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:
An insurer holds 100% shares of Holdco1. Whether or not shares of Holdco1 are investment property to that insurer
a)where Holdco1 owns 100% of the shares of an insurance corporation
b) where Holdco1 owns 100% shares of another Holdco2 which in turn owns 100% of the shares of another insurance corporation.
Position:
Shares of Holdco1 are not investment property to the insurer.
Reasons:
The requirements of the definition of "investment property" in subsection 2405(3) of the Regulations are not met.
January 30, 1998
MEMORANDUM TO FILE Michèle Trotier
980065
INVESTMENT PROPERTY
Our September 18, 1995 memorandum to Headquarters Appeals and Referrals Division (our response number 951865) discussed a situation where a Holdco is interposed between an insurance corporation ("Insurco") and another insurance corporation ("Insursub"). The fact that Insursub is a designated corporation of Insurco is not relevant to the determination of whether the shares of Holdco are investment property of Insurco (however, see "Other comments").
We will reiterate the basis for our interpretative position with regard to two factual situations.
Situation #1
This is the situation which we dealt with in our previous memorandum. The organizational structure is as follows:
Insurco
100%
Holdco
100%
Insursub
Holdco is a "designated corporation" of Insurco, within the meaning of that term as defined in subsection 2405(3) of the Income Tax Regulations ("Regulations"). In order for the shares of Holdco to be "investment property", as defined in subsection 2405(3) of the Regulations, of Insurco the tests set out in subparagraphs (d)(iv) and (v) of that definition must be met.
In making this determination the postamble to paragraph (d) of the "investment property" definition provides that for purposes of subparagraphs (d)(iv) and (v) of that definition it is assumed that the definition of "gross investment revenue" and this definition (being the definition of "investment property") apply to Holdco as though Holdco were an insurer. The reason for the specific reference to the definition of "gross investment revenue" in the above postamble is unclear especially when taking into account the fact that paragraph 2405(1)(b) of the Regulations refers to the definition of "gross investment revenue" and that "gross investment revenue" is also referred to in the definition of "investment property" other than in subparagraph (d)(v) of that definition. It is our view that the reference to "gross investment revenue" in this postamble is not necessary but perhaps is for greater certainty. While there is no specific reference in the above postamble to the definition of "designated corporation" as noted in our previous memorandum there is similarly no reference to the definition of "non-segregated property" as defined in subsection 138(12) of the Income Tax Act and referred to in paragraph 2405(1)(b) of the Regulations. There is also no specific reference in this postamble to the definition of "value for the year". "Value for the year" is referred to in subparagraph (d)(iv) of the definition of "investment property" in subsection 2405(3) of the Regulations. We are of the view that since the corporation described in subparagraph (d)(i) of the definition of "investment property" is deemed to be an insurer as set out in the postamble to the definition of "investment property" then all the relevant definitions must apply as necessary for the postamble to operate as intended. Unless we accept that Holdco is an insurer for purposes of the "non-segregated property" and the "value for the year" definitions the result may be that none of the provisions in the definition of "investment property" would have application to Holdco with respect to the determination to be made for purposes of subparagraphs (d)(iv) and (v) of the definition of "investment property" which would render the above postamble meaningless. Accordingly, we are of the view that the above postamble operates to consider Holdco as an insurer with respect to all the provisions which are relevant for the purposes of applying subparagraphs (d)(iv) and (v) of the definition of "investment property" and the definition of "investment property" in subsection 2405(3) of the Regulations.
Accordingly, Insursub is a "designated corporation" of Holdco and is excluded from the definition of "investment property" pursuant to subparagraph (d)(i) of that definition since it is an insurance corporation. Consequently, the tests in subparagraphs (d)(iv) and (v) of the definition of "investment property" cannot be satisfied since none of the property held by Holdco would be "investment property". As a result, the shares of Holdco are not "investment property" to Insurco.
Situation #2
The organizational structure in this situation is as follows:
Insurco
100%
Holdco 1
100%
Holdco 2
100%
Insursub
Holdco 1 is a "designated corporation" of Insurco within the meaning of that term as defined in subsection 2405(3) of the Regulations. Admittedly the determination of whether the shares of Holdco 1 are "investment property" to Insurco pursuant to the definition of "investment property" in subsection 2405(3) of the Regulations is somewhat convoluted where a second tier holding company is inserted between Holdco 1 and Insursub. In making this determination Holdco 1 is considered to be an insurer for purposes of the definition of "investment property" in subsection 2405(3) of the Regulations which requires a determination of whether the shares of Holdco 2 that it holds constitute "investment property" to it. Since Holdco 2 is a "designated corporation" of Holdco 1 within the meaning of that term in subsection 2405(3) of the Regulations, the shares of Holdco 2 will only constitute "investment property" to Holdco 1 if the tests in subparagraphs (d)(iv) and (v) of the definition of "investment property" are satisfied. In our opinion this determination requires that Holdco 2 is the corporation referred to in subparagraphs (d)(iv) and (v), which must be regarded as an insurer when determining whether or not the shares of Holdco 1 are "investment property" to Insurco. Since the only investment held by Holdco 2 is the shares of Insursub, which is a "designated corporation" of Holdco 2 that carries on an insurance business, Holdco 2 does not hold any "investment property". The shares of Insursub are excluded from the definition of "investment property" pursuant to subparagraph (d)(i) of that definition since it is an insurance corporation. Since Holdco 2 does not hold any "investment property" the investment of Holdco 1 in the shares of Holdco 2 cannot satisfy the tests in subparagraphs (d)(iv) and (v) of the definition of "investment property" with the result that the shares of Holdco 2 will not be "investment property" of Holdco 1. Consequently, the tests in subparagraphs (d)(iv) and (v) of the definition of "investment property" cannot be met with respect to Insurco's investment in the shares of Holdco 1. As a result, the shares of Holdco 1 will not constitute "investment property" as defined in subsection 2405(3) of the Regulations to Insurco.
We are of the view that the reference to "the insurer and persons or partnerships that do not deal at arm's length with the insurer" in the definition of "designated corporation" in subsection 2405(3) of the Regulations would include situations where the insurer does not own any common shares in the corporation under consideration but persons which do not deal at arm's length with the insurer own 30% or more of the common shares of this corporation. It is our understanding that this is in conformity with the intention of the legislator. Consequently, we are of the view in the above noted situations that Holdco 2 and Insursub are each a "designated corporation" of Insurco even though Insurco may not own any common shares in Holdco 2 and Insursub because persons which do not deal at arm's length with Insurco own 30% or more of the common shares of Holdco 2 and Insursub.
Holdco 2 would be a "designated corporation" of Insurco pursuant to the definition of "designated corporation" in subsection 2405(3) of the Regulations for the reasons above. In the event that Insurco owns shares other than common shares of or holds debt owed to it by Holdco 2 these properties would represent shares or debt of a designated corporation. These shares and/or the debt of Holdco 2 would not be "investment property" of Insurco since Holdco 2 does not own "investment property" given that its only assets are the shares of Insursub.
Insursub would be a "designated corporation" of Insurco pursuant to the definition of "designated corporation" in subsection 2405(3) of the Regulations for the reasons above. We are also of the view that where Insurco owns shares other than common shares of or holds debt owed to it by Insursub the shares and/or debt of Insursub would not be "investment property" of Insurco by virtue of subparagraph (d)(i) of the definition of "investment property".
F. Lee Workman
Chief
Financial Institutions Section
Financial Industries Division
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