16 November 1992 Administrative Letter 9213516 F - Direct Written Business of U.K. Insurer

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.

Direct Written Business of a U.K. Insurer

This is in reply to your memorandum dated April 27, 1992, requesting an opinion as to whether certain income of a non-resident U.K. insurer is subject to taxation in Canada.

24(1)

(1) Does Income Arise from Carrying on Business in Canada?

It was held in Capitol Life Insurance Company v. The Queen [1984] CTC 141 (F.C.T.D.), appeal dismissed [1986] 1 CTC 388 (F.C.A.), per Addy, J, at p. 150, that:

     "The concept of what constitutes engaging in the business of insurance in Canada is much broader under Canadian insurance legislation than under the laws governing insurance liability."

The basic rule in paragraph 2(3)(b) of the Income Tax Act ("the Act") is that a non-resident is taxable under Part I of the Act in respect of income earned in Canada from carrying on business in Canada. Whether a non-resident is carrying on business in Canada is a question of fact. After examining the case law regarding what amounts to the carrying on of business in a country, and the facts regarding the non-resident insurer's activities in Canada, the Court concluded in Capitol Life, supra, that the income in issue in that appeal did not arise from carrying on business in Canada.

The correct conclusion in the case that you have outlined depends upon Audit's assessment of all of the relevant facts; however, in our opinion, the fact that the policies written in the U.K. are reported by the Canadian Branch to OSFI does not, in and of itself, support the conclusion that the income from those policies arises from carrying on business in Canada.

(2) Is the Income Attributable to a Permanent Establishment?

Another issue which arises from the facts that have been outlined is whether the income in question would, in any event, be relieved from taxation in Canada, because it is not attributable to the non-resident insurer's Branch in Canada, for the purposes of Article 7 of the Canada/U.K. Income Tax Convention. M.N.R. v. Tara Exploration & Development Company Limited [1972] CTC 328 (S.C.C.), at p. 331, illustrates the principle that income is not attributable to a country where, in relation to a particular income-producing activity, no decisions are taken by management and no one is authorized to take such decisions.

The application of this principle also depends upon Audit's assessment of all of the relevant facts.

Although we express no opinion on the correct determination, it nevertheless is our opinion that the fact that the UK written policies are reported by the Branch in Canada to OSFI does not, in and of itself, cause the income arising from that part of the non-resident insurer's overall business to be attributable to its permanent establishment in Canada.

(3) Calculation of Gross Investment Revenue of Canadian Branch

Subsection 138(9) of the Act requires an insurer that carries on an insurance business in Canada and in a country other than Canada to include in computing its income for the year from carrying on its business in Canada the gross investment revenue for the year from property used or held by it in carrying on its business in Canada, together with such additional amount as is prescribed by regulation.

Paragraph 138(12)(l) of the Act defines "property used by it in the year in, or held by it in the year in the course of", for the purpose of section 138, as "property determined in accordance with prescribed rules". The prescribed rules, in paragraph 2400(1)(d) of the Income Tax Regulations ("the Regulations"), require the inclusion of reserves as reported to OSFI in the calculation by a non-resident insurer of its "Canadian investment fund", as defined in subparagraph 2405(3)(b) of the Regulations.

The instructions for the completion of the Annual Statement (OSFI-55) to be filed with OSFI by British and foreign companies that are registered to transact the business of life/accident & sickness insurance in Canada stipulate that the transactions to be reported are principally those relating to "policies in Canada". Section 2 of the Insurance Companies Act, S.C. 1991, c.47, provides that "policy in Canada" means:

"(a)     with respect to life insurance, a policy on the life of a person resident in Canada at the time the policy was issued,

(b)     with respect to fire insurance, a policy on property in Canada, and

(c)     with respect to any other class of insurance, a policy where the risks covered by the policy were ordinarily in Canada at the time the policy was issued".

This means that a "policy in Canada" issued by a non-resident insurer, even if it was not issued in the course of carrying on business in Canada, must be reported to OSFI by a U.K. insurer that is registered to transact business in Canada. Because of the requirement in subparagraph 2405(3)(b)(iv) of the Regulations that reserves reported to OSFI must be included in the calculation of a non-resident insurer's Canadian investment fund, it is our opinion that reserves related to the direct U.K. written business must be included in the computation of the gross investment revenue of the insurer from the business carried on through its Branch in Canada.

Paragraph 2400(1)(b) of the Regulations also makes "Canadian reserve liabilities" of an insurer relevant in determining the property used or held by an insurer in the course of carrying on an insurance business in Canada, for the purposes of paragraph 138(12)(l) of the Act. "Canadian reserve liabilities"  of an insurer are defined in subsection 2405(3) of the Regulations as the liabilities and reserves of the insurer in respect of its "insurance policies in Canada" as determined for the purposes of the relevant authority.

"Insurance policy in Canada" is defined in subsection 2405(3) of the Regulations to mean, in the case of:

"(a)     a life insurance policy, a life insurance policy in Canada,

(b)     a fire insurance policy, a policy issued or effected upon property situated in Canada, and

(c)     any other class of insurance policy, a policy where the risks covered by the policy were ordinarily within Canada at the time the policy was issued or effected."

This means, in our opinion, that Canadian reserve liabilities, even if they do not arise from carrying on business in Canada, must be included in the computation of the gross investment revenue of the UK insurer from the insurance business carried on by it through its Branch in Canada.

21(1)(b)

  , the law should be administered in the way it is written, unless the Courts subsequently determine otherwise.

(4) Insurance Cash Flow Adjustment

Regulation 2412(4) speaks of amounts received by an insurer "in the course of carrying on its insurance businesses in Canada". In our opinion, such amounts would not include amounts reported to OSFI that did not arise from carrying on business in Canada, as per the discussion under item (1) in this memorandum.

(5) Excise Tax on Premiums

The question of whether there is Excise Tax on premiums paid to a non-resident insurer should be answered by Revenue Canada Customs & Excise.

We hope that our comments are of assistance to you and will be pleased to try to answer any questions that you may have.

for DirectorFinancial Industries DivisionRulings Directorate

Obtained from the Office of the Superintendent of Financial Institutions in Ottawa on November 5, 1992.

In The Victory Reinsurance Company Limited v. M.N.R., 92 DTC 1869 (T.C.C.), Judge Taylor stated, at p. 1872:

"I doubt that the situation is quite as simple as described by counsel for the Respondent -"-if the Superintendent of Insurance requires it, the Income Tax Act requires it too". The circumstances must also be consonant with the Act, but I do agree that it would be for the Appellant to show that the specific relevant circumstances in an individual case did not fit into the provisions of the Act."