26 April 1999 Internal T.I. 9910547 - APPROPRIATIONS/RETAINED EARNINGS PART 1.3 TAX

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: Do appropriations of retained earnings or surplus remain as part of the retained earnings or surplus?

Position: Yes

Reasons: They retain their legal character of retained earnings or surplus.

		April 26, 1999

	TORONTO EAST TSO	HEADQUARTERS
      	Michèle Trotier
	Attention:  Duncan McKay	(613) 957-3494
	                  Insurance Specialist
		991054

Parts I.3 and VI Taxes

This is a follow-up to our memorandum dated April 14, 1999 concerning appropriations of retained earnings or surplus. We would like to add that we also reviewed the documentation which was provided in a memorandum dated May 8, 1998 by Jacques Dion of the Québec Tax Services Office and a submission XXXXXXXXXX. We have considered the above documentation, the submission prepared by the XXXXXXXXXX and the arguments which were raised by the interested parties.

It is our understanding that life insurers, which are regulated by the “Inspecteur Général des Institutions Financières”, the Québec regulatory authority, are required pursuant to the Québec Insurance Act to report appropriations of retained earnings or surplus in the financial statements prepared for the regulatory authority in Québec. Section 307 of this Insurance Act provides that the statement of the assets and liabilities must, as the case may be, show in particular certain items. Paragraph (i) of section 307 of this Insurance Act identifies as one of these items “the surplus from the insurer’s operations and the changes therein since the preceding balance sheet, with a separate statement of the amounts set aside to establish reserves”. We note that, in the financial statements prepared for the Québec regulatory authority provided to us, the full amount of the retained earnings was shown on the balance sheet being the total of the appropriated and unappropriated retained earnings. Both of these were identified as such in a separate schedule entitled the statement of retained earnings.

As indicated in our April 14, 1999 memorandum, in determining whether or not the amounts which are appropriated are legally reserves it would be appropriate to consider how the regulatory authority regards such amounts. At this time there is no indication based on the information provided to us that our position with respect to these appropriations for purposes of Parts I.3 and VI should be different than that expressed in our April 14, 1999 memorandum. We are of the view that these appropriated amounts are retained earnings or surplus and should be included in the capital of the insurer as such.

If you have any further questions or comments with respect to this issue do not hesitate to contact Michèle Trotier or F. Lee Workman.

Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch