26 July 1990 Ministerial Letter 73108 F - Carrying-on of an Insurance Business in Canada

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.

SUBJECT:  24(1)

We are writing in reply to your memorandum of July 27, 1988 concerning  24(1)     .  We apologize for the lengthy delay.  The facts can be summarized as follows:

(i)     

(ii)     24(1)

(iii)

(iv)     

24(1)

The court held that Capitol was not carrying on business in Canada and commented that it would have concluded that Capitol did not have a permanent establishment in Canada in 1976.  It concluded that the minimal activities which Capitol carried on in Canada resulted from the requirements of the superintendents of insurance.

The case of Sun Life Assurance of Canada (1984 BTC 233 - Chancery Division) ("Sun Life") would also seem to be on point.  In that case Sun Life's British division administered insurance policies held by policyholders who were resident abroad.  These policies had been issued by foreign branches of Sun Life which had since been closed.  The court had to decide whether the cost of administering these policies subsequent to the closure of the foreign branches was deductible from profits taxable in the United Kingdom ("U.K").  The court held that the cost was deductible as an expense attributable to the life insurance business carried on by Sun Life at or through its branch in the UK.  The Commissioners commented as follows:

     "On the closure (of the branches) the policies were transferred for administration to the British division.  Any work connected with them - for example, calculation of annual bonuses, correspondence and payment of benefits - is dealt with in the United Kingdom and nowhere else.

     We consider that the administration of these policies has become part of the life assurance business conducted in the British division and the expenses are allowable.  Life assurance is a continuing business which does not cease once the policy has been accepted:  the administration of a policy originating outside the division is part of the business of that division no less than the administration of policies originated by proposals made within the division."

LEGISLATION - CARRYING ON BUSINESS

24(1)

CANADA-US INCOME TAX CONVENTION

24(1)

We understand that Article VII of the Canada-US Income Tax Convention (1980) ("Treaty") confirms the Treaty partner's intent that this Article has application in circumstances where "the resident carries on, or has carried on, business" in the other Contracting State.

The Technical Explanation issued by the U.S. Treasury Department indicates that the words

     "or has carried on" provide that a Contracting State in which a permanent establishment existed has the right to tax the business profits attributable to that permanent establishment, even if there is a delay in the receipt or accrual of such profits until after the permanent establishment has been terminated.

It would seem that an argument can be made that the words are broad enough to include income from the run off of any business including an insurance business even if the location run off business is continued through a permanent establishment in the other Contracting State.

The business profits that can be allocated under paragraph 1 of Article VII of the Treaty are limited to those which are attributable to the permanent establishment or former permanent establishment. 24(1) If the former situation prevails business profits are clearly taxable in Canada.  If the latter situation, which as noted below is the situation we feel we are dealing with, we have some trouble with the notion that the business profits of a business carried on in the U.S. through a permanent establishment in the U.S. can be attributed to Canada.  This is particularly so given that in the case of non-resident insurer its business profit computed in accordance with subsection 138(2) of the Act is restricted to its income from carrying on its insurance business in Canada.  The Treaty cannot be utilized to subject to tax in Canada amounts that would not otherwise be subject to tax in Canada.

The scheme of the Act in effect forces a calculation of the business profits associated with the permanent establishment which is being closed in Canada.  The non-resident insurer is, pursuant to paragraph 138(4)(a) of the Act, required to include in income in the year it ceases to carry business in Canada, without further reserve, the amounts deducted in the prior year under paragraph 138(3)(a) of the Act as policy reserves. Subsection 219(5.1) of the Act is intended to apply to tax surplus funds derived from operations in the year the non-resident insurer ceases to carry on its insurance business in Canada.  Thereafter Part XIII should apply to investment income which is paid or credited to the non-resident insurer with respect to assets held in Canada.

COMMENTS

It is a question of fact as to whether 24(1). While it is our view that our auditors are in a better position to make this factual determination it seems to us that based on the information provided to us and given the decision in Capitol Life the better view is that     24(1).

In our view the scheme of the Act is such that the profits and surplus associated with an insurance business carried on in Canada are intended to be taxed in Canada up to the cessation of that business. 21(1)(b) Clearly, if the facts in that situation are similar to situation it would be appropriate to await the decision of the Courts.

We hope our comments are of some assistance and we are of course available to discuss these matters further.

F. Lee Workman for DirectorFinancial Industries DivisionRulings Directorate