28 May 1990 Income Tax Severed Letter ACC9127 - Reserve to Insurer for Premiums Payable under Reinsurance Contract

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.

MAY 1990

Appeals Branch                               Financial Industries
                                             Division
Appeals and Referrals Division               B.G. Dodd
                                             957-9769
Attention:  D. Baines
                                   900601
                     (24(1)                                      

                                             M . N. R.

We are writing in reply to your round trip memorandum dated April 27, 1990 in which you request our views on the latest arguments raised by the taxpayer in connection with the above noted appeal

                       24(1)                                     

matter on which we commented in our October 8, memorandum to your branch. In brief, our October 8 memo expressed the view that paragraph 1400(e) of the Income Tax Regulations (the "Regulations") does not apply to permit a reserve to an insurer for premiums that might become payable under a reinsurance contract and in the absence of a specific provision, paragraph 18(1)(e) of the Income Tax Act (the "Act") precludes the deduction thereof.

The arguments now being advanced by the taxpayer are  set out     
                                        24(1)

It would appear, given the taxpayer's line of reasoning, that the issue centres on the proper interpretation of section 1402 of the Regulations which reads as follows:

"for the purposes of section 1400 and 1401, any amount determined under those sections shall be determined on a net of reinsurance ceded basis."

The expression "net of reinsurance ceded basis" is not defined, in whole or in part, in the Act or Regulations. It is our understanding that in industry parlance "cede" means to assign to a reinsurer all or a portion of an original risk. The concept is reflected in other aspects of the Regulations dealing with insurance business policy reserves, particularly in connection with "reinsurance commission". For example, paragraphs 1400(c) and (d) of the Regulations respectively read in part:

(c) a policy where all or a portion of a risk thereunder was reinsured ..." and

"(d) a policy where all or a portion of a risk thereunder was assumed by the corporation pursuant to a reinsurance contract

Similarly, the definition of "reinsurance commission" in subsection 1404(2) of the Regulation reads in part:

"(a) where the `risk under the policy is fully reinsured and

"(b) where the risk under the policy is not fully reinsured....".

Based on the foregoing, it is our opinion that section 1402 of the Regulations is concerned with whether or not a risk under a particular policy has been reinsured. We do not view Section 1402 of the Regulations as being concerned with reinsurance recoveries (contingent or otherwise) as suggested by the taxpayer. Nor is the regulation concerned with (the effect of) premiums which might be payable under the reinsurance contract or the amount or level of such premiums.

Accordingly, it is our view that section 1402 of the Regulations, as it applies to paragraph 1400(e) of the Regulations, means that any amount determined under paragraph 1400(e) of the Regulations must be reduced to eliminate, with respect to a policy where al or a portion of the risk thereunder has been reinsured, the amount (of the reserve) which pertains to the reinsured risk.

                                         24(1)
                                         24(1)

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                                     in this regard we would also
direct you to our comments concerning incurred but not reported  
death claims in our December 28, 1989 memorandum to you
concerning 24(1)  

We hope this will be of assistance.

Director Financial Industries Division Rulings Directorate