28 April 1995 Internal T.I. 9431716 - INSURERS - INVENTORY

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:

Does insurance property of an insurer constitute inventory of the insurer.

Position TAKEN:

No.

Reasons FOR POSITION TAKEN:

File 923444
File 903276

									April 20, 1995

	HEADQUARTERS						HEADQUARTERS
	Audit Technical Support Division		J.P. Dunn
E. H. Gauthier						(613) 957-8953
	Director

	Attention:  Blair Chisholm
	Industry Specialist Services			 943171

Insurance Companies
Inventory Write-Down for Investments

We are writing in response to your correspondence of December 3, 1994 with which you had enclosed an excellent discussion paper prepared by Renu Bhandari of the Kitchener District Office regarding the question of whether or not investments of insurers should qualify for treatment as "inventory" pursuant to subsection 10(1) of the Income Tax Act (the "Act").

The specific case giving rise to the discussion paper is, as we understand, a property and casualty insurer which acquired real estate for the purpose of resale. The insurer maintains that such properties are held as an "adventure or concern in the nature of trade". As such an adventure is included in the definition of "business" in subsection 248(1) of the Act, this insurer claimed that subsection 10(1) of the Act was applicable to these properties and, accordingly, the cost amount of the properties was reduced to the lower of cost or fair market value to reflect an impaired fair market value.

Generally, we would agree with the majority of the conclusions reached in the above-noted paper, more specifically that;

1.Otherwise than by its inclusion in the definition of "business" in subsection 248(1) of the Act, an "adventure or concern in the nature of trade" cannot be assimilated to the carrying on of a business.

2.Similarly, a person carrying on an "adventure or concern in the nature of trade" cannot be equated to a "trader".

3.In accordance with the comments in Friesen (93 DTC 5313 - FCA), the cost amount of inventory which is held in the course of an adventure or concern in the nature of trade becomes relevant only in the taxation year in which that property is disposed of.

We would note that the Friesen case has recently been heard on appeal to the Supreme Court of Canada and, notwithstanding the numerous considerations of this and similar issues by the Courts, it is hoped that the forthcoming decision by the Supreme Court will provide guidance in this matter, especially in those instances in which the "inventory" consists of only one or a very few properties. Also the proposed "mark-to-market" legislation for financial institutions will be applicable to certain securities held by insurers, however that legislation will not affect properties such as real estate, joint venture participations or partnership interests.

We also note the statement in the paper that "insurers are not in the business of trading in investments" as one basis for denying the write-down of those investments as inventory properties. It is our understanding that the position previously adopted by the Department with regard to insurers was that, although the insurer may not be in the business of trading in its investments, those investments were held as part of the carrying on of the business of insurance and that most, if not all, of those investments were considered to be held by the insurer on account of income. Notwithstanding that these assets may be held on account of income, it is also the view of this Division that, because, in other than the year of disposition, the cost or value of those assets is not relevant in computing income those assets do not constitute inventory, within the meaning of that term in section 248(1) and subsection 10(1) of the Act, of the insurer. We also do not believe that the fact that the assets are held as an adventure in the nature of trade (regardless of whether this is or is not factually correct) is reason to deviate from this position as it is our view that such assets would also be insurance property of the insurer and subject to the same limitation.

In circumstances in which the assets are not considered to constitute inventory of the insurer, the taxpayer may be able demonstrate that, pursuant to section 9 of the Act and in accordance with ordinary commercial principles applicable to the industry, it is entitled to a write-down of the assets under consideration in computing its income for the year. It is our view that such a write-down would be specifically prohibited by paragraph 18(1)(e) of the Act as a contingent liability or amount. Accordingly, the only write-down available would be pursuant to subsection 10(1) of the Act and then only to the extent that the assets constitute "inventory" of the taxpayer.

With respect to the discussion paper in general, we consider that the issue was well researched and arrived at a conclusion which is not at variance with the views of this Division on this subject.

We trust that this is the information which you require.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch