| 19(1) | File No. 3-2323 |
| D.J. Lightheart | |
| (613) 957-9795 |
July 18, 1989
Dear Sirs:
Re:
24(1)
Our Comments
Information Circular 70-6R states that the purpose of an advance income tax ruling is to inform a taxpayer of how the Department of National Revenue (the "Department") will interpret specific provisions of the law in respect of a definite transaction or transactions. 19(1) of your office indicated to us that as your request does not relate to a definite transaction specific information and documentation would not be provided. Accordingly, our reply cannot be by way of an advance income tax ruling however we can provide you with some general comments. All references henceforth to statute are to the Act.
Paragraph 138(5)(b) provides in part that a life insurer resident in Canada that carries on any of its insurance business in a country other than Canada may deduct under paragraph 20(1)(c), provided the requirements of this provision are satisfied, interest on borrowed money used to acquire property used by it in the year in the course of carrying on that insurance business in Canada. Therefore, provided that the 24(1) is a debt that meets the requirements of paragraph (h) of the "valuation" definition in subsection 2405(3) of the Regulations, paragraph 138(5)(b) will not deny 24(1) a deduction under paragraph 20(1)(c) for the interest paid to the Canadian residents who own the 24(1).
We have taken the position that entering into a swap transaction with respect to a particular debt obligation is a separate transaction from the original act of borrowing. A taxpayer entering into a swap contract is undertaking a form of speculation with the hope of profit. Such transaction is treated as an adventure in the nature of trade and any gain or loss is on account of income. Generally amounts received from the Swap Partner will be included, and amounts paid to the Swap Partner deducted, in determining income from the insurance business. Part XIII tax would be exigible if the interest adjustment interval on the receipts from the Swap Partner does not equal the interest adjustment interval on the payments to the Swap Partner and a portion of the Swap payments is determined to be interest.
While we hope that our comments will be of assistance to you, they do not constitute an advance income tax ruling and are not binding on the Department in respect of a specific situation.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate