In July 2023, the Canada Revenue Agency
(“CRA”) released GST/HST Notice
325 (the “Notice”) with respect to
services provided by certain insurance intermediaries. The Notice
essentially makes official the 180-degree turn the CRA has taken
with respect to the taxable status of commissions and other
consideration payable to insurance intermediaries – including
Third Party Administrators (“TPAs”) and Managing General
Agents (“MGAs”) – after the industry requested
clarification with respect to the tax treatment of a range of
specific scenarios.
Background
In a 2019 technical interpretation, the CRA had stated that the
predominant nature of the supply made by an MGA was a management
and promotional service to the insurer that was excluded from the
definition of “financial service” in Part IX of the
Excise Tax Act (Canada) (“ETA”) and was
therefore taxable (GST/HST Interpretation Case Number 194986, May
6, 2019). At the end of 2019, the tax authorities began reassessing
insurance intermediaries for uncollected GST/HST.
Following representations submitted by a coalition of industry
players, the CRA agreed to clarify its view regarding the
application of the GST/HST to services supplied by insurance
intermediaries. The coalition notably provided examples to the CRA
where clarifications were necessary.
The publication of the Notice is the result of those efforts.
The Notice summarizes the CRA’s current administrative position
regarding the application of the GST/HST to supplies made, directly
or indirectly, to an insurer by certain intermediaries. The Notice
notably provides guidance to MGAs, TPAs and managing general
underwriters (“MGUs”) to determine whether the services
they provide are subject to GST/HST or not.
Comment period
The CRA is accepting feedback on
the Notice until October 31, 2023. However as the Notice
states, it can already be considered by stakeholders as an
“accurate summary of the CRA’s interpretation of the
law”.
Application of the ETA to Insurance Intermediaries
As a general rule, any supply of property or services made by an
insurance intermediary is to be considered as a taxable supply
unless it is:
- an exempt supply as provided for under
Schedule V to the Excise Tax Act (Canada)
(“ETA“); or - a zero-rated supply as listed under Schedule
VI to the ETA.
A supply of a “financial service” (as defined under
subsection 123(1) of the ETA) will generally be an exempt supply
pursuant to section 1 of Part VII of Schedule V
unless it is an “exported” financial
service made by a financial institution and is listed in Part IX of
Schedule VI as a zero-rated supply. In that context, the Notice
proposes a three-step framework designed to help
determine whether a supply made by an insurance intermediary is
either taxable, exempt or zero-rated for GST/HST purposes:
- Step 1 consists in determining whether the
insurance intermediary is making a single or multiple
supplies; - Step 2 analyzes the characteristics of each
element of a supply and identifies its predominant element;
and - Step 3 establishes whether the predominant
element of the supply meets the definition of financial service in
subsection 123(1) of the ETA.
Step 1: single vs. multiple supplies
Where an agreement provides for several elements of property
and/or services to be supplied by an insurance intermediary to an
insurer (or another person dealing with the insurer), one must
first determine whether the insurance intermediary is actually
making a single supply or multiple supplies for GST/HST
purposes.
In many cases, each element to be supplied by the intermediary,
if taken separately, could have a different tax treatment for
GST/HST purposes. This makes the single vs. multiple supplies
determination a critical aspect of the analysis framework. The
CRA’s administrative instructions regarding such determination
are published in GST/HST Policy Statement
P-077R2.
The Notice also underscores that it is ultimately a question of
fact whether an intermediary is making a single supply or multiple
supplies. In general, where several elements are provided and are
inextricably intertwined and integrally connected to one another,
such elements must be considered to form part of a single supply.
It is also noteworthy that even if more than one contract exists
between the parties, the CRA may still consider them to be a single
supply.
Even where the above analysis has identified multiple supplies,
the possible application of the deeming provisions in sections 138
and 139 of the ETA must still be considered:
- Section 138 deems a supply to form part of
another supply where they are supplied together for a single
price. - Section 139 provides that
services that are not financial services, or properties that are
not capital properties of the supplier, to the extent they are
provided together with financial services as a usual practice in
the ordinary course of business of the supplier, are deemed to be
financial services to the extent the pure financial service portion
accounts for more than 50% of the value of the combined
supply.
