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.
XXX
We refer to your letter of February 9, 1984 in which you requested a technical interpretation of the provisions of subparagraph 95(2)(b)(i) and subsection 95(3) of the Income Tax Act (the Act) in connection with the following hypothetical situation.
A Canadian corporation (Canco), within the meaning of paragraph 89(1)(a) of the Act, carries on a manufacturing business in Canada. Canco insures all but the deductible portion of its public liability risks with Canadian insurers (the prime insurers). Thus, the deductible portion of each insured risk is effectively borne by Canco.
Canco proposes to have a wholly-owned subsidiary (Captivco) resident in the Netherlands Antilles organized in such a way that it will meet the capital and regulatory requirements in the Netherlands Antilles that pertain to insurance companies.
Canco will then negotiate contracts with the prime insurers to insure the deductible portion of its insurance risks such that the deductible portion so insured will be reinsured by the prime insurers with Captivco. The reinsurance activity of Captivco will not, in your view, constitute the carrying on of an insurance business in Canada for the purposes of the Act, since all of the business activities will, as a question of fact, be carried on in the U.S. In this regard, you inform us that the activity of reinsurance will not result in Captivco being subject to taxation in the U.S.
You are also of the view that, for the purposes of paragraph 5907(1)(a) of the Regulations to the Act, the reinsurance activities of Captivco will result in the carrying on of an active business.
Opinions
The Department is fully aware of the reliance that is being placed on the provisions of subsection 138(2) of the Act by certain taxpayers when evaluating their tax position as it would be affected by the provisions of subparagraph 95(2)(b)(i) and subsection 95(3) of the Act. However, the Department intends to assess the income derived from the reinsurance and investment activities of the typical Captivco whenever such activities come within the clear intent of the provisions of subparagraph 95(2)(b)(i) and subsection 95(3) of the Act.
We regret that the heavy workload of this Directorate prevented us from responding to your letter earlier.
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© Her Majesty the Queen in Right of Canada, 1984
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© Sa Majesté la Reine du Chef du Canada, 1984
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