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.
DOCUMENT TYPE:
Head Office Memo - 951865
Principal Issues:
Whether or not shares of a subsididary ("holdco") of an insurance corporation are "investment property" where holdco in turn owns more than 30% of the common shares of another insurance corporation.
Position TAKEN:
No.
Reasons FOR POSITION TAKEN:
Considered the intention of the legislator and the wording of the related provisions.
September 18, 1995
HEADQUARTERS HEADQUARTERS
Appeals & Referrals Division Michèle Trotier
(613) 957-8953
Attention: Jim Nordin
Section Chief
951865
Shares of Designated Corporations
This is in reply to your memorandum dated July 14, 1995 wherein you requested that we reconsider our earlier position concerning whether the shares of a subsidiary ("Holdco") of an insurance corporation ("Insurco") are "investment property", as defined in subsection 2405(3) of the Income Tax Regulations ("Regulations"), of Insurco where Holdco in turn owns more than 30% of the common shares of another insurance corporation.
Our previous opinions indicated that the shares of the insurance subsidiary would constitute "investment property" of Holdco pursuant to paragraph (a) of that definition. Accordingly, Holdco would own "investment property" and to the extent the asset and income tests contained within subparagraphs (d)(iv) and (v) of the definition of "investment property" in subsection 2405(3) of the Regulations are met the shares of Holdco would constitute "investment property" of Insurco.
The basis for our view was the postamble to paragraph (d) of the definition of "investment property" which provides that Holdco is an "insurer" only for the purposes of this definition and the definition of "gross investment revenue". Subsection 2405(1) of the Regulations states that for purposes of Part XXIV of the Regulations "gross investment revenue" and "non-segregated property", which are referred to in this memorandum, have the meanings assigned by subsection 138(12) of the Income Tax Act ("Act"). Given that no specific reference was made to the definition of "designated corporation" we concluded that as this definition only has application to insurers it could not apply to Holdco.
The revision to the definition of "designated corporation" to provide that a corporation is a "designated corporation" in respect of an insurer if the insurer, or the insurer and persons or partnerships that do not deal at arm's length with the insurer, own 30 per cent or more of the common shares of that corporation at any time in the year did not alter the view expressed above. While this particular amendment would increase the number of circumstances in which a particular corporation would be a "designated corporation" in respect of an insurer it did not, in our view, address the situation described above.
We recognize that as a consequence of the above-noted revision to the definition of "designated corporation" in the situation described above the insurance subsidiary would be a "designated corporation" of Insurco notwithstanding that it would not be a "designated corporation" of Holdco. It seems unlikely that this was the intent of the legislator and accordingly we have reconsidered this matter as requested.
We spoke with a representative of the Department of Finance and were advised that the intention of the legislator was to exclude from the definition of "investment property" shares of a holding corporation where, as in the situation described above, the only holdings of Holdco are the shares of an insurance subsidiary. In this regard it seems reasonable that the legislator would not have intended the shares of a "designated corporation" which when owned directly by Insurco would not qualify as "investment property" would effectively so qualify by interposing Holdco between Insurco and the "designated corporation".
The intent of the legislator would be obtained if Holdco were considered an insurer for purposes of the definition of "designated corporation". The fact that those provisions of the definition of "investment property" dealing with "designated corporation" would not have application to Holdco with respect to the determination to be made for purposes of subparagraphs (d)(iv) and (v) of the definition of "investment property" would appear to be an unintended result in light of the intention of the legislator to introduce the above postamble in the first place. In addition, we now note that the postamble to paragraph (d) of the definition of "investment property" does not provide that Holdco is an "insurer" for purposes of the definition of "non-segregated property". Consequently, unless we accept that Holdco is an insurer for purposes of the "non-segregated property" definition the result may be that none of the provisions of the definition of "investment property" would have application to Holdco with respect to the determination to be made for purposes of subparagraphs (d)(iv) and (v) of the definition of "investment property" which would render the above postamble meaningless.
Clearly the postamble is poorly worded and given the expressed intent of the provision it seems to us that a reasonable case can be made that in the situation described above the shares of Holdco would not constitute "investment property" to Insurco because Holdco would not own any "investment property". Accordingly we would argue that the assumption that Holdco be an insurer for purposes of the definition of "investment property" requires that Holdco be regarded as an insurer for purposes of all definitions referred to therein including "designated corporation" and "non-segregated property". The shares of the other insurance corporation which are held by Holdco would therefore be shares of a "designated corporation" of Holdco and would be excluded from the definition of "investment property" pursuant to subparagraph (d)(i) of that definition since the other insurance corporation carries on a business of insurance.
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Given the above we are prepared to adopt the interpretation that is consistent with the intent of the provision.
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We also note that with respect to a non-resident insurer, where the shares of the holding corporation are not "investment property" of the insurer they may nevertheless be included as "property used by it and used by it in the year in, or held by it in the year in the course of" pursuant to paragraph 2400(1)(e) of the Regulations as it now reads and previously pursuant to paragraph 2400(1)(f) of the Regulations. Consequently, the "Canadian investment fund" of the non-resident insurer would be reduced by the aggregate valuation of such shares pursuant to subparagraph (b)(vii) of this definition in subsection 2405(3) of the Regulations and this only where the shares are not "investment property".
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We note that the two aforementioned insurance acts have now been combined in one Insurance Companies Act. We have not at this time reviewed the provisions of the Insurance Companies Act as they may apply to the comments made in our March 9, 1992 memorandum. However, we do maintain our position expressed in our March 9, 1992 memorandum subject to our review of the Insurance Companies Act.
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We trust that the above comments will be of assistance. We are prepared to review further the above related issues if you so request.
Roy Shultis
Acting Director General
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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