2003 Income Tax Severed Letter 2003-0031790 - Amalgamation of Mutual Insurers

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether the disposition of Membership rights of a mutual corporation will be subject to the provisions of subsection 87(4)?

Position: Yes.

Reasons: The Membership Rights have the attributes of shares.

XXXXXXXXXX 2003-003179

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("Aco")
XXXXXXXXXX ("Bco")

This is in reply to your letters of XXXXXXXXXX, wherein you requested an opinion on behalf of the above-noted taxpayers.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this request is:

a. in an earlier return of the taxpayers or a related person;

b. being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayers or a related person;

c. under objection by the taxpayers;

d. before the courts; or

e. the subject of a ruling previously issued by this Directorate;

DEFINITIONS

In this letter, the following terms or expressions have the meanings specified:

a) "Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th supp) as amended to the date hereof. Unless otherwise stated, all statutory references in this letter are to the Act;

b) "adjusted cost base" has the meaning assigned in section 54;

c) "Corporations Act" means the XXXXXXXXXX;

d) "Insurance Act" means the XXXXXXXXXX;

e) "mutual corporation" has the meaning assigned under XXXXXXXXXX the Insurance Act. Specifically, it "means a corporation without share capital that is empowered to undertake mutual insurance exclusively";

f) "mutual insurance" has the meaning assigned under XXXXXXXXXX the Insurance Act. Specifically it "means a contract of insurance in which the consideration is not fixed or certain at the time the contract is made and is to be determined at the termination of the contract or at fixed periods during the term of the contract according to the experience of the insurer in respect of all similar contracts, whether or not the maximum amount of such consideration is predetermined";

g) "Regulations" means the Income Tax Regulations;

h) "Superintendent" has the meaning assigned under XXXXXXXXXX the Insurance Act. XXXXXXXXXX; and

i) "taxable Canadian corporation" has the meaning assigned in subsection 89(1).

Our understanding of the facts, purposes of the proposed transactions and proposed transactions is as follows:

FACTS

1. Aco is a Canadian resident corporation without share capital. It was incorporated by letters patent on XXXXXXXXXX.

Aco is licensed under the Insurance Act. Aco's sole business is the provision of mutual insurance other than life insurance. Accordingly, it is a mutual corporation for the purposes of the Insurance Act.

For the fiscal period ended XXXXXXXXXX, and all the preceding fiscal periods, significantly more than 20% of gross premium income (net of reinsurance ceded) as reported to the Superintendent was in respect of insurance of property used in farming or fishing or residences of farmers or fishers.

Accordingly a portion of taxable income is exempt by virtue of paragraph 149(1)(t) and related provisions of the Act and Aco is not a taxable Canadian corporation for purposes of the Act. It is represented that this situation is virtually certain to exist at XXXXXXXXXX.

2. Bco is a Canadian resident corporation without share capital. It was incorporated by letters patent on XXXXXXXXXX.

Bco is licensed under the Insurance Act. Bco's sole business is the provision of mutual insurance other than life insurance. Accordingly, it is a mutual corporation for the purposes of the Insurance Act.

For the fiscal period ended XXXXXXXXXX, and all preceding fiscal periods, significantly more than 20% of gross premium income (net of reinsurance ceded) as reported to the Superintendent was in respect of insurance of property used in farming or fishing or residences of farmers or fishers. Accordingly, a portion of taxable income is exempt by virtue of paragraph 149(1)(t) and related provisions of the Act and Bco is not a taxable Canadian corporation for purposes of the Act. It is represented that this situation is virtually certain to exist at XXXXXXXXXX.

3. The policyholders of Aco own membership rights (the "Aco Membership Rights") which include the right to vote at annual general meetings, the right to any information for those meetings and the right to the residual surplus of Aco on the final dissolution or winding-up of Aco. The Aco Membership Rights are not transferable or tradable separate from the policy conferring the membership. The policyholders of Bco own membership rights (the "Bco Membership Rights") which include the right to vote at annual general meetings, the right to any information for those meetings and the right to residual surplus of Bco on the final dissolution or winding-up of Bco. The Bco Membership Rights are not transferable or tradable separate from the policy conferring the membership.

