Offshore Income from Insuring Canadian Risks
The ITA contains rules (the FAPI rules) that are intended to tax investment income earned by a “controlled foreign affiliate” of a Canadian taxpayer when it is earned, rather than when it is repatriated to Canada.
The FAPI rules deem certain types of business income to be investment income so that it is taxed in Canada immediately, as if it were investment income. Among these rules is one that deems income earned from the insurance and reinsurance of Canadian-source risks by a foreign affiliate (generally a corporation) of a Canadian-resident taxpayer, to be investment income. However, these rules do not apply to similar types of income earned by a foreign branch of a Canadian life insurer.
The Budget introduces rules similar to the FAPI rules to tax such branch income of Canadian life insurers as it is earned, where it comprises 10 per cent or more of all branch income.
Also, the Budget introduces specific anti-avoidance provisions to prevent the circumvention of both the existing FAPI rules and the new branch provisions.
Lastly, provisions will be introduced to prevent avoiding the rules described above by entering into arrangements that attempt to substitute income from insuring foreign-source risks for income from insuring Canadian-source risks.
These changes will be effective for taxation years commencing on or after March 22, 2017.
Base Erosion and Profit Shifting (BEPS)
The 2016 Budget indicated the government’s desire to prevent the erosion of the Canadian tax base by shifting income offshore. In this regard, the Budget indicates that, in addition to the insurance provisions described above, the government will continue to pursue various initiatives, such as the modification of existing tax treaties to further this end.