7 June 2001 External T.I. 2000-0055905 - DEMUTULIZATION CONVERSION BENEFIT

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: Would an employee who obtained coverage under a policy subsequent to the date of demutualization be an "individual for whose benefit insurance coverage was provided under the policy" pursuant to subparagraph 139.1(16)(b)(iii) of the Act?

Position: Yes, as there is no point in time specified in subparagraph 139.1(16)(b)(iii) of the Act. However, the other requirements of subsection 139.1(16) of the Act including paragraph 139.1(16)(c) of the Act must be met.

Reasons: As above

XXXXXXXXXX 						2000-005590

June 7, 2001

Dear XXXXXXXXXX:

Re: Demutualization - Conversion Benefits

This is in reply to your letter of November 8, 2000 wherein you requested our views with respect to the interpretation of subparagraph 139.1(16)(b)(iii) of the Income Tax Act ("Act").

The particular circumstance in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4 dated January 29, 2001, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments which may be of assistance.

Where an employer is a stakeholder (as that term is defined in subsection 139.1(1) of the Act) and where the provisions of subsection 139.1(16) of the Act including paragraph 139.1(16)(c) of the Act otherwise apply you have enquired as to the interpretation to be given to the application of subparagraph 139.1(16)(b)(iii) of the Act. Specifically you have requested our opinion with regard to subparagraph 139.1(16)(b)(iii) of the Act as to whether an employee who obtained coverage under a policy subsequent to the date of demutualization but before the employer intends to distribute the conversion benefit would be an "individual for whose benefit insurance coverage was provided under the policy".

Subsection 139.1(16) of the Act permits an employer which has received a cash conversion benefit to distribute such benefit to its employees provided the conditions set forth in that subsection are satisfied. Subsection 139.1(16) of the Act generally treats the employer as a conduit by deeming the employer not to have received the conversion benefit and by providing that no amount is deductible in computing the employer's income because of the distribution. The employees are deemed to have received from the insurance corporation a taxable dividend equal to the amount of the distribution.

Subparagraph 139.1(16)(b)(iii) of the Act does not specifically require the individual described therein to have had coverage under the policy at or prior to the date demutualization was announced. Consequently, a distribution of the conversion benefit by the employer to an individual who obtained coverage under the policy subsequent to the date of the demutualization is not specifically precluded provided the other requirements of subsection 139.1(16) of the Act, including paragraph 139.1(16)(c) of the Act, are satisfied.

We trust that the above comments will be of assistance.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch