February 21, 1992
| Scarborough Distric Office | Head Office |
| Basic Files | Financial Industries |
| Division | |
| L. Workman | |
| Attention: S. Yee | (613) 957-8953 |
902368
Interest Bearing Reinsurance Receivables
This is in reply to your memorandum of September 5, 1990 regarding the above mentioned subject. All references to statute unless otherwise indicated are to the Income Tax Act (Canada). We apologize for the delay in replying.
You have identified the situation whereby a reinsurer, in exchange for accepting policy risks, receives a reinsurance premium in the form of an interest-bearing account receivable from the ceding company (the "reinsurance receivable"). The issue is whether the reinsurance receivable qualifies as "investment property" as defined in subsection 2405(3) of the Income Tax Regulations ("Regulations").
"Property" is defined in subsection 248(1) to include "a right of any kind whatever". "Investment property" is defined in subsection 2405(3) of the Regulations to be a "property acquired by the insurer for the purpose of earning gross investment revenue". "Gross investment revenue" of an insurer is defined in paragraph 138(12)(e) to be the aggregate of various items including "all taxable dividends, interest, rentals and royalties included in its gross revenue for the year".
In our opinion, the reinsurance receivable is a property as it fits the broad definition of that word. Notwithstanding that the reinsurance receivable was acquired for the purpose of acquiring reinsurance contracts, it is our view that the reinsurance receivable would also be acquired for the purpose of earning gross investment revenue. There is nothing in the definition of "investment property" that confines its application to properties that are acquired for the sole purpose of earning investment income. Consequently, in our opinion, the interest bearing reinsurance receivable would qualify as an "investment property" within the definition in subsection 2405(3) of the Regulations.
A reinsurance receivable which does not specify an interest rate may not be an "investment property" as it is not immediately evident that the reinsurance receivable would be acquired for the purpose of earning gross investment revenue. The determination of whether or not a specific non-interest bearing reinsurance receivable would be an investment property can only be made after a review of the reinsurance contract, the specific terms of the receivable and any related agreements.
21(1)(b)
We would also note that whether a particular insurance or reinsurance policy or contract constitutes part of the insurance business carried on in Canada or a country other than Canada is a question of fact. The fact that life or lives insured are not Canadian and the policy is not an "insurance policy in Canada" within the meaning of paragraph 138(12)(g) is not determinative. In this regard we would refer you to our memorandum to Special Audits Division, dated July 10, 1990, a copy of which is enclosed for your information.
We hope this information will be of assistance and again we apologize for any inconvenience our delay in responding may have caused.
ChiefFinancial Institutions SectionFinancial Industries DivisionRulings Directorate