23 April 2012 Internal T.I. 2011-0426601I7 - Part XIV tax - non-resident insurer

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: The TSO has requested our views on the expiry of the normal
reassessment period with respect to Part XIV of the Act. In the situation described, a non-resident insurer
ceased to carry on an insurance business in Canada. It transferred the business to a qualified related
corporation, and elected under subsection 219(5.2) of the Act.

Position: In the situation described, it is our view that the normal reassessment
period for Part XIV will expire within the limits described in subsection 152(3.1) of the Act. The
Minister may not reassess after the expiry of the normal reassessment period unless the exceptions
described in paragraphs 152(4)(a) to (d) of the Act apply.

Reasons: Legislation.

April 23, 2012

XXXXXXXXXX

Bob Naufal
Income Tax Rulings Directorate
Financial Institutions Section

2011-042660

Part XIV Tax and Normal Reassessment Period

We are writing in response to your email dated November 3, 2011, wherein you requested our
comments as to the expiry of the normal reassessment period for a non-resident insurer for
purposes of Part XIV tax.

Briefly, you describe in your email that, on XXXXXXXXXX , a non-resident insurer (“ACo”)
with operations in Canada ceased to carry on its insurance business in Canada. ACo transferred
the Canadian insurance business to a newly incorporated related company (“BCo”). BCo was
incorporated in a country other than Canada and is a wholly-owned subsidiary of ACo.

We understand that ACo filed its T2 Corporation Income Tax Return (the “T2 Return”) for the
taxation year ending XXXXXXXXXX , on XXXXXXXXXX , and jointly elected with BCo in
writing under subsection 219(5.2) of the Income Tax Act (the “Act”) to reduce to nil, the tax that
ACo would otherwise be liable to pay under subsection 219(5.1) of the Act when it ceased to
carry on its insurance business in Canada. ACo did not enter any amount on line 728 of the T2
Return in respect of Part XIV tax payable. Also, no specific Part XIV schedule was filed by
ACo, other than the election under subsection 219(5.2) of the Act. A Notice of Assessment for
the XXXXXXXXXX taxation year was issued to ACo on XXXXXXXXXX , and it showed a
nil amount with respect to Part XIV tax.

You advise that the residency status of BCo is currently under review. However, for the
purposes of this memo, we are to assume that BCo is a qualified related corporation of ACo.
You have asked whether ACo has met its filing requirement and when the normal reassessment
period expires for ACo in respect of Part XIV of the Act.

Our Comments

Part XIV tax

Generally, subsection 219(1) of the Act imposes Part XIV tax on certain non-resident
corporations, computed by reference to a base amount. The base amount for the purpose of Part
XIV tax is computed as the amount, if any, by which the total of the amounts listed in paragraphs
219(1)(a) through (g) of the Act, exceeds the total of the amounts listed in paragraphs 219(1)(h)
through (l) of the Act. In this regard, form T2SCH 20, Part XIV – Additional Tax on Non-
Resident Corporations is the schedule that computes the relevant amounts under subsection
219(1) of the Act.

Pursuant to subsection 219(4) of the Act, a non-resident insurer is not subject to tax under
subsection 219(1) of the Act. However, the non-resident insurer may elect in prescribed manner
under subsection 219(4) of the Act, to compute and pay an amount, which can then be deducted
in computing its Canadian investment fund as of the end of the immediately following taxation
year. For this purpose, subsection 2403(1) of the Income Tax Regulations (the “Regulations”)
describes the prescribed manner for this election as a letter in duplicate stating (a) the insurer
elects under subsection 219(4) of the Act; and (b) the amount the insurer elects to deduct under
subsection 219(4) of the Act. This letter must be filed with the non-resident insurer's return of
income required by subsection 150(1) of the Act to be filed.

In addition, subsection 219(5.1) of the Act provides that where a non-resident insurer ceases to
carry on all or substantially all of an insurance business in Canada, the insurer is liable to pay a
tax equal to 25% on the amount by which the insurer's surplus funds from the business plus
certain unrealized gains from the disposition of property used in the business exceeds the amount
elected in accordance with subsection 219(5.2) of the Act. Subsection 219(5.2) of the Act
permits a non-resident insurer to defer the amount of tax arising under subsection 219(5.1) of the
Act where,

• the insurer has ceased to carry on all or substantially all of an insurance business in Canada, and
• the discontinued business has been transferred to a “qualified related corporation” of the insurer and both parties have elected to have subsection 138(11.5) of the Act apply in respect of the transfer.

