29 September 1988 Income Tax Severed Letter 7-2840 F - Meaning of term “Canadian risks” in subsection 95(3)

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.

RE: "Canadian Risks"; Subsection 95(3) of the Income Tax Act (the "Act")

This is in reply to your memorandum of May 10, 1988, in which you requested our views on the meaning of the term "Canadian risks" as used in subsection 95(3) of the Act.

XXX

In our view, it is reasonable to consider that the loss of earnings insurance in the case at hand would be entirely in respect of "Canadian risks". That term does not have an established legal or technical meaning, and we too have found little, if any, guidance on point in legislative and judicial authorities. We have considered the arguments advanced by the taxpayer's solicitor in the submission which accompanied your memorandum and, while the matter is not entirely free from doubt, we are not persuade that the argument that a given peril or hazard physically occurs outside of Canada obliges us to consider insurance which contemplates such eventualities to be in respect of non-Canadian risks. The legal authorities (i.e., a now-repealed U.S. statutory definition of "U.S. risk" and a distinction made in a Quèbec statute with respect to what we would consider to be different terminology altogether) relied on by the taxpayer's solicitor appear to be weak. Accordingly, we believe we are entitled to adopt a reasonable interpretation based on the ordinary meaning of the words in question.

The word "risk" in the insurance context generally means the danger or hazard of loss insured against. It is not necessarily limited to or synonymous with the specific peril or hazard that causes the loss, but can include the possibility of the loss itself which is assumed by the insurer. "Canadian" means something of or pertaining to Canada (e.g., a citizen as resident etc. of Canada). Accordingly, we would agree that a risk of a loss, such as lost earnings, that would be directly felt or suffered in Canada or by a Canadian resident would seem to have a sufficient connection with Canada to constitute a "Canadian risk".

We are reluctant to suggest a general or all-purpose definition of the words "Canadian risk", but we are not inclined to quarrel with that suggested in our attached memorandum of December 10, 1984 by Specialized Audit Division. The position taken therein is that "Canadian risk" includes:

1. risks incurred by residents of Canada, and

2. risks involving property or the occurrence of events in Canada.

To the above might also be added risks to property owned by a Canadian resident (see the attached legal opinion of May 26, 1982).

On the other hand, we now have reservations about the view expressed in the Rulings opinion of April 30, 1979 to the effect that a "Canadian risk" includes all risks covered by a law on insurance protected by a government in Canada (federal or provincial): "As a rule, the risks in question will be those described or defined in the particular contract negotiated and executed by the parties of insurance, not in the statutes which may regulate the conduct of insurers and the insurance business generally".

You have also specifically asked if it is possible for a risk to be apportioned between a "Canadian risk" and an "Non-Canadian risk", that is, must a risk be either entirely a "Canadian risk" or entirely a "Non-Canadian" with respect to loss of earnings insurance? As the foregoing opinion indicates, we would suggest that loss of earnings insurance under which a Canadian resident taxpayer is the beneficiary would generally appear to be in respect of a "Canadian risk" only, without apportionment for any non-Canadian risk. The question of whether an apportionment can be made in respect of the Canadian as opposed to the non-Canadian elements of a given risk or risks is probably an issue which should be determined in light of the circumstances of each case.

On the other hand, it is our view that, notwithstanding the ambiguous drafting of subsection 95(3) of the Act, which uses the normally enlarging word "includes", the insurance of what can be established to be "Non-Canadian risks", would not appear to be "services" for the purposes of subsection 95(3) and paragraph 95(2)(b) of the Act.

XXX

In our view, this is a question of fact about which we do not possess sufficient information to reach a conclusion. A complete picture of XXX operations and overall business structure, the location and manner of soliciting orders and concluding contracts, as well as the specific types, routes, etc. of maritime shipping services provided would be necessary to decide this question. Generally speaking, for the purposes of paragraph 95(2)(b) of the Act, the principles applicable to the question of whether or not and to what extent a Canadian resident carries on business in Canada should be similar to those criteria applicable to the issue of whether or not a non-resident is carrying on business in Canada. We note, however, that the extended meaning of carrying on business contained in section 253 of the Act has application only to non-resident persons. Accordingly, the meaning of a "business carried on in Canada" in the case of residents of Canada would be determined according to the definition of "business" found in subsection 248(1) of the Act and related case law, most of which is concerned with the rather different context of paragraph 2(3)(b) of the Act. There are also some British decisions which deal with the question of whether or not a person who is a resident, but who is conducting operations abroad, is carrying on business in the jurisdiction. These are discussed in the attached legal opinion dated May 26, 1982.

As a general comment in respect of this case, it is our view that, to the extent activities are carried on in Canada (e.g. soliciting contracts, concluding contracts, general control over the shipping operations, administrative functions etc.), XXX could be considered to be carrying on business both in Canada and outside Canada (and not just outside Canada) with respect to the contracts which require ship-days to be spent and miles to be traveled outside Canadian waters. Should the activities carried on in Canada form an integral part of the business, then it could be reasonable to conclude that the insurance premium in question was deductible in computing income from a business carried on in Canada.