Bermuda - A New Domicile for Canadian Companies

1. Bermuda - A New Domicile for Canadian Companies What the Bermuda & Canada Tax Information Exchange Agreement means for Canadian Companies

2. Introductions Speakers: • Heather Bisbee, Assistant Director, Insurance Licensing & Authorization, Bermuda Monetary Authority • Jason Carne, Partner, KPMG • David Lines, Partner, Appleby Moderator: • Kilian Whelan, Chief Executive Officer, JLT Insurance Management (Bermuda) Ltd.

3. Bermuda Monetary Authority (“BMA”) Integrated regulator of the financial services sector in Bermuda. Established in 1969. Independent of Bermuda government but accountable to it. Risk based financial regulations that applies to the supervision of Bermuda’s banks, trust companies, investment businesses and insurance companies. Leading role in developing international standards and cooperation among financial services supervisors Member of International Association of Insurance Supervisors (“IAIS”) Tax information and exchange agreement (“TIEA”) regulation is not within the remit of the BMA.

4. TIEA What is a TIEA? A bilateral agreement to provide assistance in tax matters through an exchange of information to assist two countries in administering, enforcing, and collecting their respective taxes. Driven by the Organisation for Economic Co-operation and Development (“OECD”). The Bermuda Government has entered into 24 TIEAs to date.

5. TIEA Administration Minister of Finance has responsibility for signing TIEAs and receiving requests. Dedicated unit at the Ministry of Finance – Treaty Unit. Negotiates TIEAS & associated economic development agreements Responds to TIEA requests Responds to annual summary assessments and policy reviews conducted by UK and OECD.

6. Importance of TIEA to Bermuda Demonstrates at an international level Bermuda’s commitment to financial transparency and international regulatory standards that match those of other major developed countries. Builds on Bermuda’s good reputation for being an appropriately regulated domicile of choice. Levels the playing field from a tax perspective

7. Memorandum of Understanding MOU signed in August 2008 with The Office of the Superintendent of Financial Institutions (“OSFI”) in Canada. Formalizes the basis for consultation, cooperation, coordination between BMA and OSFI Covers procedures for requesting and providing investigative assistance where appropriate.

8. Bermuda Regulation Bermuda has a diversified portfolio of insurers. Appropriate supervision over diversified portfolio achieved through: Risk based approach Thoughtful application of regulatory provisions consistent with nature, scale and complexity in business. Proportionality Not a one size fits all approach to regulation. Various licence categories support this. Insurance regulation at BMA split into Licensing, Authorisations, and Complex Institutions.

9. Statistics

10. BMA Service Standards – 2011 Targets Application to incorporate Company Can have a same day response. Application for insurance licence Can be done concurrently to incorporation. Complete applications received by 5pm on Monday will be reviewed and responded to on Friday: Approval Deferral Declination Final registration and insurance licensing Upon approval of application and receipt of all documentation approval for registration can take 3 business days.

11. Captive Insurance – The Opportunity Implementation of the TIEA between Canada and Bermuda, plus others expected going forward, widens viable captive domiciles for Canadian companies. Traditionally Canadian companies have selected Barbados primarily due to the double tax treaty between the countries. The Bermuda TIEA can provide similar benefits as a double tax treaty. We believe there are currently a low level of Canadian companies with captive operations compared with other markets such as the USA and UK. With increased choice of captive domiciles viable for Canadian companies we believe a significant opportunity exists for Canadian companies to establish a captive or re-evaluate the domicile of any current captive. Canadian captives by domicile Source: A.M. Best captive data 2008

12. Who Might Benefit? Most Canadian groups should evaluate forming a captive if there is sufficient critical mass. Potential beneficiaries would include the following: • Canadian multinational company • Profitable in foreign jurisdiction • Business operations give rise to risks which require some form of insurance • Business risks may be currently self-insured or insured by an independent insurance company • Looking to take risk management procedures to the next level • Have risks that are difficult to cover in the commercial market

13. Potential Benefits Financial Benefits • Predictable costs at the subsidiary level • Pricing stability • Reduced Cost of Insurance • Profit retention • Improved Cash Flow • Facilitates movement of capital • Control over investments • Tax deferral or saving depending on risk location Risk Management Benefits • Access to Reinsurance markets • Integration with overall risk management plan • Spreading risk among affiliated group • Coverage for non-traditional risks not usually insurable • Response to lack of available/affordable insurance • Formalized self-insurance program • Flexibility in program/policy design • Avoid local insurance regulatory concerns • Simplicity – Easy to maintain

14. How much capital do I need and where should I hold it? • What form should the capital take? • How can I efficiently redeploy profits? Treasury • Where should I domicile a captive? • How do I structure an offshore captive • Should I use a Protected Cell Company? Structuring • What are the tax implications of the desired structure? • Will the premiums suffer premium taxes? • Are premiums tax-deductible • Will the structure give rise to withholding tax implications? • Will the undistributed profits of the captive be taxed in the hands of the owners? • What are the transfer pricing implications? International Tax Considerations What Are Some of the Issues? • Would my risk management strategy benefit from having a captive? • How do I run my captive? • How do I use my captive to control costs and reduce the cost of buying (re)insurance? • What insurance related services can I provide? Operational • How are captive insurance companies regulated? • How can I avoid a unduly burdensome regulation? • Are there any regulatory restrictions on writing captive business? Regulatory

