30 September 1997 970321A - ORDINARY AND ACCOUNTING MEANING OF THE WORD "SURPLUS"

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:

Whether the "Head Office Account" of a Canadian branch of a non-resident insurer should be included as "any other surpluses" under subparagraph 181.3(3)(d)(ii) of the Act.

Position:

Yes, except amounts already included under subparagraph 181.3(3)(d)(i).

Reasons:

Ordinary and accounting meaning of the word "surplus"

			September 30, 1997

	TORONTO EAST TAX SERVICES				HEADQUARTERS
A. St-Amour
	Attention:  Duncan McKay					(613) 957-8953
	            Insurance Specialist
			7-970321

Part I.3 of the Income Tax Act ("the Act")
Head Office Account - Non-resident insurers

This follows our discussion on the above subject. We have issued our views on the inclusion of Head Office Account in subparagraph 181.3(3)(d)(ii) of the Act to the XXXXXXXXXX Tax Services Office (copy inclosed). This memorandum is to advise you of that position.

The capital of a non-resident insurer is calculated under paragraph 181.3(3)(d) of the Act. Subparagraph 181.3(3)(d)(i) includes the greater of its surplus funds derived from operations (as defined under subsection 138(12)) and its attributed surplus for the year as defined in subsection 2405(3) of the Regulations. Subparagraph 181.3(3)(d)(ii) includes any other surpluses relating to its insurance businesses carried on in Canada.

We understand that the Head Office Account of a non-resident insurer represents the amount of capital retained in Canada relating to the Canadian branch. It is equivalent to the Shareholders' equity and retained earnings of a Canadian insurer. It includes many elements, such as infusions of capital, trading transactions, adjustments (increase or decrease) of reserves, accumulated earnings, etc...

There is no provision in paragraph 181.3(3)(d) to specifically include the amounts constituting the Head Office Account. Although, the branch's income for the year may be included under subparagraph 181.3(3)(d)(i) in the surplus funds derived from operations, other amounts may not be included. For instance, the balance sheet of the case presented by the XXXXXXXXXX Tax Service Office discloses that the balance as of year end of the Head Office Account is $XXXXXXXXXX of which $XXXXXXXXXX represent transfers from Head Office. These amounts cannot be treated as long term debt under subparagraph 181.3(3)(d)(iii) since there is no liability (the branch is part of the Head Office non-resident insurer).

The word "surplus" is not defined in section 181 of the Act. The dictionary definitions of the word "surplus" relate to a remainder or excess, often in the sense of an arithmetical difference. In accounting, "surplus" has long been used to designate the excess of net assets over the total paid-in value or stated value of the shares of a corporation. Therefore, we can conclude that Head Office Account represents a "surplus". You have indicated that the inclusion of the Head Office Account in the tax base would be tantamount to a double counting of certain amounts already considered in the calculations under subparagraph 181.3(3)(d)(i). You have also indicated that an analysis of this account to determine the amounts that need to be excluded could be a very time consuming if not an impossible task in some cases because of the quantum of transactions.

We are of the view that the total amount of the Head Office Account as of year end should be included under subparagraph 181.3(3)(d)(ii) as "any other surpluses..." except amounts already included under subparagraph 181.3(3)(d)(i) of the Act. This will compel the insurers to do a detailed analysis of the account.

With respect to reimbursement of specific advances in subsequent years and any other administrative questions relating to the inclusion or exclusion of amounts in certain circumstances, we are of the view that these matters should be resolved by your directorate. We have advised the XXXXXXXXXX Tax Service Office accordingly.

If you have any questions do not hesitate to contact Adèle St-Amour at (613) 952-1764.

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