Step 2: predominant element of the supply
To the extent one single supply of multiple elements has been
identified or where multiple supplies are instead made by the
intermediary, it is then necessary to identify all of the elements
of each supply. Finally, the predominant element of each supply
should be determined.
As stated in case law, the CRA considers that the test to
determine the predominant element of a supply is to find the
element that gives the supply commercial efficacy. In this respect,
the Notice states that such determination requires identifying
objectively, from the recipient’s perspective, the service
provided by the insurance intermediary in exchange for the
consideration. The Notice also mentions that the way the
consideration for the supply is calculated is not, in and of
itself, a determining factor.
Step 3: whether the supply is a financial service
Once the predominant element of a supply has been identified, it
is then necessary to determine whether it is a supply of a
financial service.
Generally, under Part IX of the ETA, a supply is a financial
service, as defined in subsection 123(1), if it is listed within
any of paragraphs (a) to (m) of such definition (collectively, the
“Inclusionary Paragraphs“). However, if
such supply also falls within any of the exclusions listed in
paragraphs (n) to (t) of the definition (collectively, the
“Exclusionary Paragraphs“), it is deemed
not to be a financial service.
Inclusionary Paragraphs
The Notice focuses on Inclusionary Paragraph (l) which refers to
“arranging for” a service that is referred to in any of
Inclusionary Paragraphs (a) to (i) and is not referred to in any of
Exclusionary Paragraphs (n) to (t).
More precisely, the Notice considers a scenario where an
intermediary is involved in the insurer’s supply of a financial
service such as the issuance or renewal of an insurance policy.
The CRA notes that in order for an insurance intermediary’s
supply to be considered as “arranging for” an
insurer’s supply of a financial service, the following factors
described in GST/HST Technical
Information Bulletin B-105 are pivotal:
- the purpose of the supply must be to act as an intermediary to
bring parties together to make the insurer’s supply of the
financial service; - the insurance intermediary must have sufficient direct
involvement in the insurer’s supply of insurance policies that
it can be said that the intermediary causes the supply to occur
(although it is not necessary for the insurance intermediary to be
involved in each individual transaction); and - there should be a high degree of reliance on the insurance
intermediary by the insurer or the recipient of the insurer’s
supply of the financial service.
Certain Exclusionary Paragraphs
Even if a supply made by an insurance intermediary is included
in one or more of the Inclusionary Paragraphs, the supply can still
be excluded from the definition of “financial service” to
the extent its predominant element is also caught by one of the
Exclusionary Paragraphs.
The Notice specifically focuses on Exclusionary Paragraphs (r.4)
and (t). Exclusionary Paragraph (r.4) excludes from the definition
of “financial service” a service that is preparatory to
the provision, or the potential provision, of a service referred to
in any of Inclusionary Paragraphs (a) to (i) and (l), or that is
provided in conjunction with a service referred to in any of those
Inclusionary Paragraphs, and that is either:
- a service of collecting, collating or providing information,
or - a market research, product design, document preparation,
document processing, customer assistance, promotional or
advertising service or a similar service.
For its part, Exclusionary Paragraph (t) also excludes certain
services that are prescribed under the Financial Services
and Financial Institutions (GST/HST) Regulations (the
“Regulations“). A prescribed service for
purposes of this paragraph generally includes any administrative
service (including an administrative service in relation to the
payment or receipt of claims or benefits, but excluding a service
that is solely the making of the payment or the taking of the
receipt). This means that a prescribed administrative service could
include a service in relation to the payment of an insurance claim
that does not involve any independent decision-making.
However, an administrative service is generally not a prescribed
service (and not excluded from the definition of financial service)
if it is supplied with respect to an instrument (which is defined
as money, an account, a credit card voucher, a charge card voucher
or a financial instrument such as an insurance policy) by certain
persons at risk (directly or indirectly through closely related
groups or agents).
A “person at risk” in respect of an instrument means a
person that is financially at risk by virtue of the acquisition,
ownership or issuance by that person of the instrument or by virtue
of a guarantee, an acceptance or an indemnity in respect of the
instrument, but does not include a person who becomes “at
risk” in the course of, and only by virtue of, authorizing a
transaction, or supplying a clearing or settlement service, in
respect of the instrument.
