Canada – the behemoth country to the north, frozen for half the year – and the Cayman Islands – the tiny speck of an island sizzling in the Caribbean sunshine – might seem unlikely bedfellows, but the synergies of a great relationship are all present.
In 2012 when the governments of Canada and the Cayman Islands signed a tax information exchange agreement (TIEA) that formalised the process by which Canadian authorities can request and receive information relating to Canadian-owned entities, the foundation for establishing insurance business in the domicile was poured. The TIEA put Cayman on the same footing as Barbados, previously Canada’s default offshore jurisdiction, in terms of its ability to allow Canadian captives to benefit from the same cost effective tax planning strategies.
This is important to Canada for several reasons.
First of all, Canadian companies are really starting to see the potential benefits from using captives. Canada’s insurance industry is stable and 2013 saw mid-market growth in captives, particularly in the oil and gas industry, which is thriving. Canadian companies understand the value of a captive insurance company, which can be established to diversify a company’s business operation and maintain revenue streams that would have typically gone to a commercial underwriter. These companies have developed a healthy appetite for captive insurance products that are established to innovatively solve business challenges, some of which are uniquely Canadian: terrorism threats, environmental pollution, warranty risk, and premium healthcare coverage, for example.
The benefit of the Canadian/Cayman TIEA is that it allows Cayman companies to pay dividends from active business income earned outside Canada insuring non-Canadian risk to Canadian corporate shareholders tax free. If certain rules in the foreign affiliate (aka FAPI) rules are followed, income earned outside Canada insuring Canadian risk is given the same tax treatment.
The benefits resulting from the TIEA may also be available to smaller companies through participation in a group captive through a segregated portfolio structure (SPC) that allows individual cells within the structure to carry on its own business. New legislation has just introduced portfolio insurance companies (PICs) which are particularly useful for alliances or associations that have similar insurance needs or are engaged in businesses in similar industries, but need to keep their assets and the management separate. These alliances or associations would generally utilise specific provisions in the foreign affiliate (FAPI) rules with the result that the insured risks can be Canadian and don’t need to be risks outside of Canada.
The combination of the Cayman’s 30-plus year history in captive insurance, the TIEA and the new legislation will likely attract the attention of an eye or two in Canada, positioning the Cayman Islands as an attractive jurisdiction for Canadian captives.