30 November 1996 Ruling 9712983 - ASSUMPTION REINSURANCE AGREEMENT

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.

RULINGS DIRECTORATE

CORRESPONDENCE SUMMARY

Principal Issues:

(1)Whether an assumption reinsurance premium paid or payable by XXXXXXXXXX for the purpose of transferring long-term disability coverage under the XXXXXXXXXX is deductible by XXXXXXXXXX and included in the income of XXXXXXXXXX in the course of carrying on their accident and sickness insurance businesses.

(2)Whether XXXXXXXXXX is entitled to claim policy reserves pursuant to paragraph 20(7)(c) in the computation of income in the taxation year in which the XXXXXXXXXX long-term disability coverage is transferred.

Position TAKEN:

(1) Yes.

(2) Yes.

Reasons FOR POSITION TAKEN:

(1)Considered an income or expense incurred in the ordinary course of business.

(2)The nature of assumption reinsurance is that XXXXXXXXXX becomes the primary insurer with no further liability or obligation attaching to XXXXXXXXXX.

XXXXXXXXXX							971298
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 the XXXXXXXXXX.

Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (herein referred to as the "Act") and unless otherwise expressly stated:

(a)"Administrative Services Agreement" ("ASA") means an agreement between XXXXXXXXXX the purpose of which is the provision, by XXXXXXXXXX, of transitional services, to XXXXXXXXXX, relating to the administration of claims under the XXXXXXXXXX;

(b)"Assumption Reinsurance Agreement" means the agreement(s) between XXXXXXXXXX the purpose of which is to cede the XXXXXXXXXX to XXXXXXXXXX;

(c)"Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(d)"Closing date" means the second business day following the date on which both approval by the Minister of Finance (Canada), if and as required under section 254 of the Insurance Companies Act, and the date of a written income tax ruling that provides that XXXXXXXXXX may, for its XXXXXXXXXX taxation year, deduct in computing its income, the reinsurance premium paid by it to XXXXXXXXXX with respect to the XXXXXXXXXX;

(e)"Insurance Companies Act" means the Insurance Companies Act, S.C. 1991, c.47;

(f)"Insurance corporation" has the meaning assigned by subsection 248(1) of the Act;

(g)"XXXXXXXXXX" means the group long-term disability contracts issued by XXXXXXXXXX;

(h)"public corporation" has the meaning assigned by subsection 89(1) of the Act;

(i)"Reinsurance Premium" means the reinsurance premium to be paid by XXXXXXXXXX pursuant to the Assumption Reinsurance Agreement;

(j)"taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

You advise that to the best of your knowledge and that ofXXXXXXXXXX, 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 authorized under the Insurance Companies Act to conduct life and accident and sickness insurance in Canada. Its corporate income tax returns are filed with the XXXXXXXXXX District Taxation Office and XXXXXXXXXX Taxation Centre. XXXXXXXXXX is an insurance corporation, a public corporation and a taxable Canadian corporation. The fiscal year end of XXXXXXXXXX is XXXXXXXXXX. XXXXXXXXXX is a resident of Canada for purposes of the Act.

2.XXXXXXXXXX is authorized under the Insurance Companies Act to conduct life and accident and sickness insurance in Canada. Its corporate income tax returns are filed with the XXXXXXXXXX District Taxation Office and XXXXXXXXXX Taxation Centre. XXXXXXXXXX is an insurance corporation, a public corporation and a taxable Canadian corporation. The fiscal year end of XXXXXXXXXX is XXXXXXXXXX. XXXXXXXXXX is a resident of Canada for purposes of the Act.

3.XXXXXXXXXX carries on the business of providing long-term disability coverage on a group contract basis. Premiums for this business for the year ended XXXXXXXXXX were approximately $XXXXXXXXXX. Policy reserves with respect to group long-term disability coverage were approximately $XXXXXXXXXX.

4.The long-term disability coverage described in paragraph 3 above includes coverage provided to XXXXXXXXXX.

