16 June 1990 Ruling 900643 F - Deduction by Insurer of Premiums Payable under Reinsurance Contract (Burning Costs)

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) Buring Costs Provision

We are writing in reply to your May 6, 1990 memorandum concerning the above-noted matter which is under audit by the Vancouver District Office. 24(1) Our understanding of the "burning costs" issue is that it entails an insurer seeking to deduct for income tax purposes an amount in respect of premiums which might become payable under a reinsurance contract, generally pursuant to some form of retrospective or experience rating.  Insurers have argued that such a deduction is permissable either under the reserve system provided in Part XIV of the Income Tax Regulations, or alternatively, under generally accepted accounting principles.  As you know, the department has not accepted these arguments and our view of non-deductibility was recently conveyed to you (May 28, 1990) in connection with a submission on the subject by  

In the present case, it would appear that the D.O. proposal extends beyond our general position on the buring cost issue in that it would disallow not only amounts in respect of premiums which might become payable in the future but also amounts which are in fact paid (or payable) on a current basis.  In the case of premiums which might become payable in the future, the basis for our view of non-deductibility is principally the contingent nature of such a liability, at least prior to any adjustment calculations.  The case of the "provisional" and "deposit" premiums differs, however, in they reflect actual outlays the liability for payment of which is not subject to further contingencies but rather is contractually required to be made on a current basis.  As such, it is our view that the provisional premium (and the deposit premium. to the extent it does not exceed the maximum and is otherwise reasonable in the circumstances) should be deductible on a current basis.

This is consistent with, and some what analogous to, the treatment of premiums received, which must be included in income pursuant to subsection 138(1) of the Act (see paragraph 138(1)(c) which refers to "every amount received by the corporation under, in consideration of , in respect of or on account of such a contract ..."), and the eventuality that there may be a refund of premiums or refund of premium deposits, which under certain circumstances, are deductible pursuant to subsection 140(1) of the Act.

We might note here that we concur with the comments of    19(1)     on page 2 of this March 8, 1990 memorandum to Mr. George Pottage of the Kitchener D.O., regarding the dissimilarity between the situations discussed in the "two Rulings memoranda" and the situation at hand.

24(1)

Here again we note that the concern with the buring costs provision is that tit contemplates premiums which might be payable in the future i.e. a contingency.  In contrast however, the premium adjustments (as they arise) are actual outlays by the insurer which are required under the terms of the reinsurance contract.  It would seem to us that to deny or limit the deduction for such an outlay would require some other basis, such as unreasonableness (for example a demonstrable pattern of significant overpayment resulting in refunds.)

We hope this will be of assistance to you.  As requested, your materials are returned herewith.

for DirectorFinancial Industries DivisionRulings Directorate