US embassy cable - 05TORONTO2697

UNCLAS SECTION 01 OF 03 TORONTO 002697 
 
SIPDIS 
 
STATE FOR EB A/S TONY WAYNE 
STATE FOR WHA/CAN, EB/IFD, INR 
STATE FOR WHA DAS WHITAKER 
USDOC FOR 3000/ITA U/S RHONDA KEENUM 
USDOC FOR 432/ITA/IAA/BASTIAN/RUDMAN/FOX 
TREASURY FOR U/S (INTERNATIONAL AFFAIRS) TIMOTHY ADAMS 
TREASURY FOR U/S (DOMESTIC FINANCE) RANDY QUARLES 
TREASURY FOR PATRICIA BROWN 
DEPT ALSO PASS USTR FOR J. MELLE AND S. CHANDLER 
DEPT PASS SEC - MARISA LAGO 
DEPT PASS FEDERAL RESERVE BOARD 
DEPT PASS TO IRS - COMMISSIONER MARK EVERSON 
WHITE HOUSE/NSC - KIM BRIER AND SUE CRONIN 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, PREL, KPAO, CA, US, Finance 
SUBJECT: The Canadian Financial Sector: U.S. Life 
Insurers in Canada Complain of IRS Ruling 2004-75 
 
Ref: (A) Toronto 2609 (B) Toronto 2638 
 
Sensitive but Unclassified - Protect Accordingly. 
 
1.  (U) This cable contains an action request; see 
paragraph 9. 
 
2.  (U) This message is one in a series reviewing the 
Canadian financial services sector from a cross-border, 
North American integration perspective.  In September 
2005 the Toronto Financial Services Alliance sponsored 
roundtables for ConGen Toronto with industry sector 
experts in venture capital (ref (B)), banking (septel), 
securities (septel), and insurance. 
 
3.  (SBU) SUMMARY: During a September 27 financial 
services roundtable on the insurance sector held for 
ConGen Toronto, the Canadian Life and Health Insurance 
trade association (CLHIA) complained that IRS Ruling 
2004-75 is "a real headache" for U.S. companies doing 
business in Canada because it imposes extra-territorial 
taxation on Canadians who receive benefit payments from 
U.S. insurance carriers.  This effectively subjects 
them to double-taxation in both Canada and the U.S. 
The net effect is to reduce significantly the 
competitiveness of U.S. life insurers in the Canadian 
market place.  Several written requests from both 
Canadian and U.S. trade associations to Canadian and 
U.S. authorities have so far not/not produced any 
results.  END SUMMARY. 
 
Background: Canada's Life Insurance Sector 
------------------------------------------ 
 
4.  (SBU) Established in 1894, the Canadian Life and 
Health Insurance Association (CLHIA) prides itself on 
being Canada's oldest trade association.  Canada's life 
insurance industry is highly globalized, with more than 
half of the industry's annual premiums being generated 
outside Canada - C$65 billion - compared to C$58 
billion within in Canada.  The industry's biggest 
growth areas are wealth management and health 
insurance, with life insurance in relative decline and 
disability insurance growing only modestly. 
 
5.  (SBU) An industry trend among Canada's best known 
life insurance firms to demutualize (i.e., change their 
ownership structure from "member owned" to "shareholder 
owned") was completed in the late 1990s: Clarica, 
Manulife, Canada Life, and Industrial Alliance in 1999, 
and SunLife in 2000.  Demutualization was followed by 
some limited merger activity that reduced the number of 
life insurers in Canada from 163 in 1990 to 105 in 
2004.  The most prominent mergers were SunLife's 
acquisition of Clarica (2002) and Great-West Life's 
acquisition of Canada Life (2004) - permitted by the 
federal government as compatible with its financial 
services sector dictum that "big shall not buy big." 
Frustrated with the federal government's no merger 
policy among big financial services providers, Manulife 
Financial, Canada's biggest insurer, bought Boston- 
based John Hancock Financial services in the spring of 
2004 for US$15 billion in the biggest Canadian cross- 
border financial services deal in history. 
 
