Changes to income trusts may favor captives

The proposed changes in tax rules for Canadian income trusts could spark increased interest in captives as many income trusts will likely convert to corporate structures, which are more conducive to captive formations.

Due to the tax-favored status of Canadian income trusts, captive insurance companies held few tax advantages for trusts although a number of energy income trusts set up captives for risk management reasons.

The tax change proposal is a positive development for captive formations, though, because captives can be a tax-efficient vehicle for Canadian corporations, said Colin Mitchell, senior associate in the risk financing group of Integro (Canada) Ltd. in Toronto.

"To the extent that some of those trusts will convert back to corporations, you'll probably see interest in some of those in establishing a captive corporation," Mr. Mitchell said.

The captive domicile most likely to benefit from any new formations is the offshore domicile long favored by Canadian companies--Barbados, Mr. Mitchell said.

If the tax changes stall the trend of corporations converting to income trusts, Canadian companies may reconsider forming captives, said Vinston Hampden, managing director of Aon Insurance Managers (Barbados) Ltd. "Indirectly, I guess it could be positive for captives," he said. "I would not classify this as being big for captives."