Strategic Risk Solutions observes further domestic options for Canadian captives, while examining the markets of onshore domiciles, Alberta and British Columbia, and offshore in Barbados
Bordering the world’s leading domicile, Vermont, Canada, has never gained much traction in the industry. There are only two “onshore” domicile options in the region: British Columbia (BC) and Alberta. This is a small offering in contrast to the neighbouring US, which has 30 captive domiciles as of 2022, according to Business Insurance.
Strategic Risk Solutions (SRS) has recently witnessed more domestic options for Canadian captives, following the introduction of legislation in Alberta in 2022, while also observing some of its Canadian clients choosing Barbados to domicile their captives.
There was continued interest in captives throughout 2023, including in Canada, driven by hard market conditions. A review of captive insurance by the Financial Services Commission (FSC) found that there were 13 application approvals to the FSC in Canada in the first 10 months of 2023, compared to 15 for the entirety of 2022. This was for both traditional and non-traditional lines and typically for stand-alone, self-insuring entities.
Considering SRS’ domicile section criteria in Canada and globally, Brad Meindersma, senior vice president, says: “We like to ensure our clients have all the considerations of a domicile. We’re agnostic about where our clients choose to set up their captives.” He emphasises that it is important for a captive management firm to provide the best information available to allow their clients to determine the most appropriate structure and market catered to their needs.
Alberta (A)
Responding to the challenges of obtaining insurance in the traditional market, Alberta introduced its Captive Insurance Companies Act on 1 July 2022. Meindersma describes it as “just a baby in the captive world”. Already crawling, this baby has licensed 17 captives. SRS expects that Alberta will overtake BC in terms of number of captives licensed in “short-order”. Kirk Cyrus, a managing director for SRS Barbados, and Meindersma provide the details of the state’s first 16 licences. “Of the captives Alberta has licensed so far, 12 have property licences, 10 liability licences, six automobile licences and a scattering of other licences.”
Neighbouring BC, the Western Canadian energy province’s landscape consists of mountains and vast coniferous forests. Since their discovery in 1947, the state’s massive oil reserves have been exploited. There is a possibility of oil, gas and mining companies (OGMs) re-domesticating their captives to the state, says SRS, as well as OGMs starting new captives to complement existing global transfer solutions. However, given the increasing need for companies to respond to market and environmental pressures and shift towards renewable energy, the sustainability of these companies operations could be called into question.
The young jurisdiction could yet run into some teething issues. Meindersma and Cyrus offer an explanation as to why this might be: “BC maintains steady regulation, provided by long-standing and knowledgeable regulators”, whereas it could take years for Alberta to reach the same level of domestic knowledge and expertise.
There is also the possibility of momentum resulting from the introduction of a new domicile decreasing. For now, they observe: “Canada is seeing a lot of interest from entities headquartered and with a large operational footprint in the country. The competitive domiciles which are open for business with Alberta adding operational choice and flexibility as well as an evolving tax landscape are driving this.”
In a recent statement, Nate Horner, Alberta’s president of the treasury board and minister of finance, said that the jurisdiction is prepared to welcome more captives. “Companies are choosing Alberta as their captive jurisdiction for a number of reasons, including its six-week turnaround time for licence approvals, low costs and firms’ ability to cover business risks from outside the province,” he explained.
Barbados (B)
The trade link between Barbados and Canada can be traced back to the 18th century — sugar and rum were exported to Canada in exchange for salted cod and lumber. This marked the beginning of a long and fruitful relationship between the two countries, resulting in Canadian investment of US$45.1 billion into Barbados, among the top six in the world for investment into the country.
Historically, Barbados has enjoyed a strong connection with Canada as a captive domicile thanks to the Canada-Barbados Double Tax Treaty of 1980. SRS’ Cyrus and Meindersma articulate further: “By 1995 changes to Canada’s Federal Income Tax Act made it legitimate for income from active businesses overseas, such as captives, to be exempt from tax for the parent in Canada when received as a dividend under the right circumstances.”
This exemption was at the time applicable to “designated treaty countries” like Barbados, an advantage that Barbados exclusively enjoyed in Canada up until 2012. Explaining the shift in this year, Cyrus and Meindersma note: “A change in Canada’s Foreign Affiliate Rules confirmed that ‘designated treaty country’ status would also include other countries with which Canada has a Tax Information Exchange Agreement (TIEA).”
Subsequently, the introduction of TIEAs led to more Canadian captives domiciled in Bermuda and the Cayman Islands. However, the number of Canadian captives in Barbados still continues to grow; SRS estimates Barbados’ insurance register to be 313 regulated entities in Barbados with 51 per cent from Canada, as of 31 October 2023.
British Columbia (BC)
Established in 1988, BC is a tortoise among captive domiciles, slow and steady to attract and licence entities. It has an estimated 20-25 captives currently licensed, according to SRS. However, Derick White, managing director of governance, risk and compliance practice, explains that “they don’t publicly list their approved insurance entities”, explaining the lack of certainty around the figure.
Meindersma and Cyrus for SRS Barbados add: “We are aware of at least a couple formations [in BC] this past year.”
The region’s terrain includes rocky coastlines, forests, lakes and mountains, which cater for thriving heavy operations industries such as forestry, mining and construction. SRS is seeing some interest from clients in this province. White elaborates: “That interest is often driven by clients that have heavy operations or assets in BC, companies going directly to local self-insurance. There’s captive prospects in a lot of different industries in the state,” highlighting the value of BC’s ability to write directly in the province. There is demand there, given that as of 2021 BC was home to 45 per cent of all publicly listed companies in Canada, according to publication Business in Vancouver.
Taking more time than its counterparts, BC’s captive application review time is 12 weeks, compared to Alberta and Barbados’ six to eight weeks. Where BC shines over Alberta, though, is in its assurance of stable regulation and experienced regulators.
Which letter to choose?
The advantages of domiciling in Barbados over domestic Canadian states include the permission of segregated cell captives, which is currently not permitted in either Alberta or BC. Additionally, Barbados has a combined tax rate of 0 per cent for class one captives and two per cent for class two, while Alberta and BC have combined tax rates, inclusive of both class one and two captives, of 27 per cent and 23 per cent, respectively. “Canadian clients are choosing Barbados for the certainty of its legislation, transparency and regulatory compliance that is modelled around a framework of ‘international best practice’,” add Cyrus and Meindersma.
On the other side of the coin, the cost of applications for registration and renewals is significantly less for both Canadian states than in Barbados. Alberta and BC have application fees of US$500, contrasting with Barbados’ heftier fee of US$1250. Horner appears confident that Alberta’s new regime is a worthy competitor to Barbados. In a recent statement he said: “In less than two years, the captive insurance programme in Alberta now rivals those found in already-established jurisdictions such as Barbados, Bermuda and Vermont.”
Industry experts have seen companies with captives in Canada express delight at having a secondary domicile option, which presents new opportunities for them. For example, an opportunity for Canadian-parented captives to relocate back to Canada from Barbados, with a further opportunity either for the administrative services to be performed in Alberta or remain in Barbados.
Alternatively, captive owners with entities in Barbados have also been considering the possibility of underwriting their Canadian operations through Alberta while leaving their US and international exposures in Barbados. Alberta is certainly one to watch, Horner affirmed in his statement: “As more captives are established in Alberta, we expect to see a growing hub of specialised skills, including experts like captive managers and actuarial services.”