The election under subsection 219(5.2) of the Act is to be made jointly by the insurer (transferor)
and the qualified related corporation (transferee), in prescribed manner and within prescribed
time. Pursuant to subsection 2403(2) of the Regulations, the prescribed manner is a letter in
duplicate signed by an authorized officer of the non-resident insurer and an authorized officer of
the qualified related corporation stating (i) whether paragraphs 219(5.2)(a) and (b) of the Act
apply and (ii) the amount elected under subsection 219(5.2) of the Act. This letter must be filed
with the non-resident insurer's return of income required by subsection 150(1) of the Act to be
filed for the year in which the event to which the election relates occurred.

It should be noted that unlike other Parts of the Act (e.g., Parts I.3, II, IV.1 and VI), section 219
of the Act does not include a provision that expressly requires the filing of a return in prescribed
form in respect of Part XIV of the Act. However, subsection 219(3) of the Act provides that the
relevant provisions of Part I of the Act relating to returns, assessments, interest, penalties and
objections (e.g., sections 150 to 152, 154, 158, 159 and 161 to 167 and Division J of Part I) are
applicable to Part XIV with such modifications as the circumstances require. Paragraph
150(1)(a) of the Act provides that in the case of a corporation, a return of income for each
taxation year is to be filed with the Minister within six months after the end of the year, in
prescribed form and containing prescribed information. The prescribed form for a corporation,
in this regard, would be the T2 Return which includes a line (line 728) that reports Part XIV tax
payable. In addition, as described above, section 2403 of the Regulations specifies the
prescribed manner and prescribed time by which an election under subsection 219(4) or (5.2) of
the Act is to be made.

In the situation described, ACo attached its election under subsection 219(5.2) of the Act when it
filed its T2 Return for the XXXXXXXXXX taxation year on XXXXXXXXXX . Accordingly,
it appears that ACo has met its filing requirement with respect to Part XIV of the Act for the
XXXXXXXXXX taxation year.

Assessments, reassessments and normal reassessment period

Subsection 152(1) of the Act provides that the Minister is required, with all due dispatch, to
examine a return for a taxation year and assess any tax, interest and penalties payable. In this
regard, it is our long-standing position that an assessment under each Part of the Act should be
regarded as a separate assessment notwithstanding the fact that a single Notice of Assessment is
used to inform a taxpayer of assessments under more than one Part of the Act.

In general terms, subsection 152(4) of the Act provides that for a taxation year, the Minister may,
at any time, issue an assessment, reassessment or additional assessment of tax or notify a
taxpayer that no tax is payable. However, assessments, reassessments, or additional assessments
of tax, interest or penalties for the taxation year cannot be issued by the Minister beyond the
"normal reassessment period" in respect of the taxation year unless the circumstances described
in paragraphs 152(4)(a) to (d) of the Act apply. A "notification that no tax is payable" is
commonly referred to as a "nil assessment". The issuance of a nil assessment under a Part of the
Act for a taxation year is relevant in identifying the date from which the normal reassessment
period begins for purposes of determining whether the Minister may assess additional taxes for
that year.

The "normal reassessment period" is defined in subsection 152(3.1) of the Act. For mutual fund
trusts and corporations other than Canadian-controlled private corporations, that period is the
four-year period beginning after the earlier of the day of mailing of a notice of an original
assessment for the relevant year or the day of mailing of an original nil assessment for that year.

Applying the modifications as the circumstances require pursuant to subsection 219(3) of the
Act, the above-noted provisions are applicable to Part XIV of the Act as follows:

• As discussed above, it appears that ACo has met its filing requirement with respect to Part XIV of the Act. In this regard, ACo’s filing position for the XXXXXXXXXX taxation year was no tax owing under Part XIV of the Act, by virtue of the election filed pursuant to subsection 219(5.2) of the Act; and
• For the XXXXXXXXXX taxation year, the Minister issued a Notice of Assessment to ACo on XXXXXXXXXX , which indicated no taxes payable under Part XIV of the Act.

In other words, the Minister notified ACo that no tax was payable under Part XIV of the
Act.

Therefore, in the situation described in your email, the normal reassessment period under Part
XIV for ACo’s XXXXXXXXXX taxation year expires on XXXXXXXXXX . Consequently,
the Minister is unable to reassess ACo’s XXXXXXXXXX taxation year under Part XIV after
this date unless one or more of the circumstances described in paragraphs 152(4)(a) to (d) of the
Act apply.

We trust that these comments will be of assistance.

Yours truly,

Jenie Leigh
Section Manager
for Division Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch