The federal government’s 2025 budget may have survived by only two votes, but one of its quieter tax changes carries major implications for Canadian insurers with foreign-affiliate structures. Ottawa has moved to close what it describes as a longstanding gap in the Foreign Accrual Property Income (FAPI) regime – a move KPMG Canada says could alter how insurers manage, invest, and report income tied to Canadian insurance risk.
Under the change, investment income earned by a foreign affiliate on assets backing Canadian insurance or reinsurance policies will now be included in FAPI, regardless of which entity holds the assets. Paul Vienneau, a financial institutions tax partner at KPMG Canada, told Insurance Business the measure targets arrangements where insurers could shift certain investment income offshore, keeping it outside Canada’s immediate tax base.
“The Budget closes a perceived loophole in FAPI, where certain insurance companies were able to shift investment income offshore to affiliates,” Vienneau said. “Investment income from assets held by a foreign affiliate to back the insurance or reinsurance of Canadian risks will now be included in FAPI, regardless of which entity holds those assets.”
The rule takes effect for taxation years beginning after November 4, 2025, and the federal government projects it will generate $255 million in additional tax revenue over five years.
For insurers that use foreign affiliates to manage investment income tied to Canadian risks, the change may trigger a reassessment of long-standing structures.
Vienneau says the update “could prompt some insurers to revisit whether to maintain foreign-affiliate investment operations or consolidate them in Canada, weighing factors like cost, operational efficiency, and long-term strategic fit.”
In other words, while the new rule does not prohibit offshore investment structures, it reduces the tax benefit of using them for Canadian business – particularly for carriers that have built specialized investment hubs in low- or no-tax jurisdictions.
Some insurers may determine that the compliance and reporting burdens associated with FAPI – combined with the loss of preferential tax treatment – outweigh the benefits of keeping those operations offshore. Others may choose to maintain foreign affiliates but adjust the mix of assets they hold, the risks they back, or how income is allocated across entities.
Alongside the structural considerations, insurers can expect heightened tax compliance obligations. According to Vienneau, the new rules will mean “tighter compliance and reporting on how investment income tied to insurance risk will be treated,” increasing the need for documentation around what assets support which risks – and where.
Beyond tax planning and foreign-affiliate structures, the federal budget carries several other implications for insurers – many of them tied to modernization, talent strategy, and long-term competitiveness. Two of the most consequential measures, industry experts say, are the expansion of the Scientific Research and Experimental Development (SR&ED) program and the proposed federal ban on non-compete clauses.
The SR&ED changes mark one of the biggest shifts to Canada’s innovation framework in years. As highlighted in Insurance Business’ earlier budget coverage, the government is reintroducing capital expenditure eligibility, raising the expenditure limit, and broadening access for publicly listed companies. For insurers, this opens the door to tax-supported investment in AI, automation, underwriting modernization, and advanced data infrastructure – exactly the areas where carriers have been trying to scale innovation while controlling expenses.
Industry tax leaders noted that the previous SR&ED rules often excluded the hardware and technology required for digital transformation. With those barriers removed, insurers with sizeable analytics and actuarial teams may now be able to bring long-deferred modernization projects back into scope, potentially unlocking millions in tax credits.
The budget also moves forward with a proposed federal restriction on non-compete clauses – a measure that could indirectly reshape insurers’ workforce strategies. While non-competes were already difficult to enforce in Canadian courts, a national ban would formalize the shift toward narrower tools like non-solicitation and confidentiality agreements. Experts previously told Insurance Business that the move is expected to have a modest effect overall, but it may still increase mobility in certain high-demand areas such as analytics, AI, actuarial science, and distribution.
For an industry already grappling with a tight labour market – and simultaneously pushing for accelerated digital transformation – these changes could converge to create new opportunities, new compliance requirements, and a slow but meaningful recalibration of how insurers invest, hire, and compete.
