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: 123157
February 15, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Application of the GST/HST to services provided by insurance brokers
Thank you for your letter of May 10, 2010, and an earlier fax from [...] on March 24, 2010, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to services provided by property and casualty insurance brokers. We apologize for the delay in responding.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, Newfoundland and Labrador, 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) unless otherwise specified.
In your letter, you provide the following information related to property and casualty insurance brokers (Insurance Brokers) and their activities.
[...]
Insurance Brokers are professionally qualified and regulated intermediaries of insurance products sold to the public.
The Insurance Act of Manitoba and the Registered Insurance Brokers of Ontario Code of Conduct state that "you [Insurance Broker] have an obligation to inform your clients at all times about all aspects of the insurance products they have purchased including any changes affecting a policy which occur during the policy term". Most other provinces have the same concept.
An Insurance Broker's responsibilities include a number of interrelated and variable services (Services) in association with the provision of insurance coverage, such as:
• assess and discuss with the client the risk exposure;
• provide and discuss possible solutions with the client;
• identify and discuss possible suppliers with the client;
• select the best solution with the client;
• establish an insurance contract (insurance policy) with a supplier (Insurer) for the selected solution; and
• provide ongoing customer service and claims support.
Generally, the Insurance Broker does not receive payment or remuneration for its Services unless an insurance policy is placed with an Insurer on behalf of a client. Any commission paid is consideration for, but is not limited to, the above Services provided to the client. Although a contract setting out the commission payable and the terms applicable thereto was not submitted, it is our understanding that the commission is paid only upon the issuance of the contract. Also, some Insurers do not require a written contract with an Insurance Broker (Broker-Insurer Contract) to transact business with the Insurance Broker.
A Broker-Insurer Contract (a sample contract was not submitted) generally deals with, among other things, the following pertinent business arrangements:
• Binding authority of the Insurance Broker - as an independent contractor, the Insurance Broker may be authorized: to solicit and submit applications for insurance contracts and surety and fidelity bonds; to bind the Insurer on and execute insurance contracts and certificates for the lines of insurance the Insurer and Insurance Broker are legally permitted to write; to collect and remit premiums; to provide all usual and customary services (Services) of an Insurance Broker on all insurance contracts placed by the Insurance Broker with the Insurer on behalf of clients. All of the business written by the Insurer through the Insurance Broker at all times is and remains the sole property of the Insurance Broker, and the policyholders are and remain his customers;
• Commissions - as full compensation for services on behalf of clients, the Insurer establishes a standard schedule of commissions, as it is not customary for the rate of commission to be negotiated with each individual customer. [Broker-Insurer] Contracts further deal with accounting procedures to establish expectations between the Insurance Brokerage and Insurer offices;
• Conditions for termination of agreement; and
• Claims Procedures.
We understand that you would like confirmation that the supply of insurance brokerage services is a financial service.
Interpretation Given
The determination of whether a particular supply made by an Insurance Broker is subject to GST/HST requires a detailed review of the facts and circumstances of the transactions which generally includes a review of the agreement or agreements under which the supply is made. As you did not submit copies of the relevant agreements, we are pleased to provide the following general information which may assist you in making that determination.
Under the ETA, all 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 XI of Schedule VI (which generally requires that the supply be made by a financial institution to a non-resident and that certain other conditions are met). A service will be 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 not otherwise excluded by any of paragraphs (n) to (t) of that same definition.
A financial service includes, for example, under paragraph (d), the issue, granting and transfer of ownership or repayment of a financial instrument. A "financial instrument" is 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 resale) that is issued by an insurer. Another example of a financial service is in paragraph (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, 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 made.
If multiple supplies are being provided by a person, the possible application of sections 138 and 139 should 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.
Services in the nature of management, administration, marketing or promotional activities are intended to be taxable as they are not themselves financial services. However, an activity performed by a person that is the "arranging for" a financial service is included in paragraph (l) of the definition of financial service provided it is not excluded by any of paragraphs (n) to (t) of that definition.
The term "arranging for" is generally intended to include intermediation activities that are normally performed by financial intermediaries described in subparagraph 149(1)(a)(iii), such as agents, brokers and dealers in financial instruments or money. In determining if an intermediary's service is included in paragraph (l), all the facts surrounding the transaction, including the following factors, must be considered:
• the degree of direct involvement and effort of the person in the provision of a financial service referred to in any of paragraphs (a) to (i);
• the time expended by the intermediary in the provision of a financial service referred to in any of paragraphs (a) to (i);
• the degree of reliance of either or both the supplier and the recipient on the intermediary in the course of providing a financial service referred to in any of paragraphs (a) to (i);
• the intention of the intermediary to effect a supply of a financial service referred to in any of paragraphs (a) to (i); and
• the normal activities of an intermediary in a given industry (including whether the intermediary is engaged in business of providing financial services).
Where an intermediary provides a number of services including services described by any of paragraphs (n) to (t) as part of an agreement to arrange for a supply of a financial service, the single supply of the bundled services may be a supply of a financial service of arranging for, depending on the facts surrounding the transaction, the above listed factors, and the predominant element of the supply.
The following exclusionary paragraph, among others, was added to the definition of financial service in subsection 123(1) by Bill C-9, the Jobs and Economic Growth Act, which received Royal Assent on July 12, 2010.
New paragraph (r.4) is added to the definition of financial service to clarify 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 to in any of 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:
• a service of collecting, collating or providing information, or
• a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or similar service.
Currently, no services are prescribed or proposed to be prescribed for the purposes of paragraph (r.4).
The application of paragraph (r.4) may vary depending on the specific facts and circumstances of a particular transaction.
This paragraph is deemed to have come into force on December 17, 1990, except where it is in respect of a supply rendered under a written agreement where all of the consideration for the supply became due or was paid on or before December 14, 2009, and the supplier did not, on or before that day, charge, collect or remit any amount as or on account of GST/HST in respect of the supply or any other supply that is made under the agreement that includes a service referred to in paragraph (r.4).
Based on the information provided, an Insurance Broker is licensed to solicit property and casualty insurance policies, acts as an intermediary directly involved in the selection of the policies, and is relied on by both the Insurer and the potential policyholder in the provision of insurance. The Insurance Broker is generally the only contact the potential policyholder will have with the Insurer. Although the Insurance Broker provides information, document preparation or processing, and customer assistance that may be preparatory to the provision of a financial service, the Services (described above) provided by the Insurance Broker are not limited to these preparatory services. In these circumstances, the Services performed by an Insurance Broker in consideration of the commission paid on the issuance of a property and casualty insurance policy would generally be considered to be arranging for the supply of the insurance policy and would not be excluded from the definition of financial service by any of paragraphs (n) through (t) of that definition.
Please note that Examples 11 and 12 of Technical Information Bulletin B-105, Changes to the Definition of Financial Service, issued in February 2011, discuss the GST/HST status of services that relate to supplies of insurance policies.
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, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require guidance with respect to a particular case, please submit a request for a ruling including all relevant contracts and related document. If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-9248 or Dawn Weisberg at 613-952-9210.
Yours truly,
Ivan Bastasic
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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