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:
(1) Whether XXXXXXXXXX continued to carry on business where, after the sale of its client list, it operated on a run-off basis with a XXXXXXXXXX from OSFI prohibiting it from writing new business. (Ref: paragraph 111(5)(a))
(2) Whether the property and casualty ("P&C") insurance classes of XXXXXXXXXX are similar to other classes of P&C insurance.
Position TAKEN:
(1) Yes
(2) Yes
Reasons FOR POSITION TAKEN:
(1) The servicing of existing policies constitutes the carrying on of a business. (SEE E9433136 & "Household Products Company Limited v. MNR", 64 DTC 164, Tax Appeal Board and Carland (Niagara) Ltd v MNR, 34 Tax ABC 386)
(2) (a) The treatment of insurance and general scheme of the Act; life vs non-life.
(b) We could find no substantive basis upon which a conclusion could be reached that the provision of one class of P&C insurance would be dissimilar to the provision of another. This view was supported by a discussion with officials of OSFI.
XXXXXXXXXX 970630
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sir:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, requesting an advance income tax ruling on behalf of XXXXXXXXXX.
Unless otherwise specified, all references to statute are to the Income Tax Act.
You advise that to the best of your knowledge and that of XXXXXXXXXX, none of the issues involved in the ruling request has been considered by a district taxation office or a taxation centre in connection with a tax return already filed, and none of the issues involved in the ruling request is the subject of any notice of objection or is under appeal.
Our understanding of the facts, proposed transactions and their purposes is as follows.
FACTS
1. XXXXXXXXXX is an "insurance corporation" within the meaning assigned to that term in subsection 248(1) and is also a "Canadian controlled private corporation" within the meaning assigned to that term in subsection 125(7).
XXXXXXXXXX fiscal year end is December 31.
XXXXXXXXXX was incorporated pursuant to
XXXXXXXXXX
2. The authorized and issued capital stock of XXXXXXXXXX is as follows:
XXXXXXXXXX
The letters patent provide that the total number of shareholders, excluding employees and former employees, be limited to XXXXXXXXXX. It also provides that all classes of shares are entitled to vote although voting rights may be restricted in special cases.
3. XXXXXXXXXX
4. In its XXXXXXXXXX taxation year XXXXXXXXXX experienced significant operating losses. It's non-capital losses for XXXXXXXXXX of which a substantial portion was carried back and applied to earlier years. The notes to XXXXXXXXXX financial statements provide that, XXXXXXXXXX remained to be carried forward with expiry occurring in XXXXXXXXXX. The notes to XXXXXXXXXX financial statements state that non-capital losses of $XXXXXXXXXX are available for carryforward and will expire in the period XXXXXXXXXX.
5. Following the results of its XXXXXXXXXX taxation year XXXXXXXXXX made the decision, effective XXXXXXXXXX, to continue its insurance business on a run-off basis only. On this basis its business activities were to be restricted to the servicing of existing policies only. No new or renewal business was written.
XXXXXXXXXX
6. XXXXXXXXXX signed an agreement of purchase and sale (the "agreement"), dated XXXXXXXXXX for the sale of its goodwill, trademarks, client list and its underwriting files with respect to its XXXXXXXXXX insurance business. Part of this agreement included a covenant that XXXXXXXXXX agree to offer employment to the employees of XXXXXXXXXX that would not be retained due to the reduced activities of the run-off operations.
XXXXXXXXXX also agreed to sign a separate non-competition agreement with XXXXXXXXXX that provided that XXXXXXXXXX, would not carry on any activity competitive with the XXXXXXXXXX issued prior to the date of the non-competition agreement.
7. The following information was reported in XXXXXXXXXX financial statements to OSFI.
XXXXXXXXXX
Claims paid
out (000)
No. of employees
XXXXXXXXXX
Outstanding
policies XXXXXXXXXX
Invest. (000)
Acc.Rec. (000)
Deficit (000)
Premiums
Received (000)
8. XXXXXXXXXX is a "Canadian corporation" within the meaning assigned that term in subsection 89(1) and an "insurance corporation" within the meaning assigned that term in subsection 248(1) which carries on a P&C insurance business, the main activity of which is XXXXXXXXXX.
PROPOSED TRANSACTIONS
9. Subject to the receipt of a favourable advance income tax ruling, XXXXXXXXXX will acquire all of the issued and outstanding shares of XXXXXXXXXX for a consideration to be established. As a result of this transaction, XXXXXXXXXX will acquire control of XXXXXXXXXX for purposes of the Act.
10. After XXXXXXXXXX acquisition of control of XXXXXXXXXX, XXXXXXXXXX will continue to carry on, with a reasonable expectation of profit, the XXXXXXXXXX business it carried on prior to such change of control. XXXXXXXXXX will inject capital in XXXXXXXXXX sufficient to meet the requirements of OSFI for the purpose of obtaining a XXXXXXXXXX. XXXXXXXXXX will not seek to have its letters patent amended or modified in any way in respect of its insurance classes.
11. After the acquisition of control, new personnel will be hired and new policies will be issued by XXXXXXXXXX in the classes of P&C insurance permitted by its letters patent. XXXXXXXXXX will continue to service its policies that were in existence prior to such change of control. XXXXXXXXXX may also transfer some of its existing insurance operations to XXXXXXXXXX.
12. Other than as described in the proposed transactions above XXXXXXXXXX is not currently contemplating the merger or winding-up of XXXXXXXXXX.
PURPOSE OF THE PROPOSED TRANSACTIONS
13. The purpose of the proposed transactions is to ensure that XXXXXXXXXX will, after the acquisition of control and injection of capital, be able to carrying on other classes of P&C insurance business, and generate additional income that will allow it to utilize its non-capital losses which would otherwise expire.
RULINGS GIVEN
Provided all relevant facts, proposed transactions and their purposes have been fully disclosed and, as summarized above, are accurate, we confirm the following.
Provided that the XXXXXXXXXX insurance business of XXXXXXXXXX is carried on by XXXXXXXXXX, as described in paragraph 3 above, for profit or with a reasonable expectation of profit throughout a particular taxation year ending after the acquisition of control of XXXXXXXXXX, as described in paragraph 9 above, and subject to the time limitations set out in paragraph 111(1)(a), the restrictions set out in subsection 111(3) and any other requirements in the Act regarding deductibility of non-capital losses, the non-capital losses of XXXXXXXXXX as determined pursuant to subsection 111(8) may be deducted under paragraph 111(5)(a) of the Act in computing the taxable income of XXXXXXXXXX for that taxation year to the extent of the income earned by XXXXXXXXXX from its XXXXXXXXXX business and from income from additional classes of P&C insurance that a XXXXXXXXXX will authorize it to carry on for that year.
Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:
(a) the determination of the amount of non-capital losses that are available to XXXXXXXXXX for carryforward at the time that XXXXXXXXXX acquires control of XXXXXXXXXX; or
(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.
This ruling is provided subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and is binding upon the Department provided that the proposed transactions are completed by XXXXXXXXXX. This ruling is based on the Act and the Income Tax Regulations in their present form and does not take into account the effects of any proposed amendments thereto.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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