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: 129875
May 17, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Application of the GST/HST to services provided by insurance brokers
Thank you for your letter of [mm/dd/yyyy] and e-mails of [mm/dd/yyyy] and [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies made by life and health insurers given the recent changes to the definition of financial service. Please note that GST/HST Notice 250 has been replaced by GST/HST Technical Information Bulletin: B-105, Changes to the Definition of Financial Service published in February 2011. We apologize for the delay in responding to your enquiry.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and 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.
[...] Life and health insurance companies distribute their products and services in Canada through [...] individually licensed intermediaries.
[...] seeks confirmation that services performed by financial intermediaries who arrange for the issuance and distribution of insurance policies will continue to be exempt financial services. More specifically, you have provided us with the following examples for our review and consideration:
Example 1 - General agent/broker
The insurer has an agreement with a general insurance agent/broker to promote and effect the sale of the insurer's insurance policies.
After cultivating a relationship with a Client for the last 2 years, the agent/broker (Advisor) meets the Client to understand and assess the Client's financial needs. During discussions, the Advisor identifies opportunities she feels the products she has to offer can fill. After researching a number of different options, she meets with her Client again and presents a number of different financial products. The Advisor helps the Client understand how each product will address the identified Client needs, explains the specific contract terms and options, and answers the Client's questions. Armed with the Advisor's professional advice, the Client is able to decide which option best suits his needs. The Advisor then assists the Client in completing the application, reviews the forms for completeness, and submits the application to the insurer. The Advisor works to ensure all requirements are met by helping facilitate obtaining any missing or additional information required.
Functions performed by the Advisor prior to issuance of policy:
• Responsible for effecting the sale of an insurance policy.
• Conducts Client needs assessment.
• Identifies opportunities for insurance product sales, including initial screening for Client insurability and eligibility for certain products.>>Researches insurance products.
• Presents product offerings.
• Provides Client with a copy of the disclosure material (an information folder), including the contract provisions.
• Explains contract terms.
• Answers Client's questions.
• Assists Client in completing application for insurance.
• Reviews application and ensures it is complete, and forwards the completed application to the insurer.
• Ensures that all requirements are satisfied so that the Client can obtain the insurance.
• In some cases, collects the first premium and forwards to insurer with application.
Functions performed by the Advisor after issuance of policy in some cases:
• Arranges for automatic payment of subsequent premiums from Client.
• Delivers applicable documents to Client once application is approved and accepted by the insurer.
• Facilitates switches between insurance products.
• Facilitates variations to insurance policy, such as a change in beneficiary.
• Assists the settlement of claims and arranges for the payment of the settlement amount.
• For segregated funds, processes and arranges for redemptions, including assistance in preparing the necessary documents to redeem.
Compensation Arrangements:
• The Advisor is paid a commission by the insurer for effecting the sale of the insurance policy. The commission could be based on various criteria such as premiums, total assets, reserves, etc.
• In some cases, a lower commission is payable in future years to the Advisor as long as the policy remains in force (referred to as a renewal commission). A renewal commission is paid to the Advisor over the term of the policy in a series of payments. Like a lump sum upfront commission, it is paid to the Advisor for effecting the sale of the insurance policy.
Example 2 - National Accounts
The insurer has an agreement with a national distribution company or other financial institution, which is commonly referred to as a National Account to distribute and sell insurance policies issued by the insurer. Insurance is one of many financial products sold through the National Accounts. The National Account provides its Clients with a suite of financial product offerings. The individual Advisors may be employees of the National Account or independent contractors hired by the National Account.
The functions performed by the National Accounts are the same as in Example 1.
Compensation Arrangements:
• Same as Example 1.
Example 3 - Managing General Agent (MGA)
The insurer has an agreement with a MGA to promote and effect the sale of the insurer's insurance policies. The MGA, effectively through a sub-contract arrangement, has an agreement with a broker/agent (Advisor) to promote and effect the sale of the insurer's insurance policies in accordance with the terms and conditions of the MGA's agreement with the insurer. Both parties are responsible for effecting the sale of insurance. The MGA is legally obligated to the insurer to effect the sales and the Advisor is legally obligated to the MGA to effect the sales.
In some cases, the Advisor also has an agreement with the insurer that sets out the terms and conditions upon which the broker/agent will sell insurance to the insurer. The sub-contract arrangement between the MGA and the Advisor remains in effect despite the fact that the Advisor may also have entered into the agreement noted above with the insurer.
