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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether or not "Negative Reserves" which are included in income for gaap are to be included for income tax purposes.
Position TAKEN:
"Negative Reserves" should be included in computing income for tax purposes.
Reasons FOR POSITION TAKEN:
Based on the limited information available to us there is no basis to exclude the "Negative Reserves" in computing income for tax purposes when recognized as income for gaap purposes. May reconsider our position if provided with detailed information on how the "Negative Reserves" are accounted for gaap purposes.
940944
XXXXXXXXXX Michèle Trotier
Attention: XXXXXXXXXX
June 22, 1994
Dear Sirs:
Re: Policy Premium Method (the "PPM")
This is in reply to your letter of April 6, 1994 wherein you requested our comments on the income tax implications to a life insurer when using the PPM in determining its actuarial liabilities for purposes of its annual statements to The Office of the Superintendent of Financial Institutions ("OSFI") in respect of non-cancellable or guaranteed renewable accident and sickness policies referred to in paragraph 1400(g) of the Income Tax Regulations ("Regulations").
Unless as otherwise stated all references to statute are to the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993 (the "Act").
We can confirm that paragraph 1400(g) of the Regulations refers to a reserve in respect of a single insurance policy. You indicated that under the PPM it is possible that the amount reported to OSFI when computing the actuarial liabilities in respect of a particular non-cancellable or guaranteed renewable accident and sickness policy can actually result in what you refer to as a "negative reserve" amount and that such an amount would have to be included as income for accounting purposes. We can confirm that this "negative reserve" amount is not to be taken into account for purposes of paragraph 1400(g) of the Regulations in respect of such a particular policy.
In your letter you did not provide detailed information regarding the accounting treatment of "negative reserve" amounts. In this regard a detailed summary of all the accounting transactions describing how the PPM is recorded in the life insurer's accounts and how this method impacts on the life insurer's profits while a particular policy referred to above is in force and also when such a policy is surrendered or cancelled would have been useful.
Nevertheless we understand from our brief discussions with an officer of OSFI that for accounting purposes the use of the PPM should not result in double counting of any profits relating to such a particular policy and that the "negative reserve" amount is to be reversed over time for accounting purposes. Accordingly we are presently of the view that such a "negative reserve" amount which is recognized as income under generally accepted accounting principles should also be included in computing the income of the life insurer for income tax purposes pursuant to section 9 of the Act. There does not appear to be any provision in the Act which authorizes the deduction of an amount of profit relating to an insurance policy that is included in income pursuant to section 9 of the Act.
We also understand that the Department of Finance is presently reviewing the taxation of "negative reserves".
We trust that the above comments will be of assistance.
Yours truly,
Section Chief
Financial Institutions
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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