7 September 1989 Administrative Letter 58316 F - Guaranteed Insurance Policy

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.

September 7, 1989

Dear Sirs:

This is in reply to your letter dated June 28, 1989, in which you raised a number of questions concerning the effect of a guarantee or guarantee insurance provided by a non-resident in respect of an obligation of a corporation whose shares are listed on the Toronto Stock Exchange.

1.     Guarantee

     We are to assume that

(i)     a bond, debenture, mortgage, hypothec, note or similar obligation (herein referred to as an "obligation") is issued by a corporation, the shares of which are listed on the Toronto Stock Exchange.(Such an obligation would be "qualified investment" as defined in paragraph 204(e)(ii) of the Income Tax Act (the "Act")).

(ii)      payment of the obligation is guaranteed by a non-resident.

     In our view the provision of a guarantee of payment of the obligation by a non-resident person would not, in itself, effect the obligation's treatment as a qualified investment under subparagraph 204(e)(iii) of the Act.  Further, in the absence of a guarantee contract to review we are not in a position to comment whether the guarantee is a separate property.  However, in cases where a guarantee is a separate property it would not, generally, be a qualified investment for an RRSP, DPSP or RRIF. 

     Concerning the foreign property rules, we have taken the general position that a guarantee given by a non-resident person in respect of a note, bond, or other similar obligation issued by a Canadian resident corporation would not be "foreign property" under paragraph 206(1)(g) of the Act.  However, based on your example we are unable to comment upon whether paragraph 206(1)(d.1) of the Act applies to the obligation or to guarantee.

2.     Guarantee Insurance

     We are to assume that, instead of arranging for a guarantee, the issuer of the obligation arranges for guarantee insurance to be provided by a non-resident insurer with which it deal's with at arm's length.  The issuer would pay the premium and a certificate insurance policy would be delivered to a trustee for the holders of the obligation.  The trustee may or may not be a resident of Canada.  In the event of default under the obligation, the insurer would make a payment under the insurance policy for the benefit of the then holders of the obligation.  The obligation and rights in respect of the guarantee insurance would not be separately tradeable.

     We have not had the opportunity to develop a position with respect to guarantee insurance in circumstances such as those outlined in your letter, and accordingly, we are not in a position to respond to your queries in general terms.  You may wish to pursue this matter further by requesting a ruling.

We trust that our comments are of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate