Multi-national insurers may save a substantial amount of Canadian tax by acting now. This applies to both resident life insurers and non-resident life and property and casualty insurers.
Draft Canadian Investment Fund ("CIF") regulations were recently released in almost final form. The CIF regulations are designed to increase the income tax paid by multi-national insurers, starting with the 1999 taxation year.
Planning is Critical
Unfortunately, the draft regulations can have unreasonable results. Insurers risk having to pay more than their fair share of tax unless they take appropriate tax-planning measures.
Still, even though the draft regulations are intended to limit the planning opportunities that exist under the current rules, they do open the door to some new strategies for saving tax. In some cases, every day that goes by has a cost. The sooner the strategies are identified and implemented, the greater the opportunity to reduce tax for the 1999 taxation year.
The best choice of tax planning strategies will depend on a company’s particular circumstances, as outlined below.
Companies with Low Reserves
Theoretically, the CIF will be overstated for a few companies for which the Canadian reserve liabilities ("CRL"), calculated under the new rules, exceeds policy loans, outstanding premiums and (for non-resident insurers) reinsurance recoverables. To avoid this outcome, it may be possible to:
- Write or acquire high reserve business; or
- Syndicate policy loans.
Non-Investment Property
The CIF may also be overstated for two groups;
- Resident multi-nationals with large investments in related financial institutions; and
- Non-residents with significant investments in non-investment property.
Possible remedies include:
- Converting non-investment property into investment property through sale and leaseback transactions;
- Leasing new property rather than purchasing it; and
- Engaging in transactions that involve liabilities that are not included in computing the CIF.
The Cash-Flow Adjustment
Although the cash-flow adjustment is tightened by the draft rules, its effect can be reduced in some cases. For transactions that produce a tax year-end for CIF purposes that does not fall on a month end, careful analysis can disclose the best filing alternative.
Among the many transactions excluded from the cash-flow adjustment are:
- Transactions with related financial institutions;
- Share issues and redemptions; and
- Shareholder dividends.
The regulations implicitly assume that such transactions occur at mid-year for cash-flow purposes. These transactions must be monitored to ensure that the resulting change in taxable investment income does not differ significantly from the income that the transaction actually generates.
Accrued Investment Income
Insurers will benefit from designating as much accrued investment income as possible. This will require co-ordination with the valuation actuary.
Investments in Financial Institutions
Interest accrued to acquire an interest in an affiliated financial institution may not be deductible.
Significant Change for Non-Residents
The starting point in the calculation of CIF for non-resident insurers has been changed from tax reserves to book reserves. This change can increase or decrease the CIF, depending on the circumstances of the particular company.
We Can Help
The appropriateness of these and other possible arrangements will depend on your corporation’s particular circumstances. As with any income tax planning, other financial implications must be reviewed before proceeding with a plan.
The draft CIF regulations are extremely complex. Full appreciation of their implications demands a thorough understanding of tax and the distinct nature of the insurance industry.
PricewaterhouseCoopers LLP has the skill and experience required to assess your company’s tax position and determine the best way to proceed.
Canadian multi-national insurers should act now to reduce tax.
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The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a PricewaterhouseCoopers LLP professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your PricewaterhouseCoopers LLP advisor.
