Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
TO:
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
FROM:
Dawn Weisberg
Manager
Financial Institutions Unit
Excise & GST/HST Rulings Directorate
320 Queen Street, 15th Floor
Ottawa ON K1A 0L5
DOCUMENT NO.:
85214
DATE:
July 21, 2009
SUBJECT:
_GST/HST Interpretation
Tax status of supplies by an insurer
Thank you for your enquiry regarding the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies made by an insurer. We apologize for the delay in our response.
All legislative references are to the Excise Tax Act (ETA), unless otherwise specified.
From your letter and its attachments, including sample insurance policies issued by XXXXX, as well as your telephone conversations with Eleanor Struth of the Financial Institutions Unit and information from the Web sites of XXXXX and the XXXXX, our understanding of the facts is as follows:
XXXXX is licenced by the XXXXX who administers the statutes and regulations under the XXXXX, to write aircraft, automobile, boiler and machinery, fidelity, hail, liability, property and surety insurance. XXXXX is subject to the XXXXX and is licensed to write insurance in all provinces and territories in Canada. It is primarily involved in writing commercial automobile XXXXX insurance, and provides property and casualty insurance for the XXXXX in Canada, with coverage for XXXXX within Canada and the United States. The majority of XXXXX insurance policies are for insured persons resident in the provinces of XXXXX. XXXXX is an insurer and a financial institution as defined in subsection 123(1).
XXXXX has been treating a portion of its premiums from automobile insurance policies it has issued to Canadian XXXXX companies as consideration for zero-rated supplies, evidenced by the fact that it has claimed input tax credits (ITCs) for GST/HST paid in respect of purchases acquired to the extent that they relate to these supplies. The ITC allocation is based on historical claim costs. A study performed by XXXXX in a prior year established that one third of its claim costs were incurred as a result of an insurable incident in the United States. Therefore, XXXXX considers one third to be the portion of its Canadian policies that relates to non-Canadian risk.
Normally, XXXXX companies insure a fleet of vehicles under one automobile insurance policy with XXXXX. The policy usually covers loss or damage to the insured vehicles XXXXX third party liability, basic accident benefits for injury or death of insured persons, specified perils, comprehensive, and injury and damage due to uninsured motorists. It may also include additional accident benefits such as greater coverage for lost income or the payment of additional expenses for injured persons.
These policies issued by XXXXX to Canadian XXXXX companies generally provide coverage for perils within Canada and the United States. Insured companies provide XXXXX with an estimate of a percentage of the use of each vehicle in Canada and in the United States. From the sample policies provided, it would appear that the vehicles covered under some of these policies are used from XXXXX% - XXXXX% in the United States (outside Canada). Some indicate the use of insured vehicles outside Canada of up to 83%. None of the sample policies provided indicate where the risks are located; however, the insured XXXXX companies in question are Canadian companies most of which operate from a location in XXXXX (some are located in other parts of Canada). The vehicles used by the companies located in XXXXX are registered with the XXXXX pursuant to the XXXXX and XXXXX, XXXXX.
When claims are paid, XXXXX either reimburses the insured for repairs to damaged vehicles, or if the vehicle is a total write-off, pays a settlement amount to the insured. Where the vehicle is a total write-off, the vehicle's ownership is transferred to XXXXX, who subsequently resells the salvaged vehicle. Salvage revenue is separated into United States (i.e., from sales taking place in the United States) and Canadian salvage revenues. GST/HST is collected on the Canadian salvage revenue, but not on the United States revenue. XXXXX has been claiming ITCs in respect of GST/HST paid for costs incurred in relation to its sales of salvage.
XXXXX is registered for GST/HST purposes.
You have the following questions in regards to XXXXX operations:
1. Whether supplies made by XXXXX of financial services related to automobile insurance policies it issues to Canadian XXXXX companies, where the policy relates to XXXXX that are used to XXXXX within Canada and the United States, can be zero-rated under paragraph 2(d) of Part IX of Schedule VI, and to what extent. Specifically, what is meant by the phrase, "risks that are ordinarily situated outside Canada"?
2. Can ITCs be claimed by XXXXX in relation to automobile insurance policies issued to Canadian XXXXX companies relating to XXXXX used to XXXXX within Canada and the United States?
