Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 209546
Dear [Client]:
Subject: GST/HST RULING AND INTERPRETATION
Insurance premiums in two situations
Thank you for your letters of [mm/dd/yyyy] and [mm/dd/yyyy] and related documentation, concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to insurance premiums in two situations.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
Based on your letters, documentation submitted, and our telephone conversations, we understand the following:
1. […](the Company) […] is registered for GST/HST.
Situation 1 […]
2. Under a Lease Agreement, […] (the Lessor) agrees to lease a specific […][vehicle] (the Sedan) to […] (the Individual) for a term of several months in return for specific monthly lease payments plus GST/HST. The Lease Agreement provides the Individual with an option to purchase the Sedan at the end of the lease term for an estimated residual value.
3. […] (the Insurer) is licensed under the laws of Canada to carry on an insurance business including an automobile, property and credit insurance business.
4. The Insurer issued […](the Policy) to the Individual regarding the Sedan. The Policy and its Declarations indicate that the Individual is the Insured. The Policy provides that, for purposes of the Insurance Companies Act (Canada), the Policy was issued in the course of the Insurer’s insurance business in Canada.
5. The Policy provides that the Company […] has been engaged by the Insurer to sell […] and administer the Policy. It provides that the Company acts in all cases on the Insurer’s behalf […][under the terms of the agreement]
6. […] the Policy provides that, in the event of […], the Insurer will pay a […] benefit […][under the terms of the Policy]
7. [Additional information about the terms of the Policy]
8. […]
9. […]
10. […] the Policy indicates that the cost of the Policy is shown on the Declarations. The Declarations indicate that, for the […] benefit, the total premium is $[…]. […].
11. […] the Policy indicates that the premium for the […] benefit […] is payable at the time the Individual purchases the Policy. […][terms of the Policy].
12. A Pre-authorized Debit Agreement (PAD Agreement) signed on [mm/dd/yyyy] by the Individual provides that for the purpose of paying the premiums under the Policy, the Individual agrees that:
- The Company is authorized to make […] withdrawals to pay the premiums to the Insurer […][under the terms of the PAD Agreement].
- […][terms of the PAD Agreement].
- The financial institution is authorized […] to honor any requests made by the Company to withdraw premiums […] from the account indicated.
13. The Lease Agreement does not in any way refer to the Policy. In particular, in the calculation of the monthly lease payment, the Lease Agreement does not include an amount attributed to an insurance premium for the insurance detailed in the Policy.
Situation 2 […]
14. Under an agreement between the Company and a particular car dealer, the dealer […][may] offer its new leasing customers an optional […] insurance policy issued by a licensed insurer. The insurance policy is not a group insurance policy. The insurance provides for a benefit […][under the terms of the Policy].
15. In a typical situation, a customer enters into a lease agreement with the dealer to lease a vehicle and customizes the options for the vehicle.
16. The customer applies for the insurance policy issued by the insurer for which the consideration payable by the customer to the insurer is […][the full] premium for the coverage period (i.e., the lease term). The consideration is payable to the insurer at the time of the purchase of the insurance. The application is submitted to the Company acting for the insurer.
17. When the application is accepted, the insurer issues the insurance directly to the customer. The dealer pays the premium to the insurer using its own funds. That amount is then added to the cost of the leased vehicle which is used, in part, to calculate the equal monthly lease payments payable by the customer under the lease agreement. […].
RULINGS REQUESTED
1. In Situation 1, you would like to know if the Company is required to charge GST/HST to the Individual on […] amounts that it withdraws from the Individual’s bank account to pay the [...] premiums payable by the Individual to the Insurer.
2. In Situation 2, you would like to know if the portion of the customer’s monthly lease payments attributable to the premium is a repayment of the principal and financing cost of the dealer’s loan to the customer for the premium which is not subject to GST/HST.
RULING GIVEN
1. Based on the facts set out above in Situation 1, we rule that the Company is not required to charge GST/HST to the Individual on the […] amounts that it withdraws from the Individual’s bank account to pay the […] premiums payable by the Individual to the Insurer.
