Thursday, November 30, 2023

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Domicile landscape evolving fast for Canada’s prospective captive owners

  • Bermuda, Caribbean traditional captive centres for Canadian businesses
  • New Alberta legislation, regulator creates competition for British Columbia, offshore domiciles
  • Canada’s mid-market seen as significant growth opportunity
  • Global tax landscape could influence future domicile choices

Alberta is expected to quickly surpass British Columbia as Canada’s largest captive domicile, as Canadian businesses are presented with greater choice between onshore and offshore jurisdictions.

The often-named Energy Province introduced its captive legislation in July last year, and already has 11 captives domiciled in the region.

British Columbia’s captive legislation is much more established and for the past 25 years had been the only onshore captive regime in Canada. It has just over 20 active captives today.

It is expected there will be one or two more captives licensed in Alberta by the end of the year.

Out of the 11 captives domiciled in Alberta, eight are writing property insurance, seven are writing liability cover, and four are writing automobile insurance.

As Alberta continues to grow, one of its main challenges will be to make sure it has enough trained staff to maintain the services captive owners are coming to expect in the jurisdiction.

Before Alberta introduced its captive legislation last year, Canadian companies wanting to domicile their captives outside of the country have historically chosen offshore jurisdictions such as Barbados, Bermuda and Cayman.

Alberta’s primary aim it to create a reliable onshore alternative to these offshore jurisdictions.

DGM Financial Group is an established captive manager in Barbados, but made the decision this year to open an office in Alberta so it can work with Canadian clients keen to stay or move onshore.

“This allows the companies within the group to remain in the Canadian market, preventing the need for international structuring, and allowing them to keep their operations simpler,” Justin Cole, vice president, management services at DGM Financial Group, told Captive Intelligence.

“Being within Canada makes coordinating board meetings and travel simpler and cheaper.”

Patrick Ferguson, Canadian captive & global life re(insurance) sales leader at Marsh Canada, said it is easier for a company to convince the board of directors and the C-suite to set up a captive in a Canadian province.

“Rather than in one of the offshore jurisdictions where there might be some discussions at the board level around is that appropriate or not.”

Ferguson said there is still a significant number of Canadian companies that do not have captives, particularly in the middle market and “that is only going to benefit Alberta”.

Most captives formed in Alberta to date are owned by Canadian companies based outside the jurisdiction.

“Of the ones I’ve done, the majority are owned by non-Albertans and their main offices are located outside of Alberta,” said Rick Da Costa, partner and national leader, corporate and regulatory insurance & reinsurance at Borden Ladner Gervais.

He revealed he is talking to potential clients based in British Columbia, Alberta, Ontario, Quebec, Halifax, New Brunswick and Nova Scotia.

One driver behind Alberta’s captive activity is the legislation allowing companies to maintain most of their operations outside the province.

“You do need an attorney for service and an address in the province to which official correspondence is sent, but they have made the legislation in a way that it is friendly to captive owners,” Da Costa said.

Despite Alberta being the largest oil and gas producing province in Canada, those companies setting up captives in Alberta appear to be from across the industrial spectrum.

“We’re talking nursing homes, I just did one for a farmer, a company that owns hotels and restaurants, and a trucking company,” Da Costa said.

“I’m also doing one in the education space, a couple in the auto space, one in professional services, and a lumber and forestry company, so it’s a cool mix.”

Cole noted that he has not worked with any oil and gas companies wanting to set up a captive in Alberta since the inception of the captive legislation last year.

This is despite the introduction of Alberta’s captive legislation being largely driven by the need to offer Alberta oil companies additional insurance options.

Da Costa believes that Alberta is going to reach around 25 captive formations and usurp British Columbia within the “next couple of years or so”.

Toronto-based Dino Fidanza, head of client strategy & operations at Dion Strategic Consulting Group, said Alberta has benefited from a lot of “industry awareness” since it introduced its captive legislation.

“It dovetailed with the challenges the commercial insurance market was experiencing in terms of rate and capacity market pressures.”

Da Costa said he is not aware of any company who has set up a captive in British Columbia over an Alberta captive since the latter introduced its legislation, while Captive Intelligence understands there have been no re-domestications from British Columbia to Alberta to date.

Offshore jurisdictions

Historically, Canadian businesses have often domiciled their captives in offshore jurisdictions, most prominently Barbados, followed by Bermuda and Cayman.

