Canadian Tax Considerations—What You Need To Know

L O C K T O N C O M P A N I E S

Market Update August 2014

Nonadmitted insurance is permissible under Canadian Insurance Regulations*

for all noncompulsory lines of insurance. That said, additional tax liability may

result from the placement of nonadmitted insurance. The Canadian Excise Tax

Act, enforced by the Canadian Revenue Authority (CRA), applies a 10 percent

federal excise tax (FET) on net premium when insurance covering Canadian

risk is placed with either an unlicensed insurer or through an unlicensed

intermediary (broker). In addition, provincial unlicensed and/or sales taxes

may apply at rates varying from 3 percent to 50 percent.

For any company with exposures in Canada, Lockton suggests careful review of the following:

� Consider the nonadmitted tax liability for the entire nonadmitted insurance program, based on a premium allocation proportional to the risk in Canada.

� Consider advantages versus costs of admitted fronts in Canada for all lines of insurance, including all levels of any property or liability program tower.

Additional tax liability may result from the placement of nonadmitted insurance.

Market Update, Canadian Tax Considerations

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� Consider carving Canada out of higher-limit tower placements above a predetermined threshold and, in doing so, avoid subjecting the program to the FET and provincial taxes and/or admitted premium requirements above that threshold.

Particular attention should be paid to insurance programs where Lloyd’s shares a position. Lloyd’s now automatically places admitted insurance for all insured Canadian risk, unless an exemption is granted by the appropriate Canadian regulator and confirmed by Lloyd’s. These exemptions are rarely given in practice.

Lloyd’s issuance of admitted Canadian paper at the top layers of a tower program structure may create inconsistencies if admitted Canadian paper is not placed below it and/or Canadian insurance premium taxes are not paid on all layers of that program. Lloyd’s further provides a full list of all placements to Revenue Canada on all lines of cover placed with Lloyd’s, with few exceptions. This may be a source of audit targets by the CRA, and their actions with respect to tower placements may cause particular problem in the event of a CRA audit. It is important to note that even if Lloyd’s issues the admitted insurance in Canada, if a local broker is not used, the 10 percent tax will still apply.

*With the exception of New Brunswick and Nova Scotia.

Even if Lloyd’s issues the admitted insurance in Canada, if a local broker is not used, the 10 percent tax will still apply.