4. The Board of Aco comprises XXXXXXXXXX directors and the Board of Bco comprises XXXXXXXXXX directors. There are no common directors between Aco and Bco and none of the directors are related for the purposes of the Act.

5. XXXXXXXXXX the Corporations Act provides that for purposes of the Corporations Act, the words and expressions defined in XXXXXXXXXX the Insurance Act have the same meaning as in that act. Therefore, for the purposes of the Corporations Act, corporations that insure farmers and fishers are mutual corporations.

6. Pursuant to XXXXXXXXXX the Corporations Act, subject to the approval of the agreement of amalgamation under the Insurance Act, XXXXXXXXXX applies with necessary modifications to the amalgamation of two or more mutual insurance corporations. XXXXXXXXXX the Corporations Act provides that any two or more companies may amalgamate and continue as one company.

7. Upon receiving notice and documentation as required by XXXXXXXXXX the Insurance Act, the Superintendent may approve or reject the amalgamation.

PROPOSED TRANSACTIONS

8. The Board of Directors of Aco and the Board of Directors of Bco have passed a resolution to proceed with the merger negotiations between Aco and Bco. This has led to a joint signing of a letter of intent to proceed with the required due diligence and subsequent steps to amalgamate the companies pursuant to XXXXXXXXXX the Corporations Act, effective XXXXXXXXXX. The Board of Directors of Aco and Bco will submit the required notice and documentation pursuant to the Insurance Act to the Superintendent for the approval of the amalgamation.

9. Aco and Bco will amalgamate and will continue to operate as one company ("Mergeco") in such a manner that:

(a) all the property of Aco and Bco immediately before the amalgamation will become property of Mergeco by virtue of the amalgamation;

(b) all of the liabilities of Aco and Bco immediately before the amalgamation will become liabilities of Mergeco by virtue of the amalgamation; and

(c) all policyholders of Aco and Bco will become policyholders of Mergeco and will have "Mergeco Membership Rights". No other consideration will be received or given by any member or policyholder of Aco or Bco. The total number of policyholders of Mergeco will approximate XXXXXXXXXX.

10. The Board of Mergeco will comprise XXXXXXXXXX directors drawn from the pool of XXXXXXXXXX directors of the Boards of Aco and Bco.

PURPOSES OF THE PROPOSED TRANSACTIONS

The purpose of the proposed amalgamation is to provide the critical mass as a merged entity to improve the economic prospects of both companies by consolidating their operations and permitting them to make the best use of their combined capital assets to achieve long-term economic stability.

OPINION

Provided that the Draft Legislation contained in subsection 37(3) of the Draft Income Tax Technical Amendments released by the Department of Finance on December 20th, 2002, is enacted substantially as proposed and provided that the Superintendent approves the amalgamation of Aco and Bco, we confirm the following:

A. The provisions of section 87 will apply to the amalgamation of Aco and Bco to form Mergeco as described in paragraph 9 above such that:

(a) each of the policyholders of Aco and Bco will be deemed by virtue of paragraph 87(4)(a) to have disposed of his Aco Membership Rights or Bco Membership Rights, as the case may be, for proceeds equal to the adjusted cost base of these Membership Rights immediately before the amalgamation; and

(b) each of the policyholders of Aco and Bco will be deemed by virtue of paragraph 87(4)(b) to have acquired the Mergeco Membership Rights at a cost equal to the proceeds described in the preceding subparagraph.

The above opinion is not an advance income tax ruling and is not binding on the Canada Customs and Revenue Agency.

COMMENT

In our view, the amalgamation of Aco and Bco may result in an acquisition of control of Bco for the purposes of the Act.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch