3 June 1996 GST/HST Interpretation 11710-1[1] - Insurance Deductibles and Penalty Charges Imposed by Trucking Companies to Independent Owner/Operator Truck Drivers

                                                                        File: 11710-1(lhk)
Leg. Ref: s. 123(1) - supply, consideration, s. 182
XXXXX                                                                                 June 3, 1996
XXXXX

I refer to your E-Mail message of April 24, 1995, to Mr. Tom Alley of Special Sectors Division of this Directorate concerning the application of the GST to deductibles and penalty charges imposed by a trucking company to independent owner/operator truck drivers under an insurance contract entered into between them. Since the questions you have raised fall within the purview of the General Applications Division, on July 4, 1995, Special Sectors have referred them to us and requested that the reply is directly forwarded to you.

Please accept our apologies for the delay in responding to the questions you have raised. As you are probably aware, the issue of the application of the GST to payments of damages (including deductibles, penalties, etc. charged as a result of an accident) has been under policy review for some time. Although the policies encompassing these issues have already been drafted, they are still under consideration by our Directorate's Policy Review Committee. Therefore, until such time as these policies are finalized the opinions expressed in this letter must be regarded as reflecting an interim policy position.

Background

Based on the information you have provided to Mr. Alley via E-mail, the copy of the June 1, 1995 letter from your office to XXXXX on the above subject and the copy of the sample agreement that is normally used by the parties (the carrier and the operators) to enter into an agreement, our understanding of the facts is as follows:

1. A trucking company ("carrier") uses independent owner/operator truckers ("operators") to deliver goods. Under the terms of the agreement, the operator leases the vehicle (truck/trailer unit) to the carrier and agrees to haul goods for the carrier. The rates payable to the operator for hauling goods are set out in the agreement.

2. Under the agreement, the carrier is responsible for insurance of the truck/trailer, cargo, etc. The carrier is not licensed or otherwise authorized under the laws of Canada or a province to carry on an insurance business (i.e. an insurer). Also, the carrier is not acting as an agent on behalf of such an insurer.

3. The carrier purchases insurance in "bulk" from the XXXXX and private insurers. Although both names (the carrier and the operator) appear on the Certificate of Insurance, usually it is the carrier's name that is identified as the "insured".

4. The operator is required to pay a portion of the cargo insurance premiums (i.e. a flat fee of XXXXX per month).

5. Clauses 7(f) and 7(g) of the agreement stipulate that the operator must forthwith repay all amounts paid by the carrier on behalf of the operator and indemnify the carrier from and against all loss or damage suffered or incurred by the carrier as a direct or indirect result of any failure on the part of the operator to observe or perform any of the conditions, stipulations and covenants the operator is obligated to under the agreement.

6. In the case of an accident involving the operator where a claim is filed and the insurance deductible becomes payable by the carrier, the operator would be required to pay the deductible amount to the carrier. Additionally, the operator may be assessed a penalty charge as determined by the Safety Committee of the carrier. Thus, in the event of an accident, the carrier may invoice the operator for the following:

XXXXX

Interpretation Requested

You have requested our opinion as to the application of the GST to insurance deductibles and penalties charged by the carrier to the operators.

Interpretation Given

Both deductibles and penalties are amounts required to be paid by the operators under the insurance coverage provided by the carrier. Put differently, they are amounts payable in respect of the supply of insurance by the carrier to the operators, and thus, would be regarded as further consideration for that supply. The point is that, the term "consideration" as defined in subsection 123(1) of the Act, would include all contingent amounts (i.e. amounts which may nor may not become payable depending on the occurrence of an event such as deductibles, fines, penalties, etc.) paid or payable in respect of a supply.

One might question whether a penalty can be regarded as "consideration" for a supply. It is the Department's view that whether a penalty can be regarded as "consideration" for a supply would depend on the transaction to which the penalty relates. The point is that the term "penalty" can merely be a label used to identify a payment rather than a term used to characterize it. While in some cases penalties could fall under a specific rule such as section 182 of the Act and could become "consideration" for a deemed taxable supply, in other cases they could fall under the general provisions of the Act and be regarded as consideration for an actual supply being made. Also, in some other cases, the penalty may not be captured by any of the rules in the sense it could fall within the category of "not consideration for a supply" (e.g. penalties imposed by statute not in connection with a supply of property or a service but for violating the law). Therefore, depending on the specific facts of the situation, a penalty could take the form of: further consideration for a previous supply, consideration for a new supply, or "not consideration for a supply"

In this case, one could argue that the Safety Committee Levy is imposed as a consequence of the breach of the agreement (e.g. safety measures agreed upon by the operator) entered into between the carrier and the operator and thus the payment should fall within the provisions of section 182. While that might be the case, the payment would still not be captured by subsection 182(1) as it is not an amount paid "otherwise than as consideration for the supply". The reason is that the penalty, as described in the agreement, is an amount payable in connection with the supply of insurance by the carrier.

Generally, financial services supplied in Canada are exempt from the GST. A "financial service" is defined in subsection 123(1) of the Excise Tax Act (the Act) to include a broad range of transactions relating to a "financial instrument". An "insurance policy" is included in the definition of "financial instrument" in subsection 123(1).

An "insurance policy", as defined in subsection 123(1) of the Act, means, with one exception, any policy or contract of insurance issued by a person who is an "insurer" [as defined in the same subsection to mean a person who is licensed or otherwise authorized to carry on an insurance business in the particular jurisdiction (i.e. Canada, a province, etc.)].

An exception to the "insurer" requirement is made in the case of an accident, sickness or dental insurance policy or contract. In this case, whether the policy is issued, or contract is entered into, by an "insurer" or not, it would qualify to be an "insurance policy" for the GST. As a general rule, all other forms of insurance provided by non-licensed (for insurance purposes) persons are subject to the GST.

Since the supply of insurance by the carrier to the operators would not come within the provisions of an "insurance policy", it would not be exempt from the GST. Further, there are no other provisions in the Act that could provide any tax relief (e.g. by way of zero-rating) for this supply. Consequently, the supply of insurance by the carrier to the operators would be taxable at 7%.

I hope the above rationale for our position on the issue will be of assistance to you. If you have any questions or require additional information, please contact Lalith Kottachchi at (613) 952-9588 or one of the other members of the Imposition Team in the Taxing Provisions Unit. They are: Serge Bernier (613) 952-9580, Gerry O'Reilley (613) 952-9589 and Anny Roy (613) 954-2560.

Yours truly,

H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations

1239(REG)

c.c.:      Mitch Bloom (sign-off)
Lalith Kottachchi
Imposition Team