial statements for one of the years at issue on the audit.
"Reserves for Reinsurance Ceded to Unregistered Insurers"
The issue of whether "Reserves for Reinsurance Ceded to Unregistered Insurers" is to be included in the computation of an insurer's CRL's was the subject of the 1992 case of Victory Reinsurance Company Limited v. MNR (92 DTC 1869). It is noted that some of the regulations related to the computation of an insurer's CRL were amended subsequent to the 1992 decision in Victory Re, and prior to the taxation years in question in this particular case (1999, 2000, 2001). After a review of the amendments made to sections 2400 and 2405 of the regulations, we are of the view that none of the amendments would render the decision in Victory Re invalid for taxation years after the amendments were passed. Since Victory Re is directly on point and there seems to be no subsequent jurisprudence or legislative/regulatory amendments that would, in our view, alter the decision of the court in Victory Re, it is our view that Victory Re is still good law. Therefore in our view, the insurer's "Reserves for Reinsurance Ceded to Unregistered Insurers", are properly included in the computation of CRL for the taxation years in question.
"Due to Reinsurers"
It is our view that in general the better argument favours the inclusion of an insurer's "Due to Reinsurers" account in the computation of CRL. It will be a question of fact whether any particular component of a liability (payable) account such as "Due to Reinsurers" will be considered to be "in respect of" an insurers insurance policies covering risks in Canada. It is our understanding from the information provided to us that a common major component of an insurer's "Due to Reinsurers" liability balance is the unpaid portion of premiums owed to other insurers in respect of reinsurance agreements under which the insurer has reinsured a portion of the risks it has undertaken in issuing policies to its policyholders. The comments to follow are based on the "Due to Reinsurers" amount being "Reinsurance Premiums Payable".
The taxpayer questioned the current validity of the Victory Re decision noted above, in light of the cases of Co-operators General Insurance Company v MNR (93 DTC 303) and Gore Mutual Insurance Company v. The Queen (97 DTC 1217). While we do not believe that the Victory Re case is in itself conclusive on the issue of whether "reinsurance premiums payable" are to be included in the computation of CRL, we do agree with your conclusion that the case is supportive of the position that this amount should be included in CRL. The Victory Re case dealt with "reserves for reinsurance ceded to unregistered insurers" and not "reinsurance premiums payable" and therefore is not directly on point in respect of this issue. However, we are of the view that the analysis of the court in Victory Re that determined whether the reserves were "in respect of the insurer's life insurance policies in Canada", would support a finding that the unpaid reinsurance premiums are also "in respect of the insurer's life insurance policies in Canada". With respect to the Co-operators General and Gore Mutual cases, we do not believe that they overturn the decision in Victory Re. We are also of the view that these two cases are not as relevant as Victory Re to the determination of whether the unpaid reinsurance premiums are to be included in CRL. The Co-operators General case and the Gore Mutual case dealt with the question of whether reserves for contingent excess premiums payable under experience rated reinsurance contracts were reserves that were deductible by an insurer, pursuant to paragraph 20(7)(c) of the Act and paragraph 1400(1)(e) of the Regulations, in computing the insurer's income for a taxation year. As stated previously, the decision in Victory Re looked at the determination of an insurer's CRL as defined in subsection 2405(3) (now subsection 2400(1)) of the Regulations). The determination of an insurer's CRL is the issue in this file and therefore in our view, Victory Re is the relevant jurisprudence to be considered.
We also had informal discussions with the Department of Finance as to the position that would be more consistent with tax policy. The conclusion of our discussions was that the inclusion of the unpaid reinsurance premiums in the CRL of the insurer would give the result that is more consistent with tax policy. If the insurer has collected the premiums under the policies in respect of which it has reinsured a portion of the risk and therefore owes a portion of the premiums to another insurer but has not remitted any of those premiums to the assuming company, because for example the reinsurance agreement is a modco or funds withheld type of contract, the ceding insurer still has the assets underlying that liability at its disposal. Where the ceding company has entered into a modco or funds withheld type of contract with a reinsurer that carries on an insurance business in Canada, an argument may be put forward that there is potential for double taxation if the ceding company must include the "Due to Reinsurer" in its CRL. That is because the reinsurer will also be including the reserves in respect of the reinsured policies in its CRL. However, it can be assumed that the ceding company would be claiming a deduction, either as interest expense under subsection 138(5) of the Act or as the cost of reinsurance under section 9 of the Act, for the amount of any interest or return in lieu of interest payable to the reinsurer under such an arrangement. If the "Due to Reinsurer", in respect of premiums payable to the reinsurer under the reinsurance contract, is not included in the CRL and CIF of the ceding company, the ceding company will effectively be claiming a deduction in computing its Canadian tax liability in respect of income it is flowing out but never reported as income for Canadian tax purposes. Accordingly, it would seem that if the "Due to Reinsurer" is not included in the CRL of the ceding company to offset the deduction claimed by it for "interest" the result would effectively be a double deduction.
Based on the foregoing, it is our view that the Due to Reinsurer amounts, to the extent there is at least an indirect link between the underlying policies covering Canadian risks and the amount included in Due to Reinsurer, should be included in the computation of the ceding company's CRL.
We hope that our comments are of assistance to you and ask that you contact us if you require anything further.
F. Lee Workman
Manager
Charitable and Financial Institutions Sectors
Income Tax Rulings Directorate
Policy and Planning Branch
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