2015-0597921E5 Subsection 138(11.94) election

Principal Issues: PRINCIPAL ISSUES: 1. The term “reinsurance premium” is not defined in the Act or Regulations. Does this term as used in paragraph 138(11.5)(m) of the Act mean the assets transferred in exchange for the assumption of the obligations under the transferred policies? 2. Does the term “reinsurance commission” used in paragraph 138(11.5)(m) of the Act carry the meaning as defined in subsection 1408(1) of the Regulations? 3. Confirmation of the tax implications for the transferor and the transferee where the transfer is made on a rollover basis pursuant to an election under subsection 138(11.94) of the Act and where the transfer is made on a taxable basis.

Position: 1. The term has a broader meaning. 2. Not necessarily. 3. Factual determination. General comments provided.

Reasons: 1. A “reinsurance premium” could include any amounts paid to the transferee as consideration for the assumed obligations in respect of the transferred insurance business. 2. Subsection 1408(1) of the Regulations applies for purposes of Part XIV of the Regulations. There is no explicit reference in the definition to paragraph 138(11.5)(m) of the Act. Further, unlike the definition of "reinsurance commission" in subsection 1408(1) of the Regulations, under paragraph 138(11.5)(m) of the Act, a "reinsurance commission" is described as an amount paid or payable by the transferee to the transferor. 3. Legislation.

Author: Johnstone, Alexander
Section: ITA 18(9)(a)(iii), 20(7), 138(11.5), 138(11.92), 138(11.94), ITR 1400(1), 1400(3), 1408(1)

XXXXXXXXXX                                                                                                                           2015-059792
                                                                                                                                                   Alex Johnstone
                                                                                                                                                  (613) 410-9134
November 15, 2016

Dear XXXXXXXXXX:

Re. Subsection 138(11.94) election

This is in reply to your emails of July 10 and August 24, 2015, concerning the election under subsection 138(11.94) of the Income Tax Act (the “Act”) in respect of the tax-deferred transfer of an insurance business carried on in Canada as well as the related rules under subsection 138(11.5) of the Act. In particular, you ask about the meaning of the terms “reinsurance premium” and “reinsurance commission” for purposes of these provisions. You also ask a number of questions on how the incomes of the transferor and transferee would be computed in two scenarios, one where an election is made under subsection 138(11.94) of the Act and the other where the transfer is done on a taxable basis. We apologize for the delay in our response.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

As discussed by telephone (XXXXXXXXXX/Johnstone), a definitive response to your queries would require a complete review of the specific facts and circumstances as they relate to a particular situation, including all the relevant documents such as the agreements between the transferor and the transferee. We would only be prepared to provide written confirmation of the tax implications inherent in such a situation where the transactions are proposed and are the subject matter of an advance income tax ruling request as noted above. Further, where the particular situation involves completed transactions, a review of the relevant facts and circumstances surrounding the particular situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit, which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year.

While we are not able to provide definitive comments, we can offer the following general comments which may or may not be relevant to the two scenarios described.

Under paragraph 138(1)(d) of the Act, an insurer is required to compute its income in accordance with the rules applicable to income computation under Part I of the Act except as otherwise provided in section 138 of the Act. Subsection 138(11.94) of the Act provides for the transfer, on a tax-deferred (i.e., rollover) basis, of an insurance business carried on in Canada by an insurer resident in Canada to a corporation resident in Canada that is a qualified related corporation as defined in subsection 219(8) of the Act.

Where the conditions of subsection 138(11.94) of the Act are met, the rules that apply to the transfer of the discontinued business by the transferor to the transferee are the same rules that apply to the transfer of all or substantially all of an insurance business carried on in Canada by a non-resident insurer to a qualified related corporation of that insurer. Those rules are set out in paragraphs 138(11.5)(e) to (m) and subsections 138(11.7) to (11.9) of the Act.

Where a reinsurance arrangement is undertaken to effect the transfer of the insurance business, paragraph 138(11.5)(m) of the Act provides for a general limitation relating to a reinsurance premium or a reinsurance commission for the purposes of computing the income of the transferor and the transferee. Pursuant to subparagraph 138(11.5)(m)(i) of the Act, a reinsurance premium paid or payable by the transferor to the transferee in respect of the assumed or reinsured obligations will be included or deducted, as the case may be, only to the extent that may reasonably be regarded as necessary to determine the appropriate amount of income of both the transferor and the transferee. A similar limitation, under subparagraph 138(11.5)(m)(ii) of the Act, applies to a reinsurance commission paid or payable by the transferee to the transferor.

With regard to the meaning of the term “reinsurance premium” as used in subparagraph 138(11.5)(m)(i) of the Act, that term is not defined in the Act. Whether an amount paid or payable by the transferor to the transferee constitutes a “reinsurance premium” depends on the legal manner by which the insurance business is transferred and whether it is done under a reinsurance arrangement. If this is the case, then the assets transferred by the transferor to the transferee in exchange for assuming the transferred obligations may be a “reinsurance premium”. We note, however, that the term would not be limited to such assets and that it may apply more broadly to any amounts paid or payable to the transferee as consideration for the assumed obligations in respect of the transferred insurance business.

You also ask about the meaning of the term “reinsurance commission” and whether it carries the meaning as defined in subsection 1408(1) of the Income Tax Regulations (the “Regulations”). Subsection 1408(1) of the Regulations applies for purposes of Part XIV of the Regulations. We note that there is no explicit reference in the definition to subsection 138(11.5) or (11.94) of the Act. Further, paragraph 138(11.5)(m) of the Act refers to an amount that is paid or payable by the transferee to the transferor, whereas the definition under subsection 1408(1) of the Regulations generally refers to the excess of the premium paid by the policyholder for the policy over the consideration payable by the insurer in respect of the reinsurance or assumption of the risk.

Finally, based on your understanding of how reserve claims by the transferor and the transferee would operate where an election is made under subsection 138(11.94) of the Act, you are concerned that the application of paragraph 138(11.5)(m) of the Act might result in a further income inclusion or deduction that would lead to double taxation. We note that subsection 138(11.5) of the Act is intended to effect a rollover upon the transfer of an insurance business carried on in Canada by an insurer resident in Canada to a corporation resident in Canada that is a qualified related corporation of that insurer. Without a detailed review of all relevant documentation and information, we are not able to provide comments on this matter. As stated earlier, the application of paragraph 138(11.5)(m) of the Act to a particular situation is a question of fact which would only be considered in the context on an advance income tax ruling.

We hope that these comments will be of assistance.

Yours truly,

Jenie Leigh
Manager
Financial Institutions Section
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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