12 April 1985 Income Tax Severed Letter 7-3857 - [850412]

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.

J. Shaw

APR 12 1985

TORONTO DISTRICT OFFICE G.R. Scott Basic Files - Section 142-3-1

This is in reply to your memorandum of February 22, 1985 in which you requested our comments regarding your proposed disallowance of a portion of the XXXX pursuant to paragraph 20(1)(bb) of the Act.

Rather simplistically, insurers carrying on business in Canada and outside Canada are required to include in their Canadian business income only investment revenue from properties having an aggregate value at least equal to their asset base assumed necessary to maintain Canadian operations, irrespective of the investment revenue factually earned in Canada which is normally a significantly greater amount. The provisions of Part XIII of the Act apply to the excess where the insurer is a non-resident. Since only certain income is required to be reported for Part I purposes, logically, only expenses relating to the reported revenue should be claimable. Since identifiable assets are the source of revenue reported, expenses clearly related to such assets would generally be deductible, and expenses relating to the entire portfolio should be allocated between reported revenue and revenue not required to be reported on some reasonable basis.

Your specific concern is with the comments in paragraphs 5 and 9 of Interpretation Bulletin IT-238R2 , with respect to the former that paragraph 20(1)(bb) "applies to fees paid on account of capital and the criteria made or incurred for the purpose of gaining or producing income from the business does not apply" and, with respect to the latter that "the fact that part or all of a taxpayer's investment income is exempt from tax does not affect a deduction that is otherwise allowable".

Further, you state paragraph 248(1) provides that exempt income means that it is not included in computing income by reason of any provision in Part I. In the case of insurers, there are provisions under Section 138 where part of the investment income is not included in Part I, but it is not excluded entirely from income. In fact, Regulation 802 provides that this additional amount is included is Part XIII income. Any exemptions are by virtue of paragraph 212(1)(b) in Part XIII, and therefore conclude that the preamble in subsection 20(1) applies to investment counsel fees as well as other deductions mentioned in section 20.

In reply, we agree with the comment in the bulletin that paragraph 20(1)(bb) applies even though the income may be exempt. In our opinion investment income not subject to Part I tax is "exempt income" within the meaning of that term in subsection 248(1) and the treatment accorded the income for Part XIII purposes is irrelevant.

However, we note that the preamble in subsection 20(1) reads, in part, "there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto", the "that source" being a source which is a business or a property.

Section 4 requires a contemporaneous allocation of income and expense items to the taxpayer's business and property sources of income on a reasonable basis. As such, the argument may be made that the Company must allocate the investment counsel fees on a reasonable basis between the Canadian business as constituted for tax purposes and the other business or businesses conducted.

Chief Financial Institutions Bilingual Services & Finance Division