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: 98811
January 5, 2012
Dear [Client]:
Subject:
GST/HST RULING
Payment of GST on group [life and health insurance] commission
Thank you for your letter of October 16, 2007, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to commissions earned on a group [life and health insurance] [...] arrangement. We apologize for the delay in responding to your enquiry.
HST applies at the rate of 15% in Nova Scotia, 13% in New Brunswick, Newfoundland and Labrador, and Ontario, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.
In addition to your written submission, you provided a copy of the following documents:
• [...] (the Contract) dated [mm/dd/yyyy], between [...] (the Administrator) and [...] (the Employer); and
• [...] (the Agreement) dated [mm/dd/yyyy], between the Administrator and [...] (the Broker).
Statement of Facts
From the documents you submitted as well as your telephone conversations with [...] and our review of the Administrator's Web site, our understanding of the facts is as follows:
1. [...] (the Broker) is a licensed life and health insurance broker in [...] [province X]. It is not registered for GST/HST purposes.
2. The Employer has established its own private health services plan (the Plan), wherein it contracts with its employees to indemnify them for the cost of their medical expenses qualifying under the Plan and subsection 118.2(2) of the Income Tax Act.
3. The Administrator is in the business of providing health spending account administration services [...]
4. Acting as an agent of the Administrator, the Broker facilitated the Contract for the Administrator to assist the Employer in the administration of the Plan. The Administrator and the Employer are not related to each other in any way.
5. According to [...] of the Contract, the Administrator agrees to provide the following administrative services to the Employer:
• processing claims in accordance with rules, regulations and procedures established by the Administrator;
• determining the coordination and limitation of benefits as outlined in the Contract;
• payment of claims to plan members or participating service providers;
• providing statements to the Employer;
• consulting on private health services plan design;
• [...]; and
• providing claims forms to the Employer and to participating service providers.
6. According to [...] the Contract, the Employer is required to pay to the Administrator, the amount of all claims paid or approved by the Administrator for payment to plan members or participating service providers for health services provided to covered persons and an administration fee of [...]% of the amount of each claim paid or approved by the Administrator for payment [...].
7. As provided for in [...] of the Contract, the Employer pays the Administrator a [...] amount based on [...], which is [...] of the amount estimated to be payable by the Employer for the year.
8. The Administrator determines the eligibility of a claim for payment in its discretion, based on the benefits of the Plan as outlined in [...] to the Contract and pays the plan member or service provider for the eligible claim.
9. According to [...] of the Contract, the Administrator is not under any obligation to pay any claim for benefits unless the Employer has paid it sufficient money to cover such claim plus the administration fee [...] in respect of that claim. In addition, [...] of the Contract states that the Administrator may, but does not have any obligation to, pay any claim for extra benefits unless the Employer provides the Administrator with:
• a written request authorizing such payment, outlining the type and cost of the health services provided or to be provided and indicating the portion of the cost to be paid by the Employer;
• supporting invoices and claim forms; and
• payment to the Administrator of an amount equal to [...]% of the amount of the extra benefits [...].
10. [...] of the Contract states that there is no trust relationship created between the Administrator and the Employer with respect to any money paid by the Employer to the Administrator under the Contract. Further, under [...] of the Contract, if the Administrator pays any claim for benefits or extra benefits when the Employer has not already paid sufficient money to it to cover the claim plus the administration fee, that amount is payable on demand to the Administrator.
11. Under the Contract, there is no stop-loss coverage provided by the Administrator to the Employer for benefits under the Plan.
12. The Administrator and the Broker entered into the Agreement to provide for the terms and conditions governing the agency relationship between the Broker and the Administrator and the compensation payable by the Administrator to the Broker.
13. Under [...] of the Agreement, the Broker agreed to render such services in respect of the administration of the Plan as may reasonably be required by the Administrator. The Broker does not have access to the computer system used by the Administrator to administer the Plan or to any confidential member information.
14. According to [...] of the Agreement, the Administrator is to pay the Broker a commission of [...]% of the amount of all claims paid by the Administrator to plan members or participating service providers for health services provided to covered persons [...] on the commission. The commission is paid [...].
15. Under [...] of the Agreement, the Broker does not have any authority to incur any liability or debt on behalf of the Administrator or to grant, make, alter or discharge any contract or agreement on behalf of the Administrator.
16. The Broker contacted the Employer, reviewed the Employer's group benefit requirements, made proposals for coverage including quotes for costs of each proposal, did comparatives and designed and provided assistance in establishing the Plan. The Broker brought the Administrator and Employer together and provided assistance to the Employer with respect to unpaid claim enquiries.
17. The Broker uses information provided by the Administrator to monitor the Employer's account, assesses the Employer's needs, ensures that the amount of money paid into the Plan is sufficient for the claims being processed under the Plan and recommends changes to the Plan, if necessary. The Broker discusses with the Employer the renewal of agreements with respect to the Plan.
Ruling Requested
1. Is the commission charged by the Broker to the Administrator for the service provided under the Agreement a taxable supply or an exempt supply?
2. If it is a taxable supply, is the Broker required to register and charge the tax on its commissions earned under the Agreement?
