Canada Federal budget 2017 proposes base erosion rule for foreign branches of life insurers

Canada’s Federal budget 2017, released today, included one international tax measure: a proposal to amend the Income Tax Act to prevent income from the insurance of Canadian risks from being shifted to a foreign branch of a Canadian life insurer where it would qualify for tax free treatment in Canada and favorable tax rules on repatriation.

The new rule would be similar to the anti-avoidance rule in the foreign accrual property income (“FAPI”) rules, according to budget documents.

The new provisions would apply where 10 percent or more of the gross premium income (net of reinsurance ceded) earned by a foreign branch of a Canadian life insurer is premium income in respect of Canadian risks.

In such cases, the new law would deem the insurance of Canadian risks by a foreign branch of a Canadian life insurer to be part of a business carried on by the life insurer in Canada and the related insurance policies to be life insurance policies in Canada, budget documents said.

It is further proposed that complementary anti-avoidance rules be introduced to ensure the integrity of the proposed rule.

Business income tax measures proposed in the budget concerned the following topics:

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