7 February 1995 External T.I. 9425625 - INSURANCE CORP & WINDING UP

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: - When does the winding-up of an insurance corporation commence?

Position TAKEN: - Upon receipt of Minister's approval.

Reasons FOR POSITION TAKEN: - The Insurance Act of Canada is very similar to the CBCA in its requirements to have an corporation wound up. However, under the Insurance Act the most critical step is getting the Finance Minister's approval which will only be granted where certain conditions have been satisfied. Therefore, we have concluded that the "commencement of the winding-up" will be when the Minister's approval is granted.

			942562
XXXXXXXXXX	M.P. Sarazin
(613) 957-2118

Attention: XXXXXXXXXX

February 7, 1995

Dear Sirs:

Re: Meaning of the Expression "Commencement of the Winding-up"

This is in reply to your facsimile dated October 4, 1994 wherein you requested our comments regarding the interpretation of when the "commencement of the winding-up" of an insurance company incorporated under the Insurance Companies Act (Canada) (the "Insurance Act") would occur for the purposes of subsection 88(1.1) of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, consolidated to June 23, 1994.

Under sections 381 to 384 of the Insurance Act, the necessary steps that must be undertaken to wind-up an insurance company are as follows:

the voluntary liquidation may be proposed by either the directors or shareholders of the company. The notice of the shareholders' meeting at which the proposal is to be considered must set out the terms of the proposal;

if authorized by a special resolution of the shareholders, the company may apply to the Minister of Finance (the "Minister") for letters patent dissolving the company. Until the application for letters patent is approved by the Minister, no other action can be taken by the company towards its voluntary liquidation;

once the application is approved by the Minister, the company can no longer carry on business except to the extent necessary to complete its voluntary liquidation;

the company then sends notice of the Minister's approval to its policyholders and creditors, publishes notice of the approval in the Canada Gazette, collects its assets and makes arrangements to transfer its policies to third parties;

the remaining property is distributed to its shareholders; and

once satisfied that all of the necessary steps have been completed, the Minister issues letters patent dissolving the company.

Even though the Department's general position as expressed in paragraph 6 of Interpretation Bulletin IT-126R is that the commencement of winding-up is evidenced by a shareholders' resolution authorizing or requiring that the corporation be wound up, you are of the view that, in the case of an insurance company, the commencement of the winding-up should occur when the directors or shareholders initially propose to recommend the liquidation or dissolution of the company to its shareholders.

Comments

Generally, a corporation incorporated under the Canada Business Corporations Act (the "CBCA") cannot voluntarily liquidate and dissolve without the consent of its shareholders. Until the shareholders' consent is provided, the corporation is not entitled to commence its voluntary liquidation and dissolution. However, once shareholder consent is obtained, the corporation can, subject to the rights of its creditors, distribute its property and undertake the other steps necessary to have its existence formally dissolved. For this reason, the Department has taken the general position expressed in paragraph 6 of IT-126R that the "commencement of the winding up" would be evidenced by the resolution of the shareholders authorizing or requiring that the corporation be wound up.

The liquidation provisions found in sections 381 to 384 of the Insurance Act appear to be very similar to the liquidation provisions found in the CBCA except that subsection 383(1) of the Insurance Act prohibits the insurance company from taking any further action directed towards its voluntary dissolution and liquidation until the application for dissolution made by the company has been approved by the Minister. Since the Minister's approval is essential before an insurance company can commence to distribute its assets and implement any other steps necessary to complete its voluntary liquidation under the Insurance Act, we are of the view that the Minister's approval would constitute the "commencement of the winding-up" of an insurance company incorporated under the Insurance Act for the purposes of subsection 88(1.1) of the Income Tax Act.

We hope that our comments will be of assistance.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch