A proposed amendment to Canada’s Income Tax Act will expressly state that insurance companies must pay tax on income their foreign investment property arms generate if that income underpins policies held in Canada. The intended measure was initially announced in the 2025 federal budget last November, and is now open for public feedback until Feb. 27, 2026.
The federal finance department’s accompanying rationale acknowledges there are currently competing interpretations of how foreign accrual property income (FAPI) should be determined. Canadian businesses and individuals generally come under FAPI inclusion when they own more than 50 per cent of the shares in a foreign corporation, and are thus required to pay tax, as it accrues, on passive income they earn from that foreign affiliate, even if the income is not repatriated to Canada.
A rule specifically pertaining to insurance companies dictates that a foreign affiliate’s “insurance business income” is subject if it is used to insure or reinsure “risks in respect of persons resident in Canada, property situated in Canada or businesses carried on in Canada”. That broadens the scope of what’s typically taxable under FAPI to include active business income, but the finance department will now remove any inadvertent wiggle room in the terminology. It reiterates that it is a core business activity for insurers to invest funds garnered from premiums in both directly and indirectly held assets.
“Invested assets indirectly held by a foreign affiliate that are held to back Canadian risks are generally regarded as backing Canadian risks for actuarial and regulatory reporting purposes. In contrast, some taxpayers have taken the position that the specific FAPI rule does not apply to such investment income arising on such assets,” the consultation document observes.
The proposed amendment will clarify that it does. Once the legislation is updated, it will take effect for the 2026 tax year.
“Investment income derived from assets backing Canadian risks encompasses both income from assets held to back such risks and assets included in regulatory surplus that back such risks,” the consultation document states.
