23 October 1996 External T.I. 9608655 - REINSURANCE THROUGH CAPTIVE AND PARAGRAPH 95(2)(A.2)

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:

In a situation where U.S. individuals pay insurance premiums to a Canadian fronting insurer and a foreign captive insurance company reinsures, is there risk being insured which is in respect of a person resident in Canada so that paragraph 95(2)(a.2) applies?

Position:

No.

Reasons:

XXXXXXXXXX

									960865
XXXXXXXXXX							J. Stalker

Attention: XXXXXXXXXX

October 23, 1996

Dear Sirs:

Re: Paragraph 95(2)(a.2) of the Income Tax Act (Canada) (the "Act")

We are writing in response to your letter in respect of the application of paragraph 95(2)(a.2) of the Act in a reinsurance situation.

You have presented a scenario where a controlled foreign affiliate (Company A) of a Canadian resident corporation (Canco) carries on an active business in the United States. A second foreign affiliate (Company B) of Canco is a foreign captive insurance company resident in Bermuda. Company B reinsures risks of customers and employees of various affiliates of Canco. Company A insures its employees' Workers' Compensation insurance through an arm's length Canadian insurance company (Insco). Company A's employees are responsible for bearing the cost of the premiums. A stipulation of the contract with Insco requires that the insurance provided by Insco must be reinsured with Company B.

It would appear that your query involves a factual situation involving a possibly completed transaction. As indicated in paragraph 21 of Information Circular 70-6R2, we are not in a position to deal with factual proposed transactions other than in the form of an advance ruling request where the identity of the parties is known and all the facts surrounding the proposed transaction are presented to us. Issues involving completed transactions should be addressed to the appropriate Taxation Services Office of Revenue Canada.

In our view, where a foreign affiliate reinsures the risk assumed by a Canadian resident insurance company and the ultimate risk is that of a non-Canadian individual, the foreign affiliate generally would not be considered to be insuring a risk in respect of a person resident in Canada and paragraph 95(2)(a.2) of the Act would not be applicable.

We note that if the foreign affiliate reinsurer has funds that are not at risk in the insurance business, income from the investment of those funds would be foreign accrual property income within the meaning of subsection 95(1). We also note that the reinsurance business of the foreign affiliate may be an "investment business" as defined in subsection 95(1) of the Act.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch