August 16, 1989
E.K. GAUTHIER Financial Institution Section Director M. J. Loveday Special Audits Division 957-8961
7-4201 Maximum Tax Actuarial Reserves (MTARs) on Reinsurance Risk
We are writing in response to your memo of August 2, 1989 concerning the proposed assessing practice in respect of three Canadian companies' reinsurance of U.S. lives. There are two questions to be examined in reviewing this situation.
1. Is the reinsurance of a life insurance policy a life insurance policy itself, or is it a different type of indemnity policy?
2. Is a life insurance policy, issued on the life of a non-resident, eligible for life-type reserves under Regulation 1401?
Unless otherwise indicated all references to statutes are to the Income Tax Act, and references to regulations are to the Income Tax Regulations.
Subject of Reinsurance Contract
As you mentioned we are awaiting a legal opinion on the subject matter of reinsurance contracts. Our preliminary review favours the opinion that the subject matter of the reinsurance contract is generally the same as that of the_underlying_insurance contract. 21(1)(b). We shall be pursuing this further with them, and are not yet able to provide an opinion on this matter.
Life Insurance Policy in Canada
Under present legislation life-type "MTAR" reserves are available only for "life insurance policies in Canada" ("LIPICs"). This term is defined in paragraph 138(12)(g) as a policy on the life of a person resident in Canada at the time of issue. Thus, under existing legislation it is quite clear that the U.S. policies to be reinsured by these three Canadian companies would not qualify as LIPICs. Accordingly, they would not qualify for MTAR reserves under Regulation 1401, and would be restricted to unearned premium reserves under Regulation 1400. It is generally acknowledged that this treatment is inappropriate in many cases.
As you are aware, the Department of Finance is considering expanding the definition of "life insurance policy in Canada" to include certain policies on non-residents' lives. However, at this time, with the existing legislation, we cannot provide a technical opinion recommending that MTAR reserves be allowed in the case at hand.
Conclusion
It is quite clear that, one way or another, the current legislation does not permit the deduction of MTAR reserves on the reinsurance of U.S. lives. Although we agree that this situation will cause inappropriate results in many situations, we are not in a position to recommend an alternative assessing practice.
Financial Institution Section Financial Industries Division Rulings Directorate