21 June 2007 Roundtable, 2007-0240221C6 - Capital Tax - Determination of CRL and TRL

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: Whether CRL and TRL mean liabilities and reserves as determined for the purpose of OSFI or other similar authority.

Position: See document.

Reasons: See document.

CLHIA ROUNDTABLE - MAY 2007

Question 8

Capital Tax

An insurer's taxable capital for Part I.3 and Part VI capital tax purposes is calculated, in general terms, by multiplying its taxable capital for the year by the ratio of its "Canadian reserve liabilities"("CRL") to its "total reserve liabilities" ("TRL"). Prior to 1999, for this purpose, pursuant to section 8600 of the Regulations, CRL and TRL were both defined in subsection 2405(3) of the Regulations. In both cases, the relevant liabilities and reserves were as determined for the purpose of the Superintendent of Financial Institutions ("OSFI") or other relevant authority. After 1998, the TRL definition, now self-contained in section 8600, retained the requirement that the relevant liabilities and reserves be as determined for the purpose of OSFI or other similar authority. However, the CRL definition, now contained in subsection 2400(1), dropped that particular requirement. If particular liabilities and reserves were not as determined for the purpose of OSFI or other similar authority, it is difficult to conceive of a policy reason, after 1998, why such liabilities and reserves would be included in the numerator (CRL) but not in the denominator (TRL) because such liabilities and reserves would, in effect, be over-weighted for capital tax purposes. The relevant Department of Finance Technical Notes (dated September 19, 1997) on subsection 2400(1) and section 8600 make no reference to any intended substantive change of law.

Questions:

Can the CRA confirm that, after 1998, as before 1999, both CRL and TRL mean liabilities and reserves as determined for the purpose of OSFI or other similar authority?

What is Finance's view with regard to this issue?

Agency's Response

Based on the current legislation as it applies to the 1999 and subsequent taxation years, in determining the CRL/TRL ratio for Part I.3 and Part VI capital tax purposes, CRA is of the view that CRL and TRL are determined on a consistent basis.

Subparagraph 181(3)(b)(ii) of the Income Tax Act provides that amounts to be utilized in the determination of the various components of the capital tax formula are amounts reflected in the balance sheet....accepted by the Superintendent of Financial Institutions. Extending this provision to CRL as defined in Regulation 2400(1), CRA would consider amounts reflected in the OSFI balance sheet in determining CRL inclusions. The reference in TRL as defined in Regulation 8600 to "as determined for the purposes of the Superintendent of Financial Institutions" is harmonious with the aforementioned reference in subparagraph 181(3)(b)(ii) and therefore, similarly, CRA would consider amounts reflected in the OSFI balance sheet in determining TRL inclusions.

For greater certainty and for this purpose, Regulation 8605(3) stipulates that TRL of foreign subsidiaries would be determined as if the subsidiaries were required by law to report (balance sheet amounts) to the Superintendent of Financial Institutions.

Finance's Response

We agree with CRA's views.