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.
November 10, 1983
HEAD OFFICE Corporate Rulings Directorate D. Holtz 593-6937
RE: Paragraph 39(5)(e)
This is in reply to your memorandum of September 9, 1983, enclosing a copy of correspondence from XXXX.
Generally, we agree that the change to paragraph 39(5)(e) would not, in and by itself, determine whether an insurer's gains or losses are on account of income or capital. It would appear, however, that Parliament, in enacting the change, wished to prevent insurers from using subsection 39(4) to protect income gains; and by this action, there appears to be almost a presumption of income treatment. However, one must look at the asset, the taxpayer's intention, and all other factors which are considered for any other taxpayer. In the case of general insurers, premiums are set by comparing costs and revenues. Included in the revenue determination is the projected investment income which will be earned; which presumably includes gains or losses on debt instruments.
The investment transactions of an insurer are such an integral part of its business, and form part of the basis for setting premiums, that we believe there must be a presumption of income treatment for gains/losses on debt securities.
Shares on the other hand, may be on account of capital or income, depending upon all of the relevant factors. Not only will one have to look at the investment activities of the insurer and his intention, but also at each share itself. In this regard, it would be appropriate to look at the frequency of sales, whether funds were borrowed to make purchases, and the general course of conduct by the insurer. These comments would apply equally to assets of life insurers (other than amortized Canada Securities), who have traditionally treated the dispositions as capital transactions.
No clear-cut answer can be given on this issue, as each situation will be judged on its individual factors.
We have forwarded a copy of this memorandum to Brian Dawe of Audit for his consideration, as Banks and Trust Companies may also be affected by our position in this area.
for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch
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