3. Does GST apply to sales of salvaged property made by XXXXX? Can ITCs be claimed in relation to these sales?
OUR COMMENTS:
Issue #1 - Zero-rating of supplies relating to insurance policies:
Under section 2 of Part IX of Schedule VI a supply made by a financial institution of a financial service that relates to an insurance policy issued by the institution (other than a service that relates to investments made by the institution), is a zero-rated supply to the extent that:
(a) where the policy is a life or accident and sickness insurance policy (other than a group policy), it is issued in respect of an individual who at the time the policy becomes effective, is a non-resident individual;
(b) where the policy is a group life or accident and sickness insurance policy, it relates to non-resident individuals who are insured under the policy;
(c) where the policy is a policy in respect of real property, it relates to property situated outside Canada; and
(d) where the policy is a policy of any other kind, it relates to risks that are ordinarily situated outside Canada.
Under paragraph 2(d) of Part IX of Schedule VI a supply of a financial service (other than a service that relates to investments made by the institution) made by a financial institution that relates to an insurance policy issued by the institution (other than a life or accident and sickness insurance policy, a group life or accident and sickness insurance policy or a policy in respect of real property) is a zero-rated supply only to the extent that the policy relates to risks ordinarily situated outside Canada. Therefore, the converse will also be true; the supply will not be a zero-rated supply to the extent that the insurance policy relates to risks not ordinarily situated outside Canada.
Under the sample automobile insurance policies provided, the risks are identified as being the danger or peril of general loss or damage to: insured vehicles, third parties, insured persons, and other property, subject to certain limitations. Further, sometimes the risk may also include loss or damage to these things due to certain specified perils. All of these risks arise through the operation of the insured vehicles.
In the case of automobile insurance, that which XXXXX provides, we will determine where the risk is ordinarily situated based on the place where the insured vehicle is required to be registered.
Based on the facts provided, all of the vehicles covered by automobile insurance policies issued by XXXXX to Canadian XXXXX companies are registered in Canada, with most of them being registered in XXXXX. Consequently, these automobile insurance policies are related to risks that are ordinarily situated in Canada. That being the case, the risks are not ordinarily situated outside Canada. Therefore, the supply by XXXXX of issuing these automobile insurance policies will not be a zero-rated supply under section 2 of Part IX of Schedule VI.
Section 1 of Part VII of Schedule V provides that a supply of a financial service that is not included in Part IX of Schedule V is exempt. Therefore, where a supply of a financial service made by a financial institution that relates to an insurance policy issued by the institution is not zero-rated under section 2 of Part IX of Schedule VI, it will be exempt.
As a result, XXXXX supplies to Canadian XXXXX companies of financial services related to the above described automobile insurance policies, including the issuance of these policies, are exempt supplies as they do not explicitly fall within section 2 of Part IX of Schedule VI.
Issue #2 - ITC entitlement with respect to supplies of financial services relating to XXXXX insurance policies:
A registrant is eligible to claim ITCs for GST/HST paid or payable on the acquisition/importation of a property or a service under the provisions of subsection 169(1) to the extent that the property or service was acquired/imported for consumption, use or supply in the course of its commercial activities, and the conditions set out in section 169 are met.
The term "commercial activity" is defined in subsection 123(1) to mean, in part, a business carried on by the person except to the extent to which the business involves the making of exempt supplies by the person.
From the information provided, none of the policies relate to any extent to risks that are ordinarily situated outside Canada. As XXXXX supplies of financial services related to the described automobile insurance policies, including the issuance of these policies are not zero-rated to any extent, XXXXX is not entitled to any ITCs with respect to the GST/HST paid or payable on purchases with respect to these supplies.
Issue #3 - Application of GST/HST to sales of salvaged property:
Subsection 184(1) provides, in part, that where at any time after 1990 personal property of a person is transferred to an insurer in the course of settling an insurance claim, there is a deemed supply of the property by the person to the insurer which is generally deemed to have been made for no consideration.
Furthermore, subsection 184(2) provides that where subsection 184(1) applies and the insurer makes a subsequent supply of the property, other than where the insurer previously used the property, the insurer is deemed to have made the supply in the course of a commercial activity (except where the supply is an exempt supply). Therefore, the sales of the salvaged vehicles by XXXXX are taxable supplies.
Also, anything done by the insurer in the course of, or in connection with, the making of the supply and not in connection with the transfer of the property shall be deemed to have been done in the course of the commercial activity.
The salvaged vehicles can be classified into two categories, those sold in Canada and those sold outside Canada (in the United States).
A sale of tangible personal property will be considered to be made in Canada under paragraph 142(1)(a) where it is delivered or made available in Canada to the recipient of the supply. Conversely, where tangible personal property is delivered or made available outside Canada to the recipient of the supply, a sale of the property will be considered to be made outside Canada under paragraph 142(2)(a).
