27 October 2004 Excise Interpretation 53104 - Part I Insurance

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

I refer to your fax XXXXX concerning the application of the Part I Tax on Insurance Premiums Other Than Marine. Your query involves the application of the tax to premiums (Inland Transit and Ocean Cargo) and related engineering, fronting and broker fees paid by Client A when acquiring Comprehensive and Property All Risks insurance policies. These policies are entered into with Client B. You have asked us to verify whether these amounts and fees comprise the total premium for purposes of this tax.

XXXXX I received a copy of XXXXX Policy Number XXXXX. XXXXX addresses Inland Transit coverage, and XXXXX covers Ocean Cargo coverage. Additionally, in a fax XXXXX you forwarded Client A's definitions of engineering, fronting and broker fees, which you had received from XXXXX of Client A. I understand from our conversation XXXXX that the fees are not separated from the Inland Transit and Ocean Cargo premiums when determining the total premium for the policies in question.

In an XXXXX memorandum from Client A, XXXXX writes that the Inland Transit and Ocean Cargo premiums deal with risk premium insurance. The Inland Transit premium is in respect of "cargo transferred within land", and the Ocean Cargo premium is in respect of "cargo transferred overseas". Both these premiums are identified on a debit memo charge from Client C.

Subsection 4(1) of the Excise Tax Act (ETA) states:

"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 into or renewed through a broker or agent outside Canada, shall, on or before April 30 in each year, pay to the Minister, in addition to any other tax payable under any other law, a tax of ten per cent on the net premiums paid or payable during the immediately preceding calendar year in respect of that insurance."

Contracts of life insurance, personal accident insurance, sickness insurance and insurance against marine risks are exempt of this tax.

For the marine risks exemption to apply, a two-fold test must be satisfied. First, there must be a contract for marine insurance. Second, at least part of the freight transportation, from origin to destination, must be over navigable waters. The transportation must not have any planned breaks. This exemption includes all risks associated with the transit from the point of origin to destination, including any land transportation and temporary storage en route and its associated risks. As we discussed, if Client A were to ship XXXXX via highway or rail from a point in the United States to a point in Canada, our position is that the insurance contract would not be against marine risks. However, a contract for marine insurance, which covers an oceanic voyage with no planned breaks in its journey, would be considered insurance against marine risks.

As the policies in question are Comprehensive and Property All Risks, the Inland Transit and Ocean Cargo premiums in this case form part of the "net premium" for a contract of insurance that is not against marine risks.

The legislative definition of "net premiums" makes no reference to deleting fees from the gross premiums. As we discussed, the related engineering, fronting and broker fees are not separated from the Inland Transit and Ocean Cargo premiums when determining the total premium. In this case, these fees form part of the "net premium" for a contract of insurance that is not against marine risks.

In summary, the Inland Transit and Ocean Cargo premiums and the related engineering, fronting and broker fees each comprise part of the "net premium" for an insurance contract that is not against marine risks. These premiums and fees are, therefore, subject to the 10% tax. Should you have any questions, please feel free to call me anytime at (613) 957-9877.

2004/10/27 — RITS 53414 — [Application of the Excise Tax to the Transaction of a Contract of Insurance]