15 January 1992 Internal T.I. 9129507 F - Canadian Reserve Liabilities

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.

January 15, 1992

Attention: Blair Chisolm

Canadian Reserve Liabilities("CRL")

This is in reply to your memorandum of October 24, 1991 concerning lists which you have prepared and which indicate the items which are to be included or excluded as CRL.

The Income Tax Act does not define "liabilities" or "reserves" for purposes of the CRL definition and consequently we must use the ordinary commercial meaning of those words and we must also determine whether such liabilities and reserves are "in respect of insurance policies in Canada". There has been a recent court decision at the Tax Court of Canada level (1991 DTC 1137) dealing with the Canadian branch of Munich Reinsurance Company which we understand has been appealed. One of the issues the court had to decide was whether certain items should be included or excluded as CRL. The court held at page 1141 that:

     "The first issue before me is whether or not the deferred policy acquisition expenses and the hail insurance reserves were reserves in respect of the appellant's insurance policies in Canada and therefore are to be included in its "Canadian reserve liabilities".

The issue boils down to whether the definition of "Canadian reserve liabilities" includes only reserves directly related to the insurer's Canadian policies of insurance or if the definition may include reserves indirectly related to policies; or, as appellant's counsel put it, only those reserves traceable to specific policies.

Clearly, some link must be established between the reserves for deferred policy acquisition expenses and hail insurance on one hand and the appellant's insurance policies on the other hand, for these reserves to be included in the definition of "Canadian reserve liabilities".

     "I see nothing in the definition "Canadian reserve liabilities" that compels me to find that the "...insurer's liabilities and reserves in respect of its insurance policies..." means the insurer's liabilities and reserves in respect of any particular insurance policy or policies. I am not of the view any "tracing" is required..."

The court also held at page 1142 that:

     "Having regard to the business carried on by a non-resident insurer, that is, the business of insurance, the definition of "Canadian reserve liabilities" is broad enough to include the liabilities and reserves reported to the relevant authority under the relevant provisions of the Insurance Act which have a connection, directly or indirectly, with the insurer's insurance policies in Canada."

Our position on the CRL issue has been to consider the definition of CRL as being broad enough to include liabilities and reserves which are effectively connected directly or indirectly with the insurer's insurance policies in Canada.

     21(1)(b)

We hope the above comments will be of some assistance.

Yours truly,

Section ChiefFinancial InstitutionsFinancial Industries DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch