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Captive Insurance

A case study

Fact Pattern

  • A-Parent Co decides to cover its insurance needs with a wholly owned subsidiary and establishes a captive insurance company, A-Captive Co.
  • A-Captive Co is located in British Columbia and licensed under the Insurance (Captive Company) Act.
  • A-Parent Co has affiliates in Canada, as well as globally, which carry on active business in the US, Asia, and Europe.
  • A-Subsidiary Co’s insure their risk with A-Captive Co, paying $2 million in premiums.
  • A-Captive Co registers with the Province of British Columbia as an "international business".
  • A-Captive Co is entitled to a full refund on provincial tax paid on corporate income on international qualifying business (In 2012, B.C.'s corporate income tax rate is 10%).

Illustration


Captive Insurance Diagram

Analysis

  • A-Captive Co is carrying on a qualifying business: insuring property outside of Canada is a qualifying activity.
  • As a registrant in the International Business Activity (IBA) program, A-Captive Co can claim a refund of provincial corporate income taxes paid on income earned from insuring non-resident affiliates. (Income earned on insuring affiliates in Canada would be subject to federal and provincial tax.)
  • A Co is required to become a member of AdvantageBC in order to remain registered.
  • A-Parent Co’s affiliates can generally deduct premiums paid to A-Captive Co as long as there is 1) bona fide transfer of risk; 2) the amount of the premium meets ‘reasonableness’ tests.
  • Since A-Captive is located in British Columbia, no Canadian federal excise tax applies.
  • The foreign affiliates may be subject to premium taxes; the actual tax will vary based on the location of risk.
  • Captive Co can deduct loss reserves according to the rules in the Income Tax Act (Canada)
  • Captive Co can flow earnings in the form of dividends to its parent free of tax.

More Information

The International Business Activity (IBA) program is administered by the BC Ministry of Finance. For more information regarding the legislation or provincial registration, please visit their website. The information on this website is provided for convenience and guidance only and is not a replacement for the legislation. Businesses considering accessing the benefits under the International Business Activity Act should consult with their professional advisors on the applicability of the legislation to their particular circumstances.

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