Vehicles sold in Canada:
Where the salvaged vehicle is delivered or made available in Canada to the purchaser, the sale is considered to be made in Canada, and unless the sale is zero-rated or otherwise relieved from GST/HST, a registrant will be required to charge GST/HST.
Furthermore, pursuant to section 144.1, a supply is deemed to be made in a province if it is made in Canada, and made in the province under the rules in Schedule IX. A supply is deemed to be made outside the province in any other case and a supply made in Canada that is not made in any participating province is deemed to be made in a non-participating province. Supplies made in participating provinces are subject to HST, while supplies made in non-participating provinces are subject to GST.
Section 1 of Part II of Schedule IX provides that generally a sale of tangible personal property is made in a province if the supplier delivers the property or makes it available in the province to the recipient of the supply. Section 3 of Part II of Schedule IX further provides, in part, that the tangible personal property is deemed to be delivered in a particular province by a supplier and is deemed not to be delivered in any other province by the supplier where the supplier ships the property to a destination in the particular province that is specified in the contract for carriage of the property or transfers possession of the property to a common carrier or consignee that the supplier has retained on behalf of the recipient to ship the property to such destination. Therefore, where XXXXX delivers the salvaged vehicle or makes it available to the purchaser in a participating province it will generally be required to charge HST. Where XXXXX delivers the salvaged vehicle or makes it available to the purchaser in a non-participating province, it will generally be required to charge GST.
Where a supply is considered to be made in Canada, it may still be zero-rated under the provisions of Schedule VI. Specifically, Part V of Schedule VI contains zero-rating provisions regarding the export of property. For further information regarding the zero-rating provisions which may apply to XXXXX sale of salvaged vehicles, please see GST/HST Memorandum 4.5.2, Exports - Tangible Personal Property. For example, paragraphs 1-14 and 39-42 of that memorandum may apply.
Vehicles sold in the United States:
Where the salvaged property is delivered or made available outside Canada to the purchaser, the sale is considered to be made outside Canada, and it is not subject to GST/HST.
ITC entitlement with respect to sales of salvaged property:
Subsection 184(2) provides that anything done by the insurer in the course of, or in connection with, the making of the supply and not in connection with the transfer of the property shall be deemed to have been done in the course of the commercial activity of making the supply, unless subsections 184(3) to 184(5) applied at an earlier time in respect of the use of the property by the insurer. Subsections 184(3) to 184(5) are all relevant in a situation where the insurer begins to use the transferred property otherwise than in the making of a supply of the property.
Regardless of whether the vehicles are sold in Canada or in the United States, they are being sold in the course of XXXXX commercial activity. Provided subsection 184(3) to 184(5) do not apply, XXXXX will be eligible to claim ITCs for GST/HST paid or payable on property and services to the extent that the property and services are for consumption, use or supply in the course of, or in connection with, the sale of the salvaged vehicles provided all the other conditions for claiming ITCs are met. However, any GST/HST paid or payable on property and services to the extent that the property and services are for consumption, use or supply in the course of or in connection with the transfer of the vehicle from the insured to XXXXX is not eligible for ITCs. For example, GST/HST paid on expenses for advertising the sale or preparing the vehicles for sale will be eligible, while GST/HST paid or payable for a lawyer's service in investigating the cause of an accident will not be eligible.
Where XXXXX acquires or imports property and services for consumption, use or supply in the course of, or in connection with both of these activities (i.e., the sale of the salvaged vehicle and the transfer of the vehicle) it has to determine the extent to which the property or service is for use in making taxable supplies for consideration in order to determine its ITC eligibility.
For fiscal years beginning after March 2007, proposed section 141.02 will apply if enacted as currently drafted. Please see the following publications for further information on these new rules: B-097, Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02, B-098, Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions, and Notice 236, Draft GST/HST Technical Information Bulletin on the ITC Allocation Methods for Financial Institutions.
Subsection 183(2), which deals with the supply of seized or repossessed property by a creditor, contains similarities to subsection 184(2). As a result, Policy Statement P-175, Costs that fall within the Scope of Subsection 183(2), may assist you in determining whether particular property or services relate to the sale of the salvaged vehicles.
If you have further questions or require clarification on the above information, please contact me at 613-952-9210.
Yours truly,
M. Dawn Weisberg
Manager, Financial Institutions Unit
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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