6.  (U) The CLHIA counts 28 U.S. life insurance 
branches and 11 U.S.-owned subsidiaries among its 
approximately 100 members.  U.S. life insurance 
companies in Canada hold some 1 million policies with 
Canadians and pay annual benefits in excess of C$2.75 
billion to those Canadian policy-holders.  U.S. members 
of CLHIA whose Canadian clients are double taxed as a 
result of IRS Ruling 2004-75 include State Farm, Met 
Life, American Income, Fortis Benefits, Combined of 
America, Knights of Columbus, and Prudential of 
America. 
CLHIA Questions IRS Ruling 2004-75 
---------------------------------- 
 
7.  (SBU) By far the biggest cross-border issue for the 
CLHIA is IRS Ruling 2004-75.  The CLHIA representatives 
present at the September 27 roundtable held for ConGen 
Toronto asked for assistance in eliminating what it 
calls "inappropriate extra-territorial taxation of 
Canadians by the United States."  According to the 
CLHIA, IRS ruling 2004-75 -- harms U.S. companies 
conducting business in Canada.  As a senior CLHIA Vice- 
President explained, the U.S. Internal Revenue Service 
announced in June 2004 the extra-territorial 
application of withholding taxes to benefit payments 
from life insurance policies (and annuity contracts) 
issued to non-U.S. residents by foreign branches of 
U.S.-based life insurance companies.  The effect of IRS 
Ruling 2004-75 is to subject Canadian residents, 
contracting in Canada with Canadian branches of U.S. 
companies, to U.S. taxes, even where those individuals 
have no U.S. property or other connection with the 
United States.  While apparently intended to address 
specific problems in Puerto Rico, IRS Ruling 2004-75 
was worded so that it applied on a worldwide basis.  A 
subsequent amendment, Ruling 2004-97, has similar 
application. 
 
8.  (SBU) According to CLHIA, IRS Ruing 2004-75 creates 
a problem of double taxation of Canadian residents who 
receive benefits under policies with U.S. life insurers 
operating in Canada.  In addition to paying U.S. 
withholding taxes, these Canadian residents already pay 
taxes on their benefits under Canadian law.  CLHIA told 
us that all one million policies held by U.S. insurers 
with Canadian residents are affected.  The dollar value 
of benefit payments subject to double taxation runs 
above C$2.75 billion annually.  Not surprisingly, the 
CLHIA and its U.S. counterpart, the American Council of 
Life Insurers, have contacted Canadian and U.S. 
authorities in order to limit the scope of these IRS 
Rulings, or exempt Canadian policyholders via an 
amendment to the Canada-U.S. Tax Convention.  Written 
submission made in regard to IRS Ruling 2004-75 
include: 
 
--ACLI letter to IRS, July 21, 2004 
 
--CLHIA letter to Len Farber (Canadian Dept. of 
Finance) et al., October 15, 2004 
 
--CLHIA letter to Patricia Brown (U.S. Treasury), July 
26, 2005 
 
--CLHIA letter to Brian Ernewein (Canadian Dept. of 
Finance), August 8, 2005 
 
(NOTE: Copies of these letters have been e-mailed to 
Embassy Ottawa and WHA/CAN desk officers.  END NOTE). 
 
Action request 
-------------- 
 
9.  (SBU) ConGen Toronto requests Department follow up 
with Treasury and the IRS to determine when U.S. 
insurance companies operating in Canada can regain the 
even playing field that they claim they have been 
deprived of by the extra-territorial provisions of IRS 
Ruling 2004-75. 
 
List of Attendees 
----------------- 
 
10.  (U) The roundtable included the trade associations 
of Canada's life insurance sector (CLHIA), the 
Insurance Bureau of Canada (IBC), as well as prominent 
private sector stakeholders:  Jim Witol, Vice-President 
Taxation and Research, CLHIA; Jane Voll, Vice-President 
Policy Development, IBC; Richard Dubin, Vice President 
Investigative Services, IBC; Deirdre Martin, Senior 
Counsel, IBC; Neil Skelding, President & CEO, RBC 
Insurance; Michael Landry, Vice President Corporate 
Development, Manulife Financial; Moira Gill, Director 
Insurance regulatory Affairs, TD Financial Group; Bill 
Pineau, Member relations, LOMA (an international 
insurance industry association offering market research 
and education programs targeted to insurance and 
financial services companies).  Represented from the 
Toronto Financial Services Alliance were its President, 
Janet Ecker (former Finance Minister of Ontario) and 
Susan Viegas, City of Toronto, Economic Development 
Bureau.  Represented on the U.S. side were Consul 
General Jessica LeCroy, Pol/Econ Consul Sherri 
Holliday, Pol/Econ Officer Tom Boughter, Pol/Econ 
Assistant Colin White, and Embassy Ottawa ECON Minister 
Counselor, Brian Mohler. 
 
LECROY