GST/HST Notice 287 "CRA Administrative Positions on the Application of the Import Rules for Financial Institutions to Reinsurance Contracts" January 2015.

Loading restricted to the administrative component [and not amounts that are fundamentally financial]

Subject to the position concerning service level agreements that meet the criteria described below, the amount representing that part of the reinsurance premium that may reasonably be allocated to administrative expenses, i.e., loading, including any error or profit margin specific to those expenses, is subject to tax under the import rules.

Amounts paid to reinsurer over and above the best estimate of losses (to reflect the transfer of risk) are excluded

In the case of the amount that the insurance industry refers to as the "margin for risk transfer" portion of the reinsurance premium, the industry has stated that this amount exclusively represents the compensation paid by the primary insurer to the reinsurer over and above the "best estimate of losses" to reflect the transfer of risk to the reinsurer for potential future insurance claims under the insurance/reinsurance policy/contract, and that some or all of this amount could become profit of the reinsurer. … The amount in the reinsurance premium described above as the margin for risk transfer is not considered to be included in loading as defined in section 217. As a result, the amount is not excluded from paragraph (k) of the definition of permitted deduction in section 217 and is not subject to tax.

Ceding commissions and expense allowances for Canadian services are excluded

The ceding commission or expense allowance that compensates the primary insurer for certain property or services acquired or performed by the primary insurer exclusively in Canada is not subject to tax under the import rules.

Safe harbour (treating all of reinsurance premiums as exempt) where there is arm's length pricing for separate properly-scoped service level agreement

[T]he import rules are not intended to impose GST/HST on the reinsurance premium charged by a reinsurer to a primary insurer in respect of a reinsurance policy or contract between the primary insurer and the reinsurer where:

1. the reinsurance policy… is recognized as an insurance contract…;
2. the primary insurer pays to the reinsurer and/or affiliates amounts, each…a "fee".. under an SLA that is allowed as a deduction… under the Income Tax Act;
3. …[T]hese fees…[are] exclusively, or almost exclusively… for imported property and services provided by the reinsurer and/or affiliates, which includes the administration of the reinsurance policy or contract, other than amounts attributable to best estimate of losses, ceding commissions/expense allowances and compensation paid by the primary insurer to the reinsurer over and above the "best estimate of losses" to reflect the transfer of risk to the reinsurer for potential future insurance claims;
4. each fee charged…by the reinsurer or an affiliate is commensurate with arm's length pricing…; and
5. the primary insurer is charged, or self-assesses, GST/HST on each of these fees.

Example where there is not an SLA

Example 2

InsurerCan, a Canadian licensed property and casualty insurer, had a 50% quota share treaty (property insurance) in place with ReinsurerUS, a related foreign reinsurer. For 2013, ReinsurerUS was paid a $10 million reinsurance premium (50% of $20 million policy premiums) priced and based on the arm's length principle. A 25% ceding commission of $2.5 million was payable by ReinsurerUS to InsurerCan to compensate for certain property and services acquired or performed by InsurerCan exclusively in Canada in 2013. Documentary evidence indicated that a reasonable allocation of the administrative expenses incurred by ReinsurerUS for the reinsurance policy with InsurerCan was $500,000.

Intent of the qualifying consideration rules is to impose tax on administrative-services component of related-party supplies and not on financial services that are fundamentally financial in nature

Finance policy intent regarding administrative expenses

It is the policy intent of the import rules that financial institutions be required to self-assess tax on the portion of a related-party supply of a financial service that is largely administrative in nature subject to the Finance policy intent concerning service level agreements that meet the criteria described below.

CRA administrative position

Subject to the position concerning service level agreements that meet the criteria described below, the amount representing that part of the reinsurance premium that may reasonably be allocated to administrative expenses, i.e., loading, including any error or profit margin specific to those expenses, is subject to tax under the import rules.

Finance policy intent regarding the margin for risk transfer

It is not the policy intent of the import rules that financial institutions be required to self-assess tax on the portion of a related-party supply of a financial service that is clearly and fundamentally financial in nature.

In the case of the amount that the insurance industry refers to as the “margin for risk transfer” portion of the reinsurance premium, the industry has stated that this amount exclusively represents the compensation paid by the primary insurer to the reinsurer over and above the “best estimate of losses” to reflect the transfer of risk to the reinsurer for potential future insurance claims under the insurance/reinsurance policy/contract, and that some or all of this amount could become profit of the reinsurer. If the margin for risk transfer is as described by the insurance industry, it is not intended to be taxed as part of “loading”.