With respect to your ruling requested in Situation 2, we are unable to rule. As outlined in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, a ruling provides the position of the Canada Revenue Agency (CRA) on specific provisions of the legislation as they relate to a clearly defined fact situation of a particular person, supported by relevant documentation. In Situation 2, although there is a clearly defined fact situation, we do not have a third party authorization from the dealer or the customer/lessee regarding the payments under the particular lease agreement and, as such, we are unable to provide a ruling. We have instead provided an interpretation which can be found following the explanation section.
EXPLANATION
A supply of property or a service made in Canada is taxable unless it is exempt under Schedule V to the ETA. A supply of a financial service is exempt under Schedule V to the ETA unless it is zero-rated under Schedule VI to the ETA.
A “financial service” is defined in subsection 123(1) to mean anything that is described in any of paragraphs (a) to (m) and that is not excluded by any of paragraphs (n) to (t) of that same definition.
A financial service includes, under paragraph (d), the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, and transfer of ownership or repayment of a financial instrument. The definition of “financial instrument” in subsection 123(1) includes an insurance policy. An “insurance policy” as defined in subsection 123(1) includes, under paragraph (a), a policy or contract of insurance that is issued by an insurer (other than certain warranties in respect of the quality, fitness or performance of tangible property). An “insurer” is defined in subsection 123(1) to mean a person who is licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an insurance business or under the laws of another jurisdiction to carry on in that other jurisdiction an insurance business.
The Policy described in the facts for Situation 1 is included in paragraph (a) of the definition of insurance policy in subsection 123(1). Further, the Insurer is making a supply of a financial service to the Individual that is included in paragraph (d) of the definition of financial service in subsection 123(1) and is not excluded by any of paragraphs (n) to (t) of that definition. The Insurer’s supply of the financial service is exempt under section 1 of Part VII of Schedule V. The Insurer is not required to charge and collect GST/HST on the consideration (i.e., the insurance premiums) payable by the Individual.
Because the Company is acting on behalf of the Insurer when it withdraws amounts from the bank account to pay the […] insurance premiums payable by the Individual to the Insurer, the Company is not required to charge GST/HST to the Individual on those amounts. The Company is not making a separate supply when they are doing this.
INTERPRETATION GIVEN
Regarding Situation 2, the consideration (i.e., the premium) payable for the insurance is fully paid to the insurer by the dealer on behalf of the customer and so no amount remains outstanding that is payable to the insurer. Therefore, the relevant agreement that we must examine is not the insurance policy but the lease agreement to determine the tax treatment of the amount of the lease payment that is attributable to the insurance premium charged by the dealer (not by the insurer) to the customer.
As noted in GST/HST Policy Statement P-077R2, Single and Multiple Supplies, the determination of whether there is a single supply or multiple supplies is confined to the transaction at issue, rather than referring to other possible transactions containing the same or similar elements.
In this situation, the lease agreement appears to be the only governing agreement between the dealer and the customer. Based on that agreement, at law, it does not appear that there is a lender-borrower relationship (or any other type of debtor-creditor relationship) between the dealer and the customer in respect of the amount of lease payment that is attributable to the insurance premium that is being charged by the dealer to the customer that is clearly dissociable from the supply of the vehicle.
Generally, where a dealer and a customer enter into a lease agreement as described in the above facts for this situation, the entire monthly lease payment would generally be consideration for the dealer’s single supply of the vehicle by way of lease to the customer. A dealer’s supply of a vehicle by way of lease to a customer is a taxable supply. If the dealer is a GST/HST registrant, the dealer would be required to charge GST/HST to the customer on the entire monthly lease payment.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the CRA is bound by the ruling given in this letter provided that: none of the issues discussed in the ruling is currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA's interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed. The interpretation given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 587-337-0489. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Heather Gibbard
Insurance and ITC Allocation Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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