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.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 129778
November 10, 2011
Dear [Client]:
Subject:
EXCISE INTERPRETATION
Clarification of 10% Part I Tax on Insurance Premiums [Other than Marine]
Thank you for your letter of [mm/dd/yyyy] concerning the application of Part I of the Excise Tax Act (ETA) to the operations of [...][Company A]. We apologize for the delay in responding.
In your letter, you have posed several questions dealing with the role of insurance brokers as it relates to the Part I tax on insurance premiums. Prior to addressing the specific questions in your letter, we will outline the relevant legislation.
Imposition of Part I Tax
Subsection 4(1) of the ETA imposes a 10% tax on insurance premiums for every person resident in Canada by whom or on whose behalf a contract of insurance, other than a contract of reinsurance, is entered into or renewed against a risk ordinarily within Canada at the time the contract is entered into or renewed,
(a) with
(i) any insurer not incorporated under the laws of Canada or of any province or not formed in Canada, or
(ii) any exchange having its chief place of business outside Canada or having a principal attorney-in-fact whose chief place of business is outside Canada, that at the time the contract is entered into or renewed is not authorized under the laws of Canada or of any province to transact the business of insurance, or
(b) with any insurer that at the time the contract is entered into or renewed is authorized under the laws of Canada or of any province to transact the business of insurance, if the contract is entered or renewed through a broker or agent outside Canada.
Tax Exemptions
Subsection 4(2) of the ETA exempts the following types of insurance from the tax:
• any contract of life insurance;
• personal accident insurance;
• sickness insurance;
• insurance against marine risk;
• insurance against nuclear risk to the extent that the insurance is not in the opinion of the Commissioner available in Canada; or
• any other contract of insurance entered into after February 19, 1973 to the extent that the insurance is not, in the opinion of the Commissioner, available within Canada.
Broker Through Whom an Insurance Contract is Made With
Under subsection 4(4) of the ETA, where a contract of insurance is entered into or renewed through more than one broker or agent, or where payment of the premium or any part of the premium thereon is effected through more than one broker or agent, the contract shall, for the purposes of this Part, be deemed to have been entered into or renewed, as the case may be, through the broker or agent directly retained or instructed by the insured and not through any other broker or agent.
We will now respond to the questions raised in your letter in the order presented.
Question 1 - How does the Canada Revenue Agency (CRA) assess the relationship between the insured companies and the broker, when considering section 4(4) of the ETA?
Where insurance has been placed or renewed through multiple brokers, the CRA will consider the first broker that is directly instructed or retained by the insured as the broker of record for purposes of the Part I tax. However, insurance policies issued by an authorized Canadian insurer with the involvement of a Canadian broker in the placing of the insurance will be considered to be exempt of the Part I tax. Instances where the tax may apply is if a non-Canadian broker has been directly retained or instructed by the Canadian insured or instances where a Canadian broker is not involved.
Question 2 - In particular, are there key indicia that insured companies should document for the CRA to review and determine whether a direct relationship was in place between the insured company and the Canadian licensed broker?
In making a determination as to the broker of record for purposes of subsection 4(4) of the ETA, the CRA would review all relevant correspondence between the insured and all brokers involved in securing the insurance. This would include reviewing emails, letters, payment invoices, and any other relevant documentation between the insured and their broker(s).
Question 3 - Would there be a distinction made under subsection 4(4) of the ETA when a Canadian broker takes instruction for coverage of Canadian risks from an insured company representative who is personally located outside of Canada, and places it with Canadian-licensed insurers?
Subsection 4(4) of the ETA only applies in the situation where multiple brokers are involved in the placing or renewing of insurance. There is no distinction in the determination of the broker of record under subsection 4(4) of the ETA where the instructions for insurance coverage are from an insured company representative who is personally located outside of Canada.
Question 4 - In other words, if the Canadian insured entity's US [United States] or overseas parent company has a risk manager residing outside of Canada, is it acceptable for that risk manager to appoint or give direction to the Canadian licensed broker on the insured company's Canadian insurance program without bringing subsection (4) of the ETA into play?
As indicated in question 3, subsection (4) of the ETA only relates to situations involving multiple brokers. As such, where a foreign risk manager directly instructs one broker, that is a Canadian licensed broker, subsection 4(4) of the ETA would not apply.
Question 5 - How do auditors confirm the brokers' licensed status?
CRA auditors do not confirm the licence status of brokers. The CRA assumes that any broker that is authorized to bind an insurance company to a contract of insurance has the necessary licences for the jurisdictions in which they operate.