One reason is the tax treaties in place between the Canadian government and offshore jurisdictions.

Braedy Walker, vice president, national captive practice leader at HUB International, said the tax treaty between Canada and Barbados is not necessarily a main consideration for captives but is the “cherry on top”.

“Canadian banks are all in Barbados, the business system is set up pretty much the same between Barbados and Canada.”

He also noted that are a lot of expatriates on the island, resulting in “greater continuity” of service providers.

“In a lot of the other domiciles such as Bermuda or Cayman, you get people on two-to-three-year work terms, and then they return back to the UK, US or to Canada,” he said.

“That’s not the case in Barbados. The management companies, the auditors and the actuarial firms all seem to have a lot more people that stick at the company for years on end, which clients really like.”

Walker said that when companies are looking to set up a captive, one of the first things they do is look at where their industry peers have domiciled their captives.

“It just so happens that a lot of Canadian companies have set up in Barbados.”

Walker noted that some clients have established a second captive in Alberta to write their Canadian risks, while keeping their offshore captive in place.

“We have clients that currently have captives in Barbados and are looking to just insure their Canadian operations through Alberta, while leaving their US operations in Barbados.”

Walker said other captives are content with the tax treaty arrangements, and the way business is conducted offshore, and as a result have a limited desire to move any of their operations back to Canada.

If the Organisation for Economic Co-operation and Development (OECD) introduces the global minimum tax rate of 15% in 2025, however, it could lead to more Canadian businesses moving their captives onshore.

Ferguson added: “As that [minimum tax rate] crystallises, we are going to see some clients with a reasonable amount of Canadian risk decide they would rather go to Alberta as it is easier, and it makes sense.”

Alberta vs British Columbia

There are a number of differences between Alberta and British Columbia’s captive legislation.

The legislation in both allows for the formation of association captives, yet British Columbia’s legislation requires an association be in place for at least a year before it can begin writing business.

Alberta legislation has no minimum timeframe for an association captive to start writing business.

“Like-minded people can gather together who need a captive quickly, and there are no requirements that you have to abide by with respect to timing issues,” Da Costa said.

There are also nuances in the legislation involving captives writing automotive cover, as captives writing this risk in British Columbia must place their primary layer through the Insurance Corporation of British Columbia (ICBC).

Alberta permits captives to be formed as limited partnerships, while the British Columbia legislation currently does not.

Some companies in Alberta are forming association captives as a limited partnership, and drafting the limited partnership agreement in such a way that it can work like a cell.

“Being able to structure a limited partnership in Alberta permits owners with associations of particular interest to limit their exposures, which is similar to a segregated cell structure available in other captive jurisdictions,” Fidanza added.

Those talking to Captive Intelligence said Alberta’s timeframe for licensing new captives is generally shorter than British Columbia.

“The licensing timeframes are five weeks or so in Alberta, and in British Columbia, the last few applications we have done have been three to four months plus,” Ferguson said.

“Alberta is very motivated to be a true alternative to Barbados, Bermuda, and Cayman.”

Cole said that prior to the introduction of captive legislation in Alberta, Canada did not have a “real domestic captive regulatory option” as the British Columbia captive legislation was “not feasible” for a lot of Canadian captives.

“The Alberta legislation is well written, and the regulator has a good understanding of how to regulate captives,” Cole added.

“The business community, including lawyers, accountants, actuaries, and brokers have rallied behind the legislation as they see it as a good opportunity for their clients. As such, it has got off to a strong start.”

Growth challenges

One challenge Alberta must contest with as it grows, is ensuring the regulator can continue to consistently deliver the expected service and regulatory timeframes.

“We might need to look at the captive legislation to allow clients to write a small book of third-party business, or something on the employee benefits, or the life side, which currently is not allowed,” Ferguson said.

Cole said Alberta is still in its “honeymoon phase”, but as it grows there will be questions concerning what additional regulations should be put in place, as well as the regulator’s response to increased regulatory challenges.

“As well as their ability to scale up to supervise a larger number of captives,” he added.

“The biggest challenge will be maintaining the right balance of fit-for-purpose regulatory oversight and continued responsiveness.”

Fidanza said a big challenge for Alberta, and other domiciles more widely, is the volatility of the retail and reinsurance markets.

“They’re going to be subject to insurance cycles,” he said. “If we experience future rate reductions and additional capacity enters the market, this will directly impact the number of new captive insurance companies created.”