An Advisor has a follow-up Client meeting and is preparing for same. He contacts his MGA for assistance in identifying the different solutions to meet his Client's needs as determined from the initial meeting with the Client. The MGA considers the identified Client needs and provides advice to the Advisor on a number of different suitable products, including the recommended insurer for each product. The MGA works with the Advisor to prepare appropriate financial presentations for the Client meeting, based on the Client's profile and identified needs. After the Advisor meets with his Client he submits the completed documentation to his MGA. The MGA monitors the suitability of the sale to the Client, ensures the completeness of the application and then submits it to the insurer. The MGA works with both the applicable insurer and the Advisor to sell the policy. This includes: obtaining missing information or additional information required to complete the insurance product applications; and answering Client queries.
MGA functions:
• Responsible for effecting sales of insurance policies, and taking all necessary steps to effect the sales.
• Responsible for recruiting, training and supervising Advisors who effect the sales.
• Responsible for ensuring that the Advisors comply with all relevant laws, industry regulations, and the insurer's code of conduct (as applicable).
• Works with Advisor to understand Client needs and recommends insurance product to Advisor for presentation to Client.
• Works with Advisor to prepare Client presentations.
• Receives completed application for insurance, ensures its completeness, and submits to the insurer.
• Works with the insurer and Advisor to obtain missing or additional information.
Advisor functions:
Generally the same as indicated in Example 1, including:
• Gathers Client information and provides to MGA
• Prepares Client presentation with MGA's assistance and presents MGA's recommendations to Client based on understanding of Clients needs.
• Assists Client in completing insurance application and related documentation and forwards to MGA.>>Provides missing or additional information as required to MGA to complete the application.
• Often, the insurer deals with both the Advisor and MGA together to complete the sale.
Compensation Arrangements:
• The Advisor and the MGA receive a commission for effecting a sale based on various criteria such as premium, total assets, reserves, etc.
• The flow of the commission payments is either from the insurer directly to the Advisor or to the MGA who then pays a commission to the Advisor.
Example 4 - Sale of a brokers/agents business
An Advisor has a thriving insurance brokerage business. The Advisor (Advisor A) wishes to sell that business to Advisor B. The assets of the business include furniture, fixtures, customer lists, and contracts with insurers. Aside from the customer lists (i.e., a listing of the insureds and potential insureds), Advisor A's most significant asset is the contracts she has with the insurers that entitle Advisor A to receive commissions. Per the terms of these contracts, Advisor A is entitled to receive a commission upon effecting the sale of an insurance policy, including renewal commissions as described in Example 1. Advisor A sells, assigns or otherwise transfers to Advisor B the rights to these future payment streams. Advisor B is now entitled to receive all future commission payments from the insurer. The insurer continues to pay the renewal commission stream as required by the contractual compensation terms of the original sale of the policy. The insurer is now legally obligated to make the payments to Advisor B. Advisor A's agreement with the insurer permits the assignment of the agreement and the commissions payable there under upon written consent of the insurer. The insurer provides written consent to the assignment of the agreement and commissions.
The functions performed are the same as Example 1.
Compensation Arrangements:
• The insurer is obliged to pay the renewal commission (i.e., the payment stream for effecting the sale of the insurance policy) to Advisor B in accordance with the sale assignment, transfer.
Example 5 - Group benefits
An insurance agent (Advisor) works with a corporate entity (Client), to develop an employee benefits plan. The Advisor explains the options available to the Client, including benefit options, funding options, and price factors. As a result, the Advisor requests proposals from a number of insurance companies for the various options. The Advisor assists the Client in reaching a decision to purchase the insurance policy of the insurer by analysing the responses from insurers. The Advisor completes the application for insurance from the winning insurer with the Client and explains the details of the chosen policy. The Advisor may assist in explaining the policy to the employees of the Client.
The functions performed by the Advisor prior to the issuance of policy:
• Same as Example 1.
• Works with Client to develop an employee benefit plan, which includes explaining the various options
• Solicits proposals from a number of insurers for the particular insurance product.
• Assists in explaining the insurance policy to the employees as required.
Functions performed by the Advisor after issuance of policy in some cases:
• Same as example 1.
Compensation Arrangements:
• The Advisor is paid a commission for effecting the sale of insurance policy. Normally for group insurance, the commissions paid are based on the premium amount.
