Why captives are set up in Canada instead of the Caribbean

Allowing limited partnerships is key to why Alberta’s captives legislation has attracted 27 captives thus far in the province, delegates heard at the National Insurance Conference of Canada (NICC) in Vancouver last Monday.

“In Alberta, uniquely in the world, the captive can be set up as a limited partnership,” said audience member Stuart Carruthers of Stikeman Elliott, in response to a panellist’s comment about the popularity of the Alberta captives legislation, introduced last year.

“There’s nowhere else in the world that allows that. And so that can present very significant tax advantages to Canadian shareholders, because the limited partnership is a flow-through entity. There’s no tax paid at the partnership level, only when earnings are distributed up to the partners. So if you’re thinking about it, talk to your tax advisors, because that that can be a real advantage over B.C. or anywhere else in the world.”

B.C. introduced its captive legislation in 1988. Canadian Captive, which publishes resources on captives in the country, reports there are more than 30 captives operating in B.C.

Panellists were asked why companies would opt to set up in Canada when there are tax advantages associated with establishing captives in Bermuda, Barbados, and other Caribbean domiciles. Bermuda, the Cayman Islands, Barbados, and other Caribbean domiciles housed 1,380 captives at the end of 2022, according to Captive Review.

Part of the allure for Canadian companies setting up captives in B.C. or Alberta, as opposed to the Caribbean, is because of the reputational optics, said Patrick Ferguson, vice president of captives and analytics at Navacord.

“We have clients who have a significant amount of Canadian risk, big clients, who will say to me, ‘I don’t care if it saves me more money to go to Barbados. I have to bring this $10-million, $5-million capital infusion to my board of directors, who don’t really understand captives at all,’” Ferguson said, referencing his previous role at Navacord. “[These boards are] very understanding of the insurance piece and wanting to make sure that creating these [captives] are within budget, and [anyone] trying to tell them [board members] that, ‘I need to go to Barbados or Bermuda’ — it’s a very difficult sell for them.

“So, if I can tell them I can go to Alberta, optically, it’s easier for them to say, ‘Wait a second, I’m okay. I’m in Canada…There’s no reputational risk whatsoever.”

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Another reason for setting up a captive in Canada may simply be due to the pragmatics of your geographical location, Ferguson added.

“If you’re all-Canadian risks as an organization, there’s a very good chance that, from an insurance and tax perspective, being onshore in Alberta or British Columbia is going to make just as much sense as being offshore,” he said. “That benefit only increases if you are considered [to be a Canadian-controlled] corporation because of some of the tax changes have come into play in the last few years…And if you have non-Canadian risk, that probably is where you would be offshore.”

One sign of a robust captives market is that larger managing general agents (MGAs) in the United States are now creating their own captives, said Marc Lipman, president of Lloyd’s Americas. And some Canadian-based carriers are exploring captive options with their accounting firms as well.

“They will adopt a variety of different structures in order to eat more of their own cooking, and to increase their share of the profit on traditionally proper business to gain extra capacity that they can [then] flow out into the marketplace,” as Lipman explained. Also, that “create[s] certainty, so they know what they’re going to be able to offer their trading partners and there’s predictability around that.

“So there’s, there are a lot of very obvious strategic purposes that MGAs [and carriers] will use captives for.”

Feature image courtesy of iStock.com/Andrzej Rostek