10 July 1996 External T.I. 9617465 - RESERVE

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.Where an insurance agency transfers its business to two holding corporations on a pro rata basis under section 55 and subsequently winds up, can the insurance agency claim a reserve under subsection 32(3) on its final tax return.

2.Can the two holding corporations continue to claim the subsection 32(3) reserve in years subsequent to the transfer.

Position:

1.No.

2.No.

Reasons:

1.In the year of transfer, the insurance agency would not carrying on business throughout the year as required by the preamble of subsection 32(3).

2.In the absence of a specific provision to allow a flow-through, the holding corporations would not meet the requirements in paragraphs 32(3)(k) and (l).

		5-961746
XXXXXXXXXX	J. Leigh

Attention: XXXXXXXXXX

July 10, 1996

Dear Sirs:

Re: Insurance Agents and Brokers - Subsection 32(3) Reserve

This is in reply to your facsimile of May 15, 1996 requesting a technical interpretation with respect to the availability of a reserve as determined under subsection 32(3) of the Income Tax Act (the "Act") in circumstances involving a transfer of business utilizing the provisions of section 55 of the Act.

It appears that your request relates to a proposed fact situation. Confirmation as to the income tax consequences of a proposed transaction will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. We can, however, offer the following general comments.

Subsection 32(3) of the Act permits a reserve in computing a taxpayer's income for a taxation year ending after 1990 from a business carried on by the taxpayer throughout the year as an insurance agent or broker. Whether a taxpayer has carried on a business of an insurance agent or broker throughout a year is a question of fact which can only be determined after reviewing all the relevant facts.

In the situation where an insurance agency owned by two holding corporations transfers its business on a pro-rata basis to each of the two holding corporations during the year, it is our view that the insurance agency would not be carrying on the business of an insurance agent or broker "throughout the year" as required by subsection 32(3) of the Act. Our position is that an insurance agency cannot be carrying on an insurance agency or brokerage business throughout the year if it transferred the business during the year, notwithstanding that the transfer may occur just before the end of the year. Accordingly, in such circumstances the insurance agency would not be entitled to claim a subsection 32(3) reserve on its final tax return.

With respect to the availability of the subsection 32(3) reserve to the two holding corporations following the transfer of business and the winding-up of the insurance agency, the reserve is computed based on the amount of reserve deducted by the taxpayer under subsection 32(1) of the Act for the last taxation year ending before 1991. Such reserve would have been deducted by the insurance agency and not the holding corporations. Therefore, in the absence of a specific provision to allow a flow-through of the reserve, there is no basis in law to allow the two holding corporations to claim the subsection 32(3) reserve even if the corporations continue to carry on an insurance agency or brokerage business.

We trust that these comments will be of assistance.

Yours truly,

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