25 July 1990 Ruling 74723 F - Farmers' Insurer - Gross Premium Income Test

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.

SUBJECT:   24(1)  and Paragraph 149(1)(t) of the Income Tax Act (the "Act")

This is in reply to the issues raised in your memo dated February 14, 1990 with respect to the above subject.

All references to statute are references to the Act unless otherwise indicated.

GROSS PREMIUM INCOME

The gross premium income percentage requirements in paragraph 149(1)(t) and subsection 149(4.2) are absolute and therefore no leeway can be allowed in interpreting the percentages.  For taxation years prior to 1989 the relevant percentage is 50 for paragraph 149(1)(t).  For 1989 and subsequent taxation years the relevant percentages are 25 and 90 for purposes of paragraph 149(1)(t) and subsection 149(4.2), respectively.

We have taken the view that the expression "on the advice of the Superintendent of Financial Institutions" allows, but does not require, the Department to obtain the percentage of gross premium income in respect of the insurance of farm property or residences of farmers from the Superintendent of Financial Institutions.

MEANING OF FARMING AND FARMER

Farming is defined in subsection 248(1) as follows:

     "farming" includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming;

Black's Law Dictionary defines a farmer as follows: a cultivator; a husbandman (a tiller of the ground); an agriculturist (farming in the sense of operating land to raise crops and livestock); one engaged in agricultural pursuits as a livelihood or business; one engaged in the business of cultivating land; one personally engaged in farming. (Underlining added)

In Moldowan v The Queen (77 CTC 310, SCC), Dickson, J. expressed the opinion that "the Income Tax Act as a whole envisages three classes of farmers:

(1)     A taxpayer for whom farming may reasonably be expected to provide the bulk of income or the centre of work routine.  Such a taxpayer, who looks to farming for his livelihood, is free of the limitation of section 31 (subsection 13(1) of the former Income Tax Act) in those years in which he sustains a farming loss.

(2)     The taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood but carried on farming as a sideline business.  Such a taxpayer is entitled to the deductions spelled out in section 31 (subsection 13(1) of the former Income Tax Act) in respect of farming losses.

(3)     The taxpayer who does not look to farming, or to farming and some subordinate source of income, for his livelihood and who carried on some farming activities as a hobby.  The losses sustained by such a taxpayer on his non-business farming are not deductible in any amount.

For the purposes of this memorandum the taxpayer described in (1) will be referred to as a "farmer", the taxpayer described in (2) will be referred to as a "restricted farmer" and the taxpayer described in (3) will be referred to as a "hobby farmer".

The gross premium test in paragraph 149(1)(t) applies to the "insurance of farm property...or residences of farmers...".  In our view consistent with the above definitions and the decision in Moldowan, property can only qualify as farm property if it is utilized by a farmer in his farming business.  Accordingly, the insurance of farm property and residences of farmers and restricted farmers would satisfy the requirements of paragraph 149(1)(t) and the insurance of property and residences of hobby farmers and retired farmers would not be the insurance of farm property or residences of farmers for the purposes of paragraph 149(1)(t), regardless of the value of machinery, produce and livestock owned by the taxpayer.

RESIDENCES OF FARMERS

It is our view that only immovable personal properties (ie: this may include inground swimming pools, TV antennas, satellite dishes) which are insured as part of the insurance policy with respect to the residences of farmers and restricted farmers could be included in "residences of farmers" for purposes of paragraph 149(1)(t).

It is our view that gross premiums from the insurance of personal property, such as jewellery and sporting equipment, would not qualify for purposes of paragraph 149(1)(t).

FARM PROPERTY

Whether the insurance of automobiles (or any other machinery) represents the insurance of farm property is a question of fact and would depend upon factors such as the licensing as farm or non-farm automobiles and the actual usage of the items insured for farming versus non-farming activities.  By nature, automobiles are road and passenger vehicles and as a result generally would not qualify as farm property for the purposes of paragraph 149(1)(t).

REINSURANCE

The revisions to paragraph 149(1)(t) for 1989 and subsequent taxation years specifically address the auditors concerns raised with respect to reinsurance.  The 25 percent gross premium income test is now determined net of reinsurance ceded.  Furthermore the test is applied to the insurer and all other insurers that were specified shareholders of or related to the insurer or where the insurer is a mutual corporation, is applied to the gross premium income of the insurer and all other insurers that were part of a group that controlled or were controlled by the insurer for the period.  Prior to 1989, paragraph 149(1)(t) did not require the reduction of gross premium income for the amount of reinsurance ceded in calculating the 50 percent requirement in paragraph 149(1)(t).

While we have not been provided with enough information to determine whether tax avoidance is involved in the reinsurance ceded, we would agree that if further analysis provides evidence of artificial transactions concerning the reinsurance arrangements, this should be considered further.

We hope our comments are of assistance to you.  If you wish to discuss any of the above further do not hesitate to call us.

F. Lee Workman for DirectorFinancial Industries DivisionRulings Directorate