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.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 212160
Dear [Client]:
Subject: GST/HST INTERPRETATION
Application of GST/HST to new home warranty insurance
Thank you for your letter of [dd/mm/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to new home warranty insurance policies issued by insurers. We apologize for the delay in our response.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15%
in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The
GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand that in certain provinces, before the construction of a new home (that is, a residential unit or common property of a condominium complex or strata residential building) commences, the builder of the new home may register the new home with an insurer for the insurer to provide a new home warranty insurance policy in respect of the new home. In [some provinces] , provincial legislation requires the builder to register each new home with an insurer for the insurer to issue a new home warranty insurance policy, in order to provide protection to the home owner (or condominium/strata corporation) against construction defects in the new home.
It is our understanding that where this is the case, generally an insurer and a builder enter into an agreement (Builder Agreement) under which the insurer agrees to provide new home warranties in the form of the new home warranty insurance policies, and the builder agrees to perform the warranty obligations of these policies, which generally includes replacing and repairing construction defects in the new home. The builder is required under the Builder Agreement to pay an amount to the insurer for each new home it constructs.
It is also our understanding that if the builder does not perform the warranty obligations, generally the insurer is liable under the new home warranty insurance policies to indemnify the homeowner (or condominium/strata corporation) for the repair or replacement of the defects in the new home.
INTERPRETATION REQUESTED
You would like to know how the GST/HST applies to new home warranty insurance policies issued by insurers.
We understand that you would also like us to provide a ruling to you regarding the particular fact situation […], as explained in your letter. However, we are unable to provide a ruling to you without a third party authorization […] allowing us to do so. We trust that the following interpretation will address your concerns.
INTERPRETATION GIVEN
Paragraph (a) of the definition of an insurance policy in subsection 123(1) includes 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.
In the Excise and GST/HST News No. 104, we provided the Canada Revenue Agency’s (CRA’s) view that where a new home warranty is issued as a policy or contract of insurance by a licensed insurer, it is usually a taxable supply for GST/HST purposes. This was based, in part, on our view that there was a supply of a new home warranty insurance policy from an insurer to the homeowner, but that policy was usually excluded from paragraph (a) of the definition of insurance policy in subsection 123(1). In our view, it was generally excluded from that definition because it was a warranty in respect of the quality, fitness, or performance of tangible property (the new home) being supplied to a person acquiring that property otherwise than for resale. As such, under this view, the issuance of the insurance policy to the homeowner is not included in the definition of financial service in subsection 123(1).
We have since reconsidered our position, and our new position is explained in the paragraphs below.
Based on the transactions outlined above between insurers providing new home warranty insurance policies, and the builders that enter into a Builder Agreement with these insurers, it is our understanding that the primary responsibility for carrying out the warranty obligations in respect of the new homes rests on the builder. The insurer only provides a back-up to the builder’s warranty. Therefore, in essence, it is the warranty obligations of the builder that are insured by the insurer and therefore the insurer takes on the risk of the builder.
As a result, based on this understanding, in our view the insurer and the builder have a contract of insurance that is included in paragraph (a) of the definition of insurance policy in subsection 123(1). Further, the insurer is making a supply of a financial service that is included in paragraph (d) of the definition of financial service in subsection 123(1), and is not excluded by any of paragraphs (n) to (t) of that definition. Consequently, the supply of the financial service by the insurer to the builder is exempt under section 1 of Part VII of Schedule V.
Furthermore, based on our understanding outlined above, in our view although the homeowners (or condominium/strata corporations) are the beneficiaries of the new home warranty insurance policies, there is no separate taxable supply of the policies by the insurer to a homeowner (or condominium/strata corporation) when the insurer issues those policies. The new home warranty insurance policies are evidence to the homeowner (or condominium/strata corporation) that a warranty is provided in respect of the new home constructed by the builder.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 780-266-5609. 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,
Eleanor Struth
Insurance and ITC Allocation Unit
Financial Institutions and Real property Division
Excise and GST/HST Rulings Directorate
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