• The Advisor may receive a higher commission if the Advisor arranges for multiple Client purchases. This is determined based on persistency of the business and claims levels resulting from the policies, among other things.
Example 6 -Creditor insurance (group plan)
A financial institution wishes to offer creditor's group insurance coverage to pay off the balance of the loans provided to its borrowers upon the happening of certain adverse events (e.g. death or disability of the borrower). The financial institution is the group insurance policy holder. The borrower is issued a certificate by the insurer. The financial institution offers coverage to the borrower, assists in the completion of the borrower's application for coverage and collects and remits premiums to the insurer. In many cases the financial institution is also involved and consulted in the design of the group policy, especially for the particular benefits offered. The insurer adjudicates and pays claims in accordance with the group policy.
Functions performed by the financial institution prior to issuance of policy:
• Responsible for effecting the sale of an insurance policy.>>Provides Client with coverage options.
• Completes the insurance application for the borrower and ensures that all relevant information is included.
• Sends the completed application to the insurer.
• May arrange for the automatic withdrawal of the premium from the Client's account.
Functions performed by the financial institution after issuance of policy in some cases:
• Delivers applicable documents to Client once application is approved and accepted by the insurer.
• Facilitates variations to the insurance coverage.
• Assists with the settlement of claims and arranges for the payment of the settlement amount.
• Collects and remits the premiums.
Compensation Arrangements:
• The insurer compensates the financial institution for effecting the sale of the insurance.
Example 7 - Affinity program (out-sourced call centre)
The insurer provides specialized group insurance coverage for customers/members affiliated with an affinity organization.
The insurer issues a group insurance master policy to the affinity organization, the group policyholder, who makes the coverage available to its customers/members (certificate holders) under the terms and conditions of the master policy. The group policyholder offers access to specialized insurance coverage at a reduced rate to its customers/members in order to enhance the value of the relationship with the customers/members.
The insurer is required by contract with affinity organization to conduct the necessary insurance coverage-placing activities with customers and uses a telemarketing agency for this purpose. The insurer engages the telemarketing company to conduct the necessary insurance coverage-placing activities with the customers/members.
These activities consist of a marketing process which follows a predetermined script jointly prepared by the insurer and the telemarketing company. The affinity organization and/or insurer may approve/monitor this marketing process. The telemarketing company contacts the customer by telephone, presenting themselves as calling on behalf of the insurer and the affinity organization, explaining the insurance coverage available, answering questions regarding the insurance coverage, screening the eligibility of the person, preparing the application and forwarding the completed applications to insurance company who grants final approval, underwrites and issues the insurance to the customer/member.
Functions performed by the telemarketing company:
• Responsible for effecting the sale of insurance policy.>>Conducts Client needs assessment.
• Identifies opportunities for insurance product sales, including initial screening for Client insurability and eligibility for certain products.
• Researches insurance products.
• Presents product offerings.
• Provides Client with a copy of the disclosure material (an information folder) including the contract provisions.
• Explains contract terms.
• Answers Client's questions.
• Assists Client in completing application for insurance.
• Reviews application and ensures it is complete, and forwards the completed application to the insurer.
• Ensures that all requirements are satisfied so that the Client can obtain the insurance.
Compensation Arrangements:
• The insurer compensates the telemarketing company for effecting the sale of the insurance.
Example 8 - Affinity program (in source call centre)
Same as Example 7, except the affinity organization is responsible for providing all functions of the telemarketing company. The insurer contracts with the affinity organization to provide these functions.
Functions performed by the affinity organization:
• Same as Example 7.
Compensation Arrangements:
• The insurer compensates the affinity organization for the sale of the insurance.>
Interpretation Given
The determination of whether a particular supply made by insurance intermediaries or agents 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. Although you did not provide us with relevant documents such as written agreements that clearly describe the actions, responsibilities and obligations of any of the insurance intermediaries described in your examples above, we are pleased to provide the following general information.
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. 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 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.
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 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.
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 (e.g. insurance policies) 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 a business of providing financial services).Where an intermediary performs a number of services including services described in any of paragraphs (n) to (t) as part of an agreement to arrange for a supply of an insurance policy, 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) through Bill C-9, the Jobs and Economic Growth Act, which received Royal Assent on July 12, 2010.
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 a 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 this paragraph.