15. Why Bermuda? • Easily accessible from Canada • Access to commercial reinsurance market • Depth and quality of infrastructure • Sensible regulation • Tax Information exchange agreement (TIEA) effective July 1, 2011 • Bermuda will need to be competitive on costs 15

16. Canadian Captive Taxation • A Canadian owned foreign captive can earn 3 types of income • FAPI (Foreign Accrual Property Income) – taxed in Canada as earned • Taxable surplus – Taxed in Canada when dividends are paid to Canada • Exempt surplus – not subject to any Canadian taxation 16

17. Canadian Captive Taxation • Tax is based on ownership • Controlled Foreign Affiliate • Group plus 4 other Canadians own 50%+ • FAPI, Taxable surplus and Exempt Surplus • Non-controlled Foreign Affiliate • Group plus 4 other Canadians own less than 50% • FAPI is not applicable • Portfolio interest • Less than 10% ownership • Dividends taxed in Canada when received 17

18. Canadian Captive Taxation • FAPI • Insurance of Canadian risk • Passive income earned offshore • Interest, dividends etc • Most Canadian risk offshore will be FAPI • Provides timing benefit to deductibility of claims for tax purposes 18

19. Canadian Captive Taxation • Taxable surplus • Income that is • Unrelated foreign business profits from insurance and certain other services • Less than 6 FTEs • E.g. Insurance of unrelated insurance business 19

20. Canadian Captive Taxation • Exempt surplus • Active offshore business income • Related foreign business • Unrelated foreign business profits (if more than 6 FTEs) E.g. Worldwide pooling of risk (other than Canadian) Assumed related party risk from outside of Canada 20

21. Canadian Captive Taxation • Excise taxes • Does not apply to life, marine insurance, where coverage not available in Canada • P&C risks generally subject to excise tax 21

22. Canadian Captive Taxation • TIEAs provide for active business income to be eligible for exempt surplus treatment for years the TIEA in force. • Do not get full treaty benefits 22

23. Captive Insurance – KPMG’s Approach Three Phase Approach • Initial Assessment • Feasibility • Implementation KPMG’s global network provides our clients with essential local knowledge in all major captive domiciles, which is key to offering a comprehensive and unbiased service to the captive industry.

24. The Move to Bermuda • Introduction: • Regulatory comparison - Bermuda vs. Barbados • How to migrate you business into Bermuda • Portfolio transfer • Discontinuance • Incorporate a new insurance company • Some practical consequences and considerations to consider before moving residence

25. Bermuda is considered a mature jurisdiction in terms of regulation Introduction of Solvency II has necessitated material changes to regulation in Bermuda Code of Conduct HOWEVER, regulation of captives remains largely unchanged Balanced against Bermuda’s significant and sophisticated infrastructure and service community (lawyer, accountants, insurance managers etc..) BMA has global credibility and standing Regulatory Comparison

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30. How To Migrate Your Captive Business • Several Options to consider: • Portfolio Transfer • Discontinuance • Incorporate a new insurance company

31. Migration – Portfolio Transfer • Transfer existing Portfolio to new or existing insurance company • May require new insurance company in Bermuda • Simply completed by way of novation of existing policies • Consent of reinsurers or fronting entities may be required • Not suitable for large numbers of polices or legacy claims

32. Migration – Continuance • Statutory process – well known and technically legally straightforward • Not expensive • Largely process driven • Not complicated but does require sufficient planning • Takes approximately 6 weeks to complete • All assets and liabilities of the company will be transferred to Bermuda • The nature of obligations of the company remain unchanged • Does not create a new legal entity

33. Migration - Continuance • Must seek the consent of the BMA • Submit an application to the Assessment and Licensing Committee including: • Monday – Friday review period • Business Plan • Pro-forma Financial information – 5 years • Shareholder information • Financial submissions to Barbados, Supervisor of Insurance • Other supporting documents

34. Incorporate a New Insurance Company • Form a new captive in Bermuda to write all future business shareholder group • Forming a Bermuda captive is simple and inexpensive to achieve • Can leverage underwriting experience from existing captive • Provides a clean start • Will require liquidation of existing captive • May be used in conjunction with a portfolio transfer of existing business • Use for the purposes of merger with an existing captive

35. Practical Consequences and Considerations • Plan ahead. All solutions take time to implement • Select and meet with your professional providers in advance: • Insurance managers, auditors, lawyers actuaries • Agree a timeline between both sets of lawyers • Understand what documents ought to be maintained in Bermuda • Run a test Statutory Return – consider a s.56 Application? • Meet with the BMA

36. QUESTIONS ?