Ruling Given
Based on the facts set out above, we rule that the Broker's service to the Administrator under the Agreement is a taxable supply. If the Broker is a GST/HST registrant, [...] [the Broker] will be required to charge tax on its commission.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
In order to determine the tax status of the services provided by the Broker to the Administrator, we first have to determine the tax status of the supply provided by the Administrator to the Employer.
Under the ETA, supplies are taxable unless they are specifically exempt.
A supply of a financial service is exempt under Part VII of Schedule V unless specifically zero-rated under Part IX of Schedule VI. In general, financial services relating to insurance policies issued by a financial institution are zero-rated to the extent that the policy relates to risks ordinarily situated outside Canada.
A service is a financial service where it is included in any of paragraphs (a) to (m) of the definition of financial service in subsection 123(1) and is not otherwise excluded by any of paragraphs (n) to (t) of that same definition.
A financial service includes, for example, under paragraph (d) of the definition of financial service, the issue, granting and transfer of ownership or repayment of a financial instrument. A "financial instrument" is also defined in subsection 123(1) and includes an "insurance policy" which in turn, is defined under that provision and includes, among, other things, a policy or contract of insurance (other than a warranty in respect of the quality, fitness or performance of tangible property, where the warranty is supplied to a person who acquires the property otherwise than for sale) that is issued by an insurer. Other [examples] of a financial service are in paragraphs (f), the payment or receipt of money as dividends (other than patronage dividends), interest, principal, benefits or any similar payment or receipt of money in respect of a financial instrument and (f.1), the payment or receipt of an amount in full or partial satisfaction of a claim arising under an insurance policy.
Where an agreement provides for a number of services or property and services, it must first be determined whether a single supply or multiple supplies have been made under the agreement. This distinction is important in cases where a combination of services and or property is supplied by a person under an agreement, some of which would be taxable and some of which would be exempt if supplied separately. In this type of situation it is a question of fact whether the person is making a single supply or multiple supplies.
GST/HST Policy Statement P-077R2, Single and Multiple Supplies, provides additional information on determining whether a single supply or multiple supplies are being provided.
If it is determined that multiple supplies are being provided by a person, the possible application of sections 138 and 139 must also be considered. However, if it is determined that a single supply is being provided, then the predominant element of that supply must be established to determine the nature of the supply. If the predominant element of the single supply is determined to be a financial service, then the supply as a whole will be considered a financial service.
Based on the information provided, it is clear that the activities performed by the Administrator for the employer are intricately linked to each other. As such the Administrator is providing a single supply to the Employer in the nature of an administration service.
Services in the nature of management, administration, marketing or promotional activities are intended to be taxable as they are not themselves financial services. Even if, an activity performed by a person that is the "arranging for" a financial service referred to any of paragraph (a) to (i) is included in paragraph (l) of the definition of financial service provided it is not excluded by any paragraphs (n) to (t) of that definition. For an insurance intermediary, it is therefore important to determine whether a supply of "arranging for" a financial service is provided and if so, whether that financial service is the predominant element of the supply.
Under the Contract, the Administrator is considered to be providing a service to the Employer for which it receives an administration fee that is excluded from the definition of financial service since the Administrator is not a person at risk. For more information, please see GST/HST Policy Statement P-136R Administrative Services only with Stop-Loss.
Therefore, since the Administrator is not providing a financial service under the Contract, the Broker is not providing an exempt financial service to the Administrator under the Agreement for which it is receiving a commission. As there is no other provision to exempt the Broker's service, the service is a taxable supply. Even if it could be argued that the service provided by the Broker to the Administrator is included in paragraph (l) of the definition of financial service in subsection 123(1), the service is excluded from that definition by paragraph (r.4) of the same definition.
Paragraph (r.4) clarifies that certain services that are preparatory to or provided in conjunction with a financial service are excluded from that definition. Paragraph (r.4) excludes from the definition of financial service, a service (other than a prescribed service) that is preparatory to the provision or the potential provision of a service referred in paragraphs (a) to (i) and (l) of the definition of "financial service", or that is provided in conjunction with a service referred to in any of those paragraphs, that is:
(i) a service of collecting, collating or providing information; or
(ii) a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or a similar service.
Currently, no services are prescribed or proposed to be prescribed for the purposes of paragraph (r.4).
Registration and collection of the GST/HST
Generally, GST/HST registrants have to collect GST/HST on all taxable (other than zero-rated) supplies of goods and services they provide to their customers. However, a person who is a small supplier and not a registrant is not required to collect tax on certain supplies it makes.
For GST/HST purposes, a registrant includes a person who is registered for GST/HST and a person who is required to be registered for GST/HST purposes.
Subsection 240(1) provides, in part, that every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada is required to be registered for GST/HST purposes, except where the person is a small supplier. A person who is not required to be registered for GST/HST purposes may apply to be registered if the person is engaged in a commercial activity or is a listed financial institution resident in Canada. A "listed financial institution" includes a person whose principal business is as a trader or dealer in, or as a broker or salesperson of, financial instruments (e.g., insurance policies) or money.
In general, a person (other than a public service body) is a small supplier throughout a particular calendar quarter and the following month if its consideration (revenues) for taxable supplies (including that of associates), other than supplies by way of sale of capital property or zero-rated financial services, in the preceding four calendar quarters did not exceed $30,000. Revenue from exempt supplies should not be included in calculating this small supplier threshold.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-954-1433. 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,
Gabrielle Nadeau
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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