In general, a financial intermediary described in subparagraph 149(1)(a)(iii) who is licensed to solicit insurance policies, who is directly involved and highly relied on by both the insurer and the potential policyholder to effect the policies, and who is the only contact the policyholder has with the insurer, is usually providing a supply of financial services described in paragraph (l) of arranging for supplies of insurance policies. However, where the intermediary is also performing other activities in conjunction with the issuance of insurance policies such as providing information, document preparation or processing, or customer assistance, it is a question of fact whether the predominant element of each single supply is the supply of a taxable preparatory service or the supply of an exempt financial service based on the circumstances of the transactions and a review of the agreement(s) under which the supplies are made.
We also have the following comments with respect to your specific examples:
1) In your Examples 1 and 2 discussed above, it is not clear what exactly is meant by the term "financial products". In providing our comments we have assumed that the term only refers to insurance policies.
2) Please note that concerning Compensation Arrangements, a renewal commission payable in future years may not be consideration for arranging for the supply of an insurance policy. To determine whether compensation paid on an on-going basis is for a financial service, it is necessary to look at the activities performed by the person in return for the renewal commission. We would require further information in order to provide a response on this issue.
In your Examples 1, and 5 above, where the insurance agent/broker is licensed to solicit insurance policies and is a financial intermediary described in subparagraph 149(1)(a)(iii) whereby the insurance agent/broker's principal business is as a salesperson of financial instruments (i.e. insurance policies) the insurance agent/broker may be providing a financial service under paragraph (l) of the definition of financial service. In determining whether the insurance agent/broker's service is included in paragraph (l) it is necessary to consider the factors as outlined on page 9 of this letter. Based on the facts presented, it appears that the insurance agent/broker has a high degree of direct involvement in the provision of an insurance product, is relied on by the Client and has the intention to effect a supply of an insurance policy. Although the insurance agent/broker may provide information, document preparation or processing, or customer assistance that would be preparatory to the provision of a financial service, the services provided by the insurance agent/broker are not limited to those preparatory services. Therefore these services would generally be financial services described in paragraph (l) of arranging for a service referred to in paragraph (d) or (f.1) and would not be excluded from that definition by reason of paragraph (r.4). Please note that Example 11 of TIB B-105 illustrates a situation relating to services provided by an insurance agent.
In your Example 2, it is not clear what a national distribution company is and how direct their involvement would be in the provision of a financial service. Also, in this example it appears the financial products could include more than insurance policies, for these reasons we would require further information to address this example.
With regards to your Example 3, it does not appear that the services provided by the MGA meet the factors that are used to determine whether a supply is arranging for a financial service under paragraph (l), such as the degree of direct involvement with the Client. Furthermore, even if the supply could be included in paragraph (l), where the supply is predominantly preparatory activities such as identifying client's needs, preparing an appropriate financial presentation for the Client's needs and ensuring the completeness of the application, these activities would be excluded from the definition of financial service under paragraph (r.4).
With regards to your Example 4, in general, a commission paid to an Advisor who is not the person who arranged for the issuance of the policy may not be consideration for a supply of a financial service, as there is no direct involvement in a supply of a financial service. Accordingly, the supply would generally be considered a taxable supply.
In your Example 6, the financial institution as the group policy holder will assist in the completion of the borrower's application for insurance coverage. Based on the facts presented, it appears that the financial institution has a high degree of direct involvement in the provision of an insurance policy and is relied on by the Client to effect the supply of an insurance policy through its group insurance policy. Although the financial institution may provide information, document preparation or processing, or customer assistance that would be preparatory to the provision of a financial service, the services provided by the financial institution are not limited to those preparatory services. The services would generally be financial services described in paragraph (l) of arranging for a service referred to in paragraph (d) and would not be excluded from that definition by reason of paragraph (r.4).
Your Examples 7 and 8 discuss situations where a telemarketing company and an affinity organization respectively perform telemarketing activities. Generally, telemarketing activities are not included in paragraph (l) of the definition of financial service. Even if these activities were included in paragraph (l), they may be excluded under paragraph (r.4) in cases where the supply is predominantly preparatory activities of collecting information, customer assistance, document preparation, and document processing. Please note that Example 12 of TIB B-105 illustrates a situation relating to marketing in the context 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 documents. If you require clarification with respect to any of the information discussed in this letter, please call me directly at 613-952-9248 or Dawn Weisberg, Manager, at 613-952-9210.
Yours truly,Ivan Bastasic
Director
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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