Question 6 - How is the CRA applying subsection 4(4) of the ETA on global insurance programs? In such circumstances, the global parent company often makes decisions about insurance coverage on a worldwide basis, and deploys the program through international insurers covering risks in multiple countries (including Canada) in various layers. The global parent company (and perhaps its subsidiary companies) use the services of local brokers in each countries where they operate.
In terms of a global insurance program, under subsection 4(4) of the ETA, where multiple brokers have been used to place insurance, the CRA will consider the first broker that is directly instructed or retained by the insured as the broker of record for purposes of the Part I tax. See also our response to question one where a Canadian broker is used in placing a policy using a Canadian insurer. As such, there is no distinction in the application of subsection 4(4) of the ETA for insurance placed by either the foreign global parent company or the domestic Canadian subsidiary.
Question 7 - Assuming that the selected insurers are themselves licensed within Canada, on such global programs, what relationship must exist and be documented in order to satisfy the CRA that placement of the Canadian portion of the program was made by the Canadian broker and subsection 4(4) of the ETA therefore doesn't apply?
In determining whether a Canadian portion of an insurance policy was placed with a Canadian broker, the CRA will review all documentation relating to the contract of insurance. This would include reviewing emails, letters, payment invoices, and any other relevant documentation that would substantiate that the Canadian broker was directly instructed or retained by the insured. Where there are multiple brokers (foreign and domestic) involved in the placement or renewal of an insurance contract, the CRA will review the documentation surrounding the placement of insurance to determine which broker was directly instructed or retained by the insured. It is this broker that would, under subsection 4(4) of the ETA, be the broker of record for purposes of the Part I tax.
Question 8 - Global placements are often made through a team of brokers in multiple countries with one lead broker who coordinates the placement to ensure consistency in the global coverage. For example, if a Canadian licensed broker is included as part of the worldwide broker team to represent the Canadian portion of the placement as directed by the global parent company and the lead broker is outside Canada, would the 10% Federal Excise Tax (FET) apply? In this instance, the global parent company would appoint the Canadian licensed broker to represent the insured's insurance interest in Canada (i.e. issue Broker of Record Letter). The Canadian licensed broker would act on instructions from the global parent company to bind the coverage in Canada at certain coverage levels with specific insurance companies. The Canadian licensed broker would be noted on the policy, invoice and remit the premium to the Canadian licensed insurance company, remit the taxes to the appropriate Provincial governments and provide on going servicing to the Canadian insured entities under the policies issued as needed by the global parent company.
This situation is similar to the situation in question 1, that is, a Canadian broker is used to place an insurance policy issued by a licensed Canadian insurer to a Canadian insured. As such the tax would not apply.
Question 9 - In a variation on that scenario, a Canadian broker may be appointed to place the risk with the Canadian insurer as in the last example. Additional layers of excess or Difference in Conditions and Difference in Limits policies could be arranged, however, on a global basis by the parent company's overseas global broker. As these polices include extra coverage for risks located in Canada, would that premium, or a portion thereof, still be subject to FET, even though the Canadian broker or the Canadian insurer could not reasonably have been negotiated or provided the over-arching global coverage?
In this example, the portion of the insurance premium relating to the Canadian risk would be subject to FET. Under subsection 4(1) of the ETA, the policy would be subject to the 10% FET because the contract of insurance was entered into with an unauthorized foreign insurance company. However, under subsection 4(2) of the ETA, if the insured can provide information to the satisfaction of the CRA that the insurance was not available in Canada, an exemption to the tax may be granted.
Question 10 - Occasionally, global parent companies may deal directly with global insurers on their worldwide program, without the involvement of a broker. If there is no other broker involved outside of Canada, would the FET still be triggered on the Canadian portion placed with Canadian-licensed branches of the global insurer?
Provided a foreign broker was not used and the Canadian-licensed branch of the global insurer is authorized under the laws of Canada or of any provinces to transact the business of insurance, the FET would not be applicable.
Question 11 - In circumstances where the CRA determines that a contract is deemed to have been entered into through a broker outside Canada pursuant to subsection 4(4) of the ETA, it appears from the wording of subsection 4(2) of the ETA that an exemption from the application of the tax can still be obtained if it can be established that the insurance was unavailable from licensed insurers through the normal application process. Can the CRA confirm the accuracy of this interpretation?
Subsection 4(2) of the ETA provides for an exemption of the Part I tax where insurance is not, in the opinion of the Commissioner (of the CRA), available within Canada.
Question 12 - Could the CRA anonymously publish the results of audits of insurance placements and the basis of their decision particularly where the FET is assessed? This could provide valuable guidance and clarity of interpretation of the ETA and the expectation of the CRA for both brokers and corporations.
