5 November 1980 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.

DATE: November 5, 1980

TO-A TORONTO DISTRICT OFFICE             FROM-DE HEAD OFFICE
     Chief of Special Audit                      Corporation Rulings
                                                 Directorate
                                                 J.W. Shaw
                                                 593-6937

ATTENTION S. Senegal, Business Section 143-1

RE: Reciprocal Insurers (the "exchanges")

This is in reply to your memorandum of February 20, 1980 under cover of which you provided us with a copy of your memorandum of June 29, 1979. Please accept our apologies for having misplaced the latter memorandum.

You have registered our opinion as to the status of the exchanges for the purposes of Parts I, XIII, and XIV. Given that the exchanges are not corporations, Part XIV of the Act would have no application to then. Sections 219(4) through (7) apply only to non-resident "insurers." An "insurer" is defined in subsection 248(1) as a corporation that carries on an insurance business. We doubt that the non-resident members of the exchanges could be considered to be carrying on an insurance business. The members' "activity" seems to be limited to making deposits with the exchanges which funds will be used to earn investment revenue until such time as they are used to satisfy claims or are refunded to the member.

Given the nature of the reciprocals' activities - it appears that they hold funds from members for payment of claims, are rot truly engaged in insurance businesses, and their income-producing activities are restricted to earning interest on funds deposited, we do not feel that Part I of to Act has application.

While the matter may ultimately be shown to involve little or no lost tax revenue, we are concerned with the lack of explanation by the exchanges for their considering Part XIII not to apply. In our view, Part XIII should apply with respect to interest paid or credited to non-resident members, at least to the extent those members have not reported the income under Part I. It may well be that most interest is specifically exempted from Part XIII tax, but this is rot apparent from the information received from the exchanges.

Chief Finance, Insurance & Leasing Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch