The federal government is cracking down on Canadian life insurance companies with foreign branches and taking new steps to ensure these entities aren’t dodging their domestic tax obligations by shifting income to their foreign units.
The federal budget, tabled in Ottawa on Wednesday, proposes new rules to ensure that Canadian life insurers are paying the appropriate taxes in Canada on income generated from the insurance of Canadian risks.
Although corporations based in Canada are generally taxable on their worldwide income, the Income Tax Act provides a special exemption for life insurance companies so that the income from their business in a foreign jurisdiction is not included in their tax base.
This means that insurers could be avoiding paying taxes in Canada on income earned on Canadian residents’ policies by including this income in their foreign branches, potentially located in low-tax or no-tax jurisdictions.
Budget 2017 proposes to close that gap. Specifically, the government proposes amending the Income Tax Act to ensure that Canadian life insurers are taxable in Canada with respect to their income from the insurance of Canadian risks.
Read: Budget 2017
This rule will apply in cases in which 10% or more of the gross premium income earned by a foreign branch of a Canadian life insurer pertains to Canadian risks. Where the rule applies, this income will be deemed to be business carried out in Canada, and the related insurance policies will be deemed to be life insurance policies in Canada.
The government further proposes that complementary anti-avoidance rules be introduced to ensure the integrity of the proposed rule.
In particular, the budget proposes that anti-avoidance rules that were introduced to the foreign accrual property income (FAPI) regime in the 2014 and 2015 federal budgets will be extended to foreign branches of life insurers. These rules are intended to ensure that the proposed rule cannot be avoided through either the use of so-called “insurance swaps” or the ceding of Canadian risks.