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 - 960452
Principal Issues:
Whether or not fair market value is the maximum value which can be used for purposes of the "valuation" of shares of a designated corporation held by a non-resident insurer in subsection 2405(3) of the Regulations.
Position:
This determination can only be made by OSFI
Reasons:
The "maximum value" is to be determined for purposes of the relevant authority which is OSFI in this case.
May 15, 1996
HEADQUARTERSHEADQUARTERS
Appeals & Referrals Division M. Trotier
L. C. Tremblay (613) 957-8953
Director
Attention: Jim Nordin
960452
Zurich Insurance Company ("Zurich")
Valuation of Shares of Designated Corporations
This is in reply to your memorandum dated January 31, 1996 wherein you requested any further comments we may have on the above issue. We would like to thank Bill Tryon of the Scarborough Appeals Division for his assistance in reviewing this matter.
Upon further review of the various correspondence you had listed in your January 31, 1996 memorandum; XXXXXXXXXX and review of the 1988 and 1989 Annual Returns filed with OSFI by Zurich we would like to make the following comments.
In determining the gross investment revenue pursuant to subsection 138(9) of the Income Tax Act ("Act") of a multinational Canadian life insurer carrying on an insurance business in and outside of Canada and of a non-resident insurer carrying on an insurance business in Canada the definition of "valuation" of certain properties found in subsection 2405(3) of the Income Tax Regulations ("Regulations") must be taken into account. These properties would include shares of a "designated corporation" held by such insurers. A "designated corporation" in respect of an insurer is defined in subsection 2405(3) of the Regulations to include a corporation in respect of which the insurer holds 30% or more of the common shares of such a corporation and would therefore include shares of a wholly-owned subsidiary of an insurer.
The "valuation" of land and shares, other than shares in a "designated corporation", is defined to be the cost to the owner. The "valuation" of bonds, mortgages and hypothecs is defined to be the book value "thereof in the accounts of the owner as determined for the purposes of the relevant authority or that would have been so determined if the owner had been a life insurer resident in Canada and registered under the Canadian and British Insurance Companies Act to carry on an insurance business in Canada." The "valuation" of shares of a "designated corporation" is defined to be the "maximum value of the property as determined for the purposes of the relevant authority or that would be determined if the owner had been a life insurer resident in Canada and registered under the Canadian and British Insurance Companies Act to carry on an insurance business in Canada,...".(underline added) The relevant authority with respect to Zurich is OSFI.
The Regulations specifically refer to the "maximum value of the property as determined for the purposes of the relevant authority..." but in the case of a non-resident property and casualty insurer such as Zurich it also provided that the "maximum value" would be basically the "maximum value" of what was reported to OSFI or what "would have been so determined if the owner had been a life insurer resident in Canada and registered under the Canadian and British Insurance Companies Act to carry on an insurance business in Canada,". One also has to give meaning to the latter part of this definition although it is not clear why such a choice was provided for. It recognized that even though an insurer other than a life insurer reported a value for purposes of OSFI it nevertheless had to consider a "maximum value" which would have been determined if it had been a registered life insurer resident in Canada. As noted above, a similar choice is found in paragraph (e) of the definition of "valuation" in subsection 2405(3) of the Regulations except that the reference to "maximum value" has been replaced by a reference to "book value".
Mr. Sommerville suggests in his letter of November 12, 1994 that the fact the definition of "valuation" uses the plural of the word "purpose" rather than the singular is relevant. We disagree with this view given that the identical phrase is used in paragraph (e) of that definition with respect to book value. Nevertheless we are of the view that some meaning must be given to the use of the word "maximum" in paragraph (g).
XXXXXXXXXX
We also note that the recent Federal Court Trial Division decision of Munich Reinsurance Company may be appealed. This decision, although not exactly on point with the issue presently under consideration in Zurich, may have some relevance in determining the meaning of the words "...determined for the purposes of the relevant authority".
XXXXXXXXXX
F. Lee Workman
Section Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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