Tax Policy Issues Relevant to Captive Insurance Companies in Alberta

Alberta now permits the creation of captive insurance companies. Captive insurance companies insure their shareholders’ risks and sometimes those of their shareholders’ customers. Captives are licensed insurance companies controlled by a single firm or by firms that are part of an industry association. While the cost savings captives can provide are beneficial, national or multilateral tax policies can impact the viability of captive insurance structures. This paper discusses the tax policy issues that may affect Alberta’s captive insurance regime. More than half of the world’s approximately 7,000 captives are located in the United States; there are only an estimated 20 located in Canada. Most of the other captives are in Caribbean low-tax jurisdictions or tax havens. Alberta cannot compete with Caribbean tax rates and will therefore probably not be successful in attracting captive insurance business if its regulatory policy treats captives like regular insurers. Working in Alberta’s favour are recently enacted and proposed multilateral tax avoidance measures which will result in higher costs for creating and maintaining a captive in a tax haven jurisdiction. If the OECD’s Pillar II proposals come to fruition, they also require all in-scope captives to pay a minimum 15 per cent tax rate regardless of residence. This paper reviews the significant Canadian tax issues that affect captive insurance companies, including GST/HST, federal excise taxes, provincial premium taxes and income tax. It also breaks down the likelihood of attracting non-Canadian versus domestic captives, looking at possible regulatory and tax policy structures and their likelihood of success. Alberta will probably not attract captive insurance business from non-Canadian multinational enterprises. However, the ability to insure or reinsure Canadian risks while avoiding negative tax consequences and achieving potential tax and tax compliance savings makes Alberta more attractive for captive insurance business from Canadian firms. While there is a possibility that other provinces or the federal government could retaliate if Alberta engages in aggressive inter-provincial tax competition, retaliation is unlikely unless Alberta materially reduces or eliminates provincial income taxes for captives.