Seven Example Scenarios
Seven examples are provided by the CRA in the Notice. These
include situations in which a range of services are provided by
insurance intermediaries, such as MGAs and TPAs, to licensed and
non-licensed insurers. In each of the first five examples, the
intermediary’s supply to the insurer is exempt, while in the
sixth and seventh examples it is not.
- Example 1 concerns a typical scenario in which
a Canadian MGA enters into a managing general agent agreement with
a Canadian licensed insurer. In this scenario, the MGA’s supply
to the insurer is a financial service covered under Inclusionary
Paragraph (l) (and not excluded under any of the Exclusionary
Paragraphs) that is exempt for GST/HST purposes. - In Example 2, a Canadian TPA develops an
employee benefit plan to market to employers and contracts with
Canadian licensed insurers to issue group insurance policies to
employers. In this case, the TPA receives a commission from the
insurers for group policies sold to employers which is also exempt
for GST/HST purposes. - Example 3 provides for a Canadian corporation
entering into an agreement with a Canadian licensed insurer. The
Canadian corporation is appointed by the insurer to act on the
insurer’s behalf to distribute and manage travel insurance
policies sold to Canadian residents and the intermediary receives a
commission based on the premiums received on policies sold by such
intermediary. Again, the intermediary’s supply to the insurer
is viewed as an exempt financial service. - Example 4 illustrates a scenario where a
Canadian TPA enters into two agreements with a Canadian insurer,
where under agreement A, the TPA solicits customers to buy the
insurer’s group life and health insurance policies, and under
agreement B, the TPA administers all policies it has distributed
under agreement A. The TPA only receives consideration (i.e.,
commissions) under agreement A based on the policies distributed.
In this case, the TPA’s supply to the insurer under both
agreements is a financial service covered under Inclusionary
Paragraph (l) (and not excluded under any of the Exclusionary
Paragraphs) that is exempt for GST/HST purposes. - Example 5 involves a Canadian corporation
entering into an agreement with a Canadian insurer where the
intermediary distributes the insurer’s car replacement
insurance policies to customers who purchase new cars through
Canadian car dealers. A commission is paid to the intermediary
based on each policy issued through the intermediary’s network
of dealers. Again, the intermediary’s supply to the insurer is
exempt for GST/HST purposes in this example. - In Example 6, a Canadian corporation that is
not authorized to carry on an insurance business develops a car
replacement program under which, in the case of a total loss, the
corporation will pay a customer the difference between the cost of
the replacement car and the primary insurer’s settlement
amount. An insurer that is licensed issues a contractual liability
insurance to the corporation providing coverage for the
corporation’s obligations towards the customers. In this case,
the supply of the car replacement contracts to the customers is not
an exempt financial service because the corporation is not issuing
an “insurance policy” as defined in subsection 123(1) of
the ETA. Premiums payable by the corporation to the licensed
insurer are nonetheless exempt. - Finally, Example 7 provides for a Canadian
corporation that owns an insurance claims adjudication and
settlement system. The corporation adjudicates drug benefit claims
made by insured employees covered by group health insurance
policies issued by insurers. Employees receive the drug benefits
directly at the point of purchase. For the corporation’s
services, an insurer pays a fee for each claim adjudicated through
the corporation’s system. By taking into account the
insurer’s perspective (i.e., the recipient of the supply), the
CRA concludes that the predominant element of the corporation’s
supply is an administrative service. Even if such service were
included in any of the Inclusionary Paragraphs, the CRA would
conclude that it should be excluded under Exclusionary Paragraph
(t) as a prescribed service under paragraph 4(2)(b) of the
Regulations. Moreover, subsection 4(3) of the Regulations would not
be applicable to exclude the supply from being a prescribed service
considering the corporation is not a “person at risk” in
this scenario.
Concluding Comments
- The publication of the CRA’s official position regarding
the exempt status of commissions payable by insurers to insurance
intermediaries, including TPAs and MGAs, in typical real-life
scenarios had long been awaited and requested by participants in
the industry. - Clarifications regarding the application of the “arranging
for” Inclusionary Paragraph (l) could also assist businesses
acting as intermediaries in connection with financial services
supplied by financial institutions outside the insurance
industry.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
