FA1 enters into insurance or reinsurance contracts in the course of carrying on an active business outside Canada, and reinsures the risk associated with the contracts with a second foreign affiliate (FA2) for regulatory reasons, with the risks assumed by FA2 then being further retroceded to a third foreign affiliate (FA3). The income derived by FA2 from payments received from FA1 in consideration for reinsuring the contracts of FA1 are stated in the question to be deemed to be income from an active business income under s. 95(2)(a)(ii), as is the income derived by FA3 from payments received from FA2 in consideration for reinsuring the risks assumed by FA2.
CRA confirmed that:
To the extent that it can be established that the income of FA3 is attributable to investment of assets that it is required to have on hand, for example by virtue of regulatory requirements, to support the risks assumed under the contracts ceded by FA1, the CRA agrees that such income would be from activities of FA3 that are directly related to the active business activities of FA1 as required by clause 95(2)(a)(i)(A) and would be included in the earnings from an active business of FA1 if it were earned by FA1 as required by clause 95(2)(a)(i)(B). Therefore provided that the other requirements for the application of subparagraph 95(2)(a)(i) are satisfied, that provision would apply to include such income of FA3 in its income from an active business.