1 May 1996 GST/HST Interpretation 11590-5[5] - GST Treatment of Cost-Plus Administrative Fees

This is in reply to XXXXX telefax dated January 5, 1996 on the tax status of the supply of certain administrative services concerning the payment of extra-contractual claims by XXXXX when the underlying group benefit plan is also insured by XXXXX is a non-profit organization which provides group and individual health benefit programs to XXXXX. When a group plan holder requests that XXXXX covers expenses which are not eligible under the group plan contract, XXXXX agrees to reimburse these expenses on an extra-contractual cost-plus plan basis. In this situation, XXXXX treats these supplies as taxable as they are providing administrative services of processing benefit claims in which the plan holder is at risk.

XXXXX has provided a sample Group Benefit Contract described as a XXXXX Contract under which:

•   XXXXX agrees with the Group Contract Holder, to provide extended health benefits and dental benefits to defined individuals (members) for a contracted payment.

•   Section 2 of the general terms and conditions states that the entire agreement consists of this contract, the application for group benefits, any document attached to this contract when issued, and any amendment written after this contract was issued.

Under the above risk contract, XXXXX insures the group benefit plan and it is at risk for the payment of claims. XXXXX treats this supply made under this type of agreement as exempt from GST. Although XXXXX may not fall within the definition of "insurer" under subsection 123(1) of the Excise Tax Act ("Act"), XXXXX is providing insurance for purposes of paragraph 123(1)(b) of the definition of "insurance policy". XXXXX provided a copy of an information newsletter published by a competitor who is an insurer. The newsletter indicated that when an extra-contractual plan claim (referred to as Medical Reimbursement Plan) is associated with an insured plan, which is exempt from GST, the extra-contractual claim is likewise considered to be exempt and the administration fee is not subject to GST. XXXXX is requesting an interpretation of the GST status of supplies made under an agreement to pay extra-contractual claims, specifically where the underlying group benefit plan is insured by XXXXX[.] When a group insurance plan holder requests XXXXX to cover expenses which are not eligible for benefit coverage and payment under the above risk contract, XXXXX may agree to reimburse such additional expenses on an extra-contractual cost-plus basis. This means that the group plan holder is financially at risk for the payment of benefit claims of members and not XXXXX has also provided a sample agreement entitled XXXXX which is a separate agreement from the risk contract and under which the group insurance plan holder authorizes XXXXX to arrange payment of claims for benefits which are not covered by XXXXX under the risk contract. In this situation, XXXXX is providing group insurance coverage for a contracted payment service fee as well as administrative services for an administration fee with respect to the payment of extra-contractual claims to which the group contract holder is at risk.

Generally, supplies of third party administrative services are subject to GST as these services are excluded from the definition of "financial service" under paragraph 123(1)(t) of the Act and the Financial Services (GST) Regulations ("Regulations"). However, subsection 4(1) of the Regulations define the terms "instrument" and "person at risk" and as a result of the application of the Regulations an administrative service may fall within the definition of a financial service if the particular service is supplied with respect to an "instrument" by a "person at risk".

In this case, XXXXX is providing administrative services with respect to an instrument to which the group plan holder is financially at risk, that is, the payment of benefit claims which the plan holder has agreed to provide to its members. XXXXX is providing administrative services under the extra-contractual authorization agreement and not under its risk contract. XXXXX is therefore not a person at risk under the Regulations and as a result such fees charged as consideration for the supply of administrative services are subject to GST as these services fall under subsection 4(2) of the Regulations.

If you have any further questions, please do not hesitate to call Ginette Bouchard-Forgues at (613) 957-8221 or Roy Osudar at (613) 952-9220.

J. Sitka
A/Director
Financial Institutions and
Real Property
GST Rulings and Interpretations