Budget Provisions Could Have Negative Effect on Five Insurers

By Andrew Rickard | May 14 2015 09:05AM

The ratings agency A.M. Best suggests that budget proposals dealing with anti-avoidance provisions under the foreign accrual property income (FAPI) regime could have negative implications for five Canadian insurers.

ottawa_parlementWhile A. M. Best says it is still too early to determine precisely what the regulatory and tax implications would be if the budget proposals became law, it is the ratings agency's view that the changes could have a negative effect on several Canadian insurers.

"The intent of the proposal contained in the 2015 budget is to ensure that profits of a Canadian taxpayer from the insurance of Canadian risks remain taxable, as intended in the 2014 budget proposal," explains A. M. Best. "The current tax proposal is specifically intended to impact a foreign affiliate’s income in respect of the ceding of Canadian risks to be included in computing the affiliate’s FAPI, and extend the activity to when an affiliate cedes Canadian risks and receives foreign risks as consideration. In this case, the affiliate is considered to have earned a FAPI in respect of accepting Canadian risks."

A.M. Best says that BMO Reinsurance Limited, Scotia Insurance (Barbados) Limited, CIBC Reinsurance Company Limited, Royal Bank of Canada Insurance Company Ltd., and TD Reinsurance (Barbados) Inc. are all exposed to the new FAPI rule.

The ratings agency notes that the Canadian government has extended the comment period until June 30, 2015, and says it will continue to monitor the progress of the proposal and determine what effect, if any, it will have on the insurers.