19 November 1975 Income Tax Severed Letter

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.

Department of Insurance 155 University Avenue Toronto, Ontario M5H 3B7

Attention: Mr. R.J. Litton

J.L. Martin Rulings Division

November 19, 1975

Dear Sirs:

This is in reply to your letter of November 3, 1975.

Part IV of The Income Tax Regulations

In previous correspondence with your office we have expressed the opinion that, for the purposes of paragraphs 403(1) and (3) of the Regulations, the insurer must allocate net premiums relating to business written in provinces in which it is unlicensed to a permanent establishment in a licensed province which can be identified as servicing the policy or, if unable to do so, to the province in which the head office is situated.

We fail to see how a reasonable argument can be made for allocating unlicensed premiums to licensed provinces on the basis of the business written in the latter provinces. In other words it is our opinion that it is unreasonable to allocate unlicensed business of, say, Saskatchewan in part to Nova Scotia when the permanent establishment in Nova Scotia has absolutely nothing to do with that particular business.

We hate brought the matter to the attention of our Operations Branch and expect that they will be issuing clarification to our District Offices and perhaps to your office as well.

Hail Reserves and Business written and not yet recorded

In an attempt to clarify some confusion which has arisen with regard to the inclusion or exclusion of these items in the CIF, you quote the following provisions of the Canadian and British Insurance Companies Act (CBICA) and the Foreign Insurance Companies Act (FICA):

(1) Hail Reserves             Section 142(2) of CBICA
                                            Section 48(2) of FICA

(2) Business written and      Section 70(1) of CBICA
not yet recorded                   Section 21(1) of FICA

The wording of the provisions in item (1) above quite explicitly calls for the inclusion of hail reserves in liabilities for the purposes of the Superintendent in the case of British and foreign insurers. We therefore agree that the level of the CIF would be increased accordingly.

However, our review of the provisions in item (2) did not lead us to the same conclusion. Section 70(1) of CBICA stipulates that the insurer must provide:

"-- a statement of the conditions and affairs of the company on the 31st. day of December in each year, showing the assets and liabilities of the company -- together with such other information as the Minister may from time to time deem necessary."

Although the corresponding provision of the FICA is less explicit, it is our understanding from a recent telephone conversation with you that the business written and not yet recorded falls within the category of "other information" as contemplated above and is so reported by insurers; i.e., it is shown separate from the statement of assets and liabilities. As such, we must conclude that it is not a liability determined for the purposes of the relevant authority as contemplated in section 2404 of the Regulations, and would therefore be excluded for the purposes of determining the CIF and the resultant gross investment revenue.

Refundable Portion of Part I Tax Non-Resident Insurers

Since the relevant provisions of the Act were intended as an incentive for recipient corporations to "flow through" certain types of investment income to their shareholders, we are not offended by the fact that we are obtaining 15% tax in the case of non-resident shareholders - for this is the only tax which would be exigible if the non-resident had invested in Canada directly rather than through the medium of a subsidiary.

We trust that the foregoing comments will be of assistance. Should you require any additional clarification, please do not hesitate to ask.

Yours truly,

for Director Rulings Division Legislation Branch

JLM/pk