(a)The XXXXXXXXXX provide long-term disability coverage to members of the group. XXXXXXXXXX acquired this case XXXXXXXXXX. The case covers XXXXXXXXXX.

b)The respective dates of issue of the XXXXXXXXXX are as follows:

XXXXXXXXXX

c)The XXXXXXXXXX as a percentage of XXXXXXXXXX total group long-term disability business are approximately XXXXXXXXXX% of annual premiums and XXXXXXXXXX% of policy reserves.

d)In calculating its income for the XXXXXXXXXX taxation year pursuant to paragraph 20(7)(c), XXXXXXXXXX will claim a deduction for claims reserves in respect of the XXXXXXXXXX. The actual amount of such reserves deducted by XXXXXXXXXX under paragraph 20(7)(c) for its XXXXXXXXXX taxation year are required to be included in its income for its XXXXXXXXXX taxation year pursuant to paragraph 12(1)(e).

e)The XXXXXXXXXX do not constitute a separate line of business for purposes of subsection 138(11.92).

5.As of XXXXXXXXXX, XXXXXXXXXX was selected by the policyholder to replace XXXXXXXXXX as insurer with respect to the provision of long-term disability insurance coverage to members covered under the XXXXXXXXXX and has since issued such policies. As a result XXXXXXXXXX, no longer provides long-term disability coverage to XXXXXXXXXX group but remains liable with respect to claims under the XXXXXXXXXX.

PROPOSED TRANSACTIONS

6.XXXXXXXXXX will enter into an Assumption Reinsurance Agreement which will be in accordance with the provisions of sections 254-259 of the Insurance Companies Act. Under the terms of the Assumption Reinsurance Agreement XXXXXXXXXX will cede and XXXXXXXXXX will assume, at the Closing Date, all of the liabilities and obligations under the terms of the XXXXXXXXXX including, reserves for claims payable under the XXXXXXXXXX which have been reported to XXXXXXXXXX and which are either (a) accepted claims that have satisfied the waiting period, (b) reported claims that remain unpaid and are either litigated or arbitrated claims or pending claims that are more than 30 days past the waiting period and (c) former claims that may be re-opened. All such claims relate to amounts that will become due after the Closing Date and accordingly no amount in respect thereof will be deductible by XXXXXXXXXX as a claims expense should the parties proceed with the Proposed Transactions as described herein.

After the Closing Date, XXXXXXXXXX will not retain any of the liabilities or obligations under the XXXXXXXXXX and the policyholder will subsequently enforce all claims under the XXXXXXXXXX directly against XXXXXXXXXX.

7.On the Closing Date and in return for assuming the obligations described in paragraph 6 above, XXXXXXXXXX will be paid a Reinsurance Premium by XXXXXXXXXX based upon an independent actuarial valuation of all outstanding claims (including incurred but unreported claims) on the XXXXXXXXXX.

The Reinsurance Premium is based on an actuarial valuation of the outstanding claims of the XXXXXXXXXX in the amount of $XXXXXXXXXX adjusted from XXXXXXXXXX to the Closing Date to reflect

XXXXXXXXXX

XXXXXXXXXX will transfer and pay to XXXXXXXXXX, by certified cheque on the Closing Date, the Reinsurance Premium as described above.

8.XXXXXXXXXX will enter into an Administrative Services Agreement, effective from the Closing Date, pursuant to which XXXXXXXXXX will provide to XXXXXXXXXX, for which a pre-determined fee structure has been established, certain transitional services relating to the administration of claims under the XXXXXXXXXX. This agreement will, subject to early termination provisions or to a mutual agreement by both parties to extend its terms, expire on the later of XXXXXXXXXX and four months after the Closing Date.

PURPOSE OF THE PROPOSED TRANSACTIONS

9.The purpose of the Proposed Transactions is to permit XXXXXXXXXX to consolidate the administration, adjudication and payment of benefits to individuals covered by the XXXXXXXXXX.

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.

A.The Reinsurance Premium paid or payable by XXXXXXXXXX in respect of the assumption by XXXXXXXXXX described in paragraph 4 above will be an amount incurred by XXXXXXXXXX and received by XXXXXXXXXX in the course of carrying on their accident and sickness insurance businesses and as such will be deductible by XXXXXXXXXX and included in income by XXXXXXXXXX pursuant to section 9.

B.In computing its income from its accident and sickness insurance business for its taxation year during which the XXXXXXXXXX are ceded to XXXXXXXXXX from XXXXXXXXXX, as described in 6 above, and for subsequent taxation years, XXXXXXXXXX will be entitled to deduct a policy reserve in respect of the XXXXXXXXXX to the extent provided for by paragraph 20(7)(c).

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