1 November 1996 GST/HST Interpretation 11600-7: 11783-2 - GST Relating to Insurance Claims

This is further to your memorandum dated August 19, 1996 and a memorandum dated August 6, 1996 from XXXXX of the XXXXX Tax Services Office where he has expressed concerns with respect to the GST status of insurance claims.

As you are aware, contracts or policies of insurance covering property losses contain provisions under which the insurer agrees to indemnify the insured. In most cases insurance claims arising under these types of policies are settled by the insurer either by paying the cost of repairs to the damaged property, by replacing the damaged property or by making a cash settlement with the insured once the amount of the loss has been determined.

The payment of a cash settlement in respect of a loss suffered by the insured is a financial service as provided under the definition of "financial service" under paragraph 123(1)(f.1) of the Excise Tax Act (the "Act") and is therefore exempt from GST under section 1 of Part VII of Schedule V to the Act.

Under the principle of indemnity, an insurer compensates the insured only to the extent of the actual loss suffered by the insured in accordance with the terms of the insurance policy or contract. In other words, the insurer undertakes to indemnify the insured's loss which, in the case of a vehicle accident claim, is the cost incurred for repairs to the vehicle damaged in the accident. In accordance with the principle of indemnity, the amount paid by an insurer to an insured in settlement of a claim may exclude or include the GST portion of the repair costs.

For example, if the insured is a GST registrant who uses the repaired vehicle primarily in the course of his business activities, then the insured would be entitled to claim an ITC for the GST portion of the repair expense. If the insured can recover the GST paid on the repair, then the GST is not part of the insured's loss. Therefore, in such situations, the insurer will not reimburse the insured for the GST portion and will settle the claim on a "Net-of-GST" basis that adheres to the principle of indemnification. However, the insurer is not permitted to claim any ITC's since it is providing a financial service that is exempt of the GST when it compensates an insured under the terms of an insurance policy or contract. After being compensated by an insurer in respect of an insurance claim, in absence of "Net-of-GST" it would be possible for the registrant to claim an ITC or a rebate, thus receiving reimbursement of the GST portion from both the insurer and the department.

On the other hand, if the insured is not a GST registrant, or if the vehicle damaged is one which a GST registrant uses primarily for non-business purposes, then the insured is not eligible to claim either a rebate of the GST paid or an ITC. In this situation, the GST portion of the cost is considered to be part of the insured's loss and will be indemnified by the insurer. The insurer will either reimburse the insured or will pay the repair bill, including, in each case, the GST portion. Again, the insurer is not eligible to claim an ITC with respect to the GST portion of the repair bill because of the exempt tax status of the financial service provided to the insured.

Mr. XXXXX has expressed concern that there may be cases where the invoiced party is not, in fact, the recipient of the supply. For example, when an insurance claim arises, the first thing asked of the insured by the insurer is whether the insured is registered for the GST. The name that appears on the invoice depends upon the answer the insured gives to the insurer, even though the same work is done.

Memorandum 700-5-10 states, with respect to meeting documentary requirements, that the recipient of a taxable supply is liable for payment of tax in respect of the supply pursuant to section 165 of the Act and that invoices must clearly establish the recipient of the supply. These documentary requirements are outlined in subsections 169(4) and 223(2) of the Act. GST Memorandum 400-1-2 also sets out these documentary requirements.

The Department will not accept other methods of invoicing practices such as "invoice splitting" where the insurer is invoiced for the repair and the insured is invoiced for the GST. This practice would not meet documentary requirements for GST purposes. Where the insurer pays for the repair it is also liable to pay the GST and in this case no one can claim an ITC.

Mr. XXXXX has expressed concern as to whether the current state of affairs in the area of insurance claims is in keeping with the intent and administration of the Department's goals. He has suggested that the definition of the word "recipient" could be amended to include a person who actually takes possession and ultimate title of the goods and services under the insurance settlement claim. This would allow the insured to claim an ITC regardless of the name appearing on the invoice, and on the other hand, the insurer could not claim an ITC on the same supply.

For purposes of the GST, subsection 123(1) of the Act defines "recipient" of a supply of property or a service. Paragraphs (a) and (b) of the definition could apply to cases which involve the GST and insurance claim settlements. We do not have any problem with the definition of "recipient" in the Act as it relates to the GST treatment of insurance claims or the policy outlined in Memorandum 700-5-10 and P-046.

Mr. XXXXX has suggested amending the definition of the word "recipient" because of a problem between the Policy and Legislation Branch and XXXXX regarding the question as to who is receiving the supply of eyewear in certain instances. He states that the Department considers insurance companies to be receiving the supply of eyewear in certain cases where the insured "assigns his or her benefits to the insurer" (i.e. where the insured signs a statement whereby the optician receives payment directly from the insurer). This situation has been addressed in the Notice of Ways and Means Motion to amend the Excise Tax Act, tabled on April 23, 1996. Section 9 of Part II of Schedule VI to the Act is amended to ensure that eye glasses and contact lenses are zero-rated when supplied, for the treatment or correction of a defect of vision, under a prescription issued to a consumer, regardless of who the legal recipient of the supply is. This amendment applies to supplies made after April 23, 1996.

We have enclosed a copy of a letter dated April 22, 1996 to XXXXX from J.A. Venne, Director, Special Sectors, GST Rulings and Interpretations, Policy and Legislation Branch, which explains how the application of GST applied to the supply of prescription eyewear prior to the change in the Ways and Means Motion tabled on April 23, 1996. To summarize, for the period from January 1, 1991 up to and including December 31, 1992, the Department interpreted the legislation using the French version of section 9 of Part II of Schedule VI to the Act, where the supply of prescription eyewear was not required to be made to a consumer as was required under the English version. The supply had merely to be made to correct a consumer's vision in order to be zero-rated. Under that revised policy, the supply of eyewear to correct the vision of a consumer, which was made to an insurer, who, in turn provided the eyewear to a consumer, was zero-rated.

In a Ways and Means Motion to amend the Excise Tax Act, tabled on December 9, 1992, among the proposed changes was a proposal to amend the French version of section 9 of Part II of Schedule VI to the Act. The provision was amended to reflect the existing English version of the Act, and applies to supplies of prescription eyewear made after 1992. Effective January 1, 1993, the supply of prescription eyewear to an insurer was subject to GST.

We hope this information will be of assistance to you and should you wish to discuss this matter further, please contact the undersigned at 952-3413 or Duncan Jones at 952-9210.

T.R. Côté
Policy Officer
Financial Institutions and
Real Property Division
GST Rulings and Interpretations Directorate

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