9 February 1995 External T.I. 9418255 - INSURANCE VS AGENCY BUSINESS

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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

WHETHER THE BUSINESS OF AN INSURANCE AGENT CONSTITUTES THE CARRYING ON OF AN INSURANCE BUSINESS.

Position TAKEN:

GENERALLY NO, HOWEVER AN EXACT DETERMINATION WOULD BE A QUESTION OF FACT THAT WOULD HAVE TO BE DETERMINED ON A CASE BY CASE BASIS.

Reasons FOR POSITION TAKEN:

THE ESSENTIAL CHARACTERISTIC OF INSURANCE IS AN UNDERTAKING TO INDEMNIFY AGAINST CERTAIN RISK OR PERIL. IN A TRUE AGENCY RELATIONSHIP THE AGENT ACTS AS OR ON BEHALF OF A PRINCIPAL ESTABLISHING, WITHIN IT'S AUTHORITY, A LEGAL RELATIONSHIP BETWEEN THE PRINCIPAL AND A THIRD PARTY. IN EFFECT THE BUSINESS OF INSURANCE IS CONDUCTED BETWEEN PRINCIPAL AND THIRD PARTY WHILE THE AGENT CARRIES ON A BUSINESS AS AN INSURANCE AGENT. IN CASES OF OTHER THAN TRUE AGENCY OR WHERE THE AGENT CARRIES ON ACTIVITIES IN ADDITION TO THAT OF AGENT THE SPECIFIC FACTS WILL HAVE TO BE EXAMINED TO DETERMINE IF THE AGENT IS A PARTY TO CONTRACTS OR OTHER ARRANGEMENTS WHEREBY IT CAN REASONABLY BE REGARDED AS PROVIDING UNDERTAKINGS OF THE TYPE DESCRIBED IN SUBSECTION 138(1) OF THE ACT AND THEREFORE CARRYING ON AN INSURANCE BUSINESS.

		941825
XXXXXXXXXX	G. Donell

Attention: XXXXXXXXXX

February 9, 1995

Dear Sir:

Re: Insurance Corporation

This is in reply to your letter of July 5, 1994 and further to subsequent telephone discussions, concerning the definition of an "insurance corporation" as defined in subsection 248(1) of the Income Tax Act (the "Act") and specifically, whether the carrying on of the business of an insurance agency would constitute the carrying on of an insurance business. Such a determination can only be made after a thorough review of the facts surrounding the arrangement and on an ongoing basis. We can, however, provide you with the following general comments. We apologize for the delay of our response.

An "insurance corporation", in subsection 248(1) of the Act, is all-inclusively defined as "a corporation that carries on an insurance business". As "insurance business" is not a specifically defined expression within the provisions of the Act it would be appropriate to consider the common usage of the words as employed by the insurance industry. The Insurance Act of Ontario, R.S.O., 1980 ("IAO"), for instance, defines "Insurance" in terms of an undertaking to indemnify or to pay a sum upon the happening of a certain event. Subsection 138(1) of the Act, although a deeming provision, lists insurance business attributes that parallel those found in the IAO and other insurance acts. In our view, corporations that are party to contracts or arrangements whereby they provide undertakings of the type specified in subsection 138(1) would be indicative of corporations that carry on an insurance business.

An "insurance agent" is essentially defined, in the IAO, as a person who solicits insurance on behalf of an insurer. The agent in a true agency relationship, legally binds it's principal to a third party where the agent has been empowered with the necessary authority or capacity to do so or where, without that authority, the principal has nevertheless agreed to ratify the relationship. The activities of agent, in a true agency context, are clearly outside the purview of the contractual relationship established between the insurer (the principal) and the insured or third party. These activities would not be considered to make agents a party to the insurance contracts, arrangements or relationships.

In any particular case factors, however, such as the intentions of the agent, the manner in which the agent holds itself out to third parties, scope of authority, terms of a contractual obligation etc, may cloud the relationship and the agent's role. In determining whether an agent carries on an insurance business consideration must also be given as to whether the agent operates in more than one capacity. In such circumstances it would be necessary to determine whether any of the activities of the insurance agent constitute carrying on an insurance business.

Factors that are relevant to a determination of whether a particular corporation is carrying on an insurance business include registration as an insurance company, being subject to regulatory approval of and reporting to a federal or provincial superintendent of Insurance, the underwriting of risks, acceptance of risks underwritten by other insurers, collecting premiums, investing funds represented by premiums, paying losses, establishing rates and advertising.

In summary it is our view that where an insurance agent's only activities are pursuant to a true agency relationship it would not be considered as carrying on an insurance business and therefore would not be an "insurance corporation", as defined in subsection 248(1) of the Act. Where the insurance agent's activities are other than or beyond that of a true agent the determination of whether such activities constitute the carrying on of an insurance business can only be made after a review of the relevant facts taking into account the factors noted above.

While we hope our comments are of assistance to you we caution that they do not constitute an advance income tax ruling and therefore are not considered binding on the Department in respect of a specific situation.

Yours truly,

Director
Financial Industries Division
Rulings Directorate
Policy & Legislation Branch