To Audit Applications Division Director
FROM Financial Industries Division B.G. Dodd 957-9769
Attention: B.E. Kuber Industry Studies Section
SUBJECT: Taxation of Gains and Losses on the Disposition of Investments in the Insurance Industry
This is in reply to your memorandum of December 29, 1987 requesting our views on certain aspects of your position paper recommendation to tax on an income basis all gains and losses from the disposition of investments (including real estate) of life and non-life insurers. You note that this recommendation was based on our earlier memorandum (May 8, 1987) concerning the taxability of capital gains realized by a benevolent or fraternal benefit society or order. In particular, you request our views on the following:
(1) Should the Department proceed with the taxation on income account for gains or losses of insurers on the disposition of investments (i.e. fixed term instruments such as investments in bonds and mortgages and equity instruments such as investments in shares and real estate, with the exception of "Canada securities" of life insurers)?
(2) Should the Department proceed with the taxation on income account for gains or losses of insurers on the disposition of real estate acquired by an insurer for its own occupancy and use?
With respect to (1) above, for the reasons outlined in our May 8, 1987 memorandum to you, we confirm that we are of the view that generally the realization of a security by an insurance corporation would be an act done in carrying out its business and therefore related gains and losses would be on income account. As also noted in our earlier memorandum, while it is a question of fact whether the making and realizing of an investment is part of the insurance business of the taxpayer, it is our view that the onus should be placed on the taxpayer to prove that any gains are not part of its insurance business.
With respect to (2) above, while such gains or losses may be assessable on income account in a particular fact situation, we would not think this would be the case generally. The underlying principle which has been confirmed in the jurisprudence cited in our previous memorandum is that the buying and selling of securities is a normal step in carrying on the insurance business. While Mr. Pottage's report indicates that an insurer's premises are at risk in its insurance business (we submit this is probably ultimately true in any business) we have difficulty with the notion that the acquisition of owner-occupied premises constitutes investments made in the context on the insurance business. (This may also be the case with the acquisition and disposition by an insurer of the shares of a wholly owned subsidiary corporation.)
There are one or two miscellaneous points which we would like to mention in connection with the report prepared by Mr. Pottage. On the issue of retrospective application, mention is made of a lack of a definitive, public policy on the income vs capital question. The technical notes, for example, relating to the November 12, 1981 proposal to add what is now subsection 138(11.3) to the Act indicated the following:
"Third, when properties are shifted in or out of the Canadian life insurance portion of an insurer's business, the normal deemed disposition rules will apply. This change will prevent the possibility, for example, of an insurer shifting an appreciated property on its books from its Canadian to its non-Canadian life insurance business in order to avoid paying Canadian capital gains tax."
Technical notes which are authored by the Department of Finance, which has the responsibility for proposing amendments to the Act, may be viewed as relevant in terms of tax policy.
A second point concerns the report's recommendation for the isolation of the insurance industry when considering the treatment for dispositions of investments. We are not certain if this is intended to mean that income treatment should apply only to insurers and not to other types of financial institutions, or simply that once so isolated, only insurers were considered. We note elsewhere in the report (page 18) that the issue was to be reviewed for all financial institutions so that an appropriate policy could be devised. You may also recall that in our May 8, 1987 memorandum we indicated that our views pertained equally to banks.
We trust these comments will be of assistance.
Director Financial Industries Division Rulings Directorate