The CRA would not be in the position to publish results of audits on an anonymous basis. Should a client require clarity or further guidance relating to the tax, a written submission should be made to the CRA.
Question 13 - What is the number of years that the Canada Revenue Agency would go back to audit for the 10% Federal Excise Tax, and under what circumstances?
Under subsection 81.11(2) of the ETA, subject to subsections (3) to (5), the CRA can issue an assessment for any tax, interest, penalty or other sum up to four years from when the Part I tax became payable. Subsection 81.11(3) is an exception dealing with objections or appeals, subsection 81.11(4) of the ETA allows for an assessment of any time period in situations of neglect or fraud and subsection 81.11(5) provides for an exception in the event of a waiver being filed pursuant to subsection 81.11(6). An assessment of the Part I tax is done through the routine CRA audit review of taxpayer accounts.
Question 14 - Is there a process in place for Voluntary Disclosure if the insured, in good faith, did not realize that the tax owed and now would like to pay those amounts? Does the CRA have any discretion with respect to the potential penalties? Would CRA consider an amnesty for past years, such as what was introduced recently in [...][Country X]?
The Voluntary Disclosures Program (VDP) allows taxpayers to come forward and correct inaccurate or incomplete information or to disclose information they have not reported during previous dealings with the CRA, without penalty or prosecution. Specific questions relating to a voluntary disclosure should be sent to the Voluntary Disclosure Program at the local CRA Tax Services Office of the taxpayer.
Question 15 - We have heard of situations where auditors have overturned previously-approved exemptions from FET. What is the CRA looking for and have additional criteria been developed around the required five letters of declination to satisfy the requirements of the unavailability under paragraph 4(2)(b) of the ETA? Since some lines of business may be entertained by only a limited number of Insurers, and declination letters should be from Insurers who could reasonably have underwritten the risk question, can declination letters be obtained from the same insurers from year to year? Under what circumstances will the CRA reject letters of declination as insufficient to demonstrate unavailability?
Initially, all requests for exemptions of the Part I tax are reviewed by the Summerside Tax Centre. Although the Summerside Tax Centre may accept the exemption as filed, it is still subject to further review by CRA auditors. Therefore, while the Summerside Tax Centre may accept an exemption as filed, upon further review, a CRA auditor may deny the exemption request and issue a notice of reassessment.
The CRA will accept letters of declination from the same insurers from year to year.
The CRA will reject letters of declination if the letters have not clearly demonstrated that the insurance was not available in Canada.
Question 16 - It is our understanding that the requirement for insurance with huge limits in a small number of larger layers would be considered unavailable if it is only available from licensed insurers with small limits? E.g. terrorism coverage required with total limits of $500M that is available from unlicensed insurers with limits of $100M for each policy vs. insurance available from licensed insurers with limits of $5M on each policy? The client will have valid reasons for wanting large layers as opposed to dealing with multiple insurers (e.g. avoids inconsistent policy wordings, gaps in coverage and problems with claims handling). In these circumstances, the insured would not have to take the available small licensed limits first before the insurance was considered unavailable? Can the CRA confirm the accuracy of this interpretation?
In this instance, where a large layer of insurance cannot be obtained through a licensed insurer, the CRA would allow an exemption.
Question 17 - Would insurance be considered unavailable from licensed insurers where they can provide the general type of insurance required but not the form of contract or all the terms and conditions required by the insured? As an example, the requirement to include international risk in the liability coverage is often declined by licensed insurers. Would this liability coverage be considered unavailable?
We would not consider the liability coverage to be considered unavailable where a Canadian licensed insurer is able to provide the liability coverage with respect to risks ordinarily within Canada but unable to provide the liability coverage for risks ordinarily situated outside of Canada. Part I tax only deals with risks being insured that are ordinarily situated within Canada, not risks ordinarily situated outside Canada.
Question 18 - Would insurance be considered unavailable from licensed insurers if the financial ratings of all insurers who can provide the coverage are below the rating legitimately required by the insured? For example, a bank might want the client to place coverage with insurers with a minimum rating as a precondition to financing.
We would not consider the insurance to be unavailable where licensed Canadian insurers could provide the coverage but did not have the financial rating desired by an insured.
As discussed by telephone [...], the questions under the heading Authorized Insurers in your letter require further development and, as such, will be the subject of a subsequent letter.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Goods and Services Tax Rulings, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the Part I tax on insurance premiums other than marine, regulations or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 957-8154.
Yours truly,
Duncan Jones
Manager, Softwood Lumber and Other Taxes Unit
Excise Duties and Taxes Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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