24 August 1988 Income Tax Severed Letter 7-2843 - [Mean Canadian Reserve Liabilities (CRL) Test, Regulation 2400(1)(e) of the Income Tax Act (the "Act")]

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.

DATE August 24, 1988

TO Industry Specialists Section Special Audits Division

Attention: Saif T. Abdulhusein

FROM Financial Industries Division A. Seidel 957-8968

SUBJECT: Mean Canadian Reserve Liabilities (CRL) Test, Regulation 2400(1)(e) of the Income Tax Act (the "Act")

FILE 7-2843

This is in reply to your memorandum, dated May 6, 1988, with respect to the above subject.

The basic files section in the Scarborough D.O. has questioned the interpretation of the word outstanding and the distinction between it and the words accrued, due, payable, owing, and debt used in Section 138, Regulations 1401, 2400, and 2405 of the Act relating to insurers. In paragraph 138(12)(b.1) of the Act, "amount payable in respect of a policy loan at a particular time, means the amount of the policy loan and the interest thereon that is outstanding at that time". The phrase "amount payable in respect of a policy loan" is used in Regulation 1401(1)(c)(i)(B), 1401(1)(c)(ii)(C), and 2400(1)(e)(i)(B)(I) & (II) of the Act and, by virtue of Regulation 2405(1)(b) and 1404(1) of the Act, the definition for "amount payable" in paragraph 138(12)(b.1) of the Act is applicable to these three sections of the Regulations.

Although the words are used synonymously in everyday language, a legal distinction is given to the term as follows: In Black's Law Dictionary, debt is defined as a sum of money which is certainly and in all events payable. It then gives the following definitions for:

DUE - a debt that is presently matured and enforceable,

PAYABLE - a debt that is fixed and certain but the day for its payment has not arrived,

OWING - a debt that is unpaid, regardless of whether it is due or payable,

OUTSTANDING - a debt remaining undischarged, unpaid, uncollected, (as an outstanding debt).

In Stroud's Judicial Dictionary, accrued, as applied to liabilities, has the meaning of completely constituted, and may be enforceable now or in the future. In various common law court cases it has also been decided that interest on money lent accrues on a day to day basis even though it is not payable until a future date. Therefore, from a legal point of view, it can be argued that outstanding interest would include accrued interest and therefore the "interest thereon that is outstanding at that time" as used in paragraph 138(12)(b.1) of the Act would include accrued interest. This view is supported by The Travelers Indemnity Company case (84 DTC 1400). This would mean that the wording in Regulation 1401(1)(c)(i)(B) and 1401(1)(c)(ii)(C) of the Act of "the aggregate of all amounts each of which is an amount payable in respect of a policy loan outstanding at the end of the year in respect of the policy or the interest thereon that has accrued to the insurer at the end of the year..." (emphasis added) would appear to be a duplication and the phrase "the interest thereon that has accrued" would be redundant. It would therefore be reasonable to conclude that the Income Tax Act is differentiating between "interest thereon that is outstanding" and "interest thereon that has accrued".

In reviewing the terminology used by insurers in preparing their financial statements, they appear to use only two of the above terms on a consistent basis, namely due and accrued. They use due in the context of something presently collectable or payable and accrued in the context of something collectable or payable at some future date. This may be part of the explanation why some insurers are interpreting "outstanding" to be the same as "due" for Regulation 2400(1)(e)(i)(B)(I) & (II) of the Act and only adding accrued interest when specifically required to do so by Regulation 1401(1)(c)(i)(B) and 1401(1)(c)(ii)(C) of the Act.

The distinction between the two phrases "interest thereon that is outstanding" and "interest thereon that has accrued" appears to be more clear when you look at the wording of the two sections in the French language. The definition in paragraph 138(12)(b.1) of the Act reads "l'intérêt … exigible" whereas the wording in Regulation 1401(1)(c)(i)(B) and 1401(1)(c)(ii)(C) of the Act is " intérêts… accumulés". The word exigible, according to the Concise Oxford Dictionary, 7th Edition, means "that may be demanded or exacted". This would be in line with the definition of a debt that is due (ie. it has matured and is presently enforceable). The word "accumulés" has the same meaning as accrue and would be in line with the definition of interest accruing but not yet due.

Based on the above, it is our opinion that, for the purposes of Regulation 2400(1)(e)(i)(B)(I) & (II) of the Act, the insurers would only be required to include policy loan interest which is due and not policy loan interest which has accrued but is not yet due.

As a final note, we would like to point out that the April, 1988 proposed amendments would revoke Regulation 2400 of the Act in its entirety. The mean Canadian reserve liability test would come under new Regulation 2400(1)(b) of the Act and introduces a new term, mean policy loans, which makes no reference to the interest on policy loans and no longer uses the "amount payable" definition in paragraph 138(12)(b.1) of the Act.

for Director Financial Industries Division Rulings Directorate