31 January 1997 GST/HST Interpretation 11585-21 - Supply of Insurance Covering Risks in Canada

This is in reply to your letter of October 4, 1995 (your file: G95-192) wherein you requested our comments concerning the GST status of an insurance agent's or broker's commissions with respect to that agent's or broker's services of arranging for the supply of a financial service provided to foreign insurers who cover risks in Canada. We apologize for the delay in responding to your letter.

Enclosed is a copy of our recent letter to the XXXXX who requested an interpretation on the same issue raised in your letter. In finalizing our response, we held discussions with the Department of Finance to confirm Finance's tax policy intent regarding non-resident insurers, who have a presence in Canada or carry on business in Canada, and who pay brokerage commissions to domestic insurance agents or brokers.

In your view, the issue is whether these commissions in respect of Canadian risks are considered to be in relation to the provision of exempt supplies of financial services under section 1 of Part VII of Schedule V of the Excise Tax Act ("the Act") or zero-rated financial services provided to a non-resident person under section 1 of Part IX of Schedule VI of the Act. It is also your view that with respect to the insurance premiums, which represent the consideration for the supply of insurance policies by the insurer to an insured, the premiums are either exempt or zero-rated under section 2 of Part IX of Schedule VI of the Act to the extent that the conditions therein are met.

Foreign insurers are generally regulated under the Insurance Companies Act and branch operations of foreign insurers are required, among other things, under regulatory legislation to, register, maintain books and records in Canada, have a Canadian Chief Agent, and keep reserves. Specifically, your main concern is that premiums in respect of Canadian risks are exempt from GST whereas the brokerage commissions with respect to the same insurance policies are zero-rated financial services even though for regulatory purposes these transactions are required to be reported as having been attributed to a permanent establishment e.g. branch office.

Our Comments:

At the time of the introduction of the GST, the policy on zero-rating of insurance brokers' commissions was discussed with the Department of Finance in advance of the release of Departmental publications directed to the insurance brokerage community, namely, the Guide on Insurance Agents and Brokers. The policy underlying the treatment of supplies of intermediary services of insurance is premised on the view that it is the insurer who pays the agent or broker for its intermediary role in arranging for the placement of the insurance policy and it is the insurer who is the recipient of the brokerage service. With respect to the insurance premiums, it is the insured who is the recipient of the supply involving the insurance coverage since the supplier is the insurer who provides coverage to the insured for the premium. The above publication has been superseded by GST Memorandum 700-5-12 and it is paragraph 20 that reflects the current policy intent (which remains unchanged from the Guide) and reads as follows:

"20. Certain supplies of goods and services provided to non-residents may be considered exports which are zero-rated. Pursuant to section 2 of Part IX of Schedule VI to the Act, financial services that relate to insurance policies issued by a financial institution are zero-rated to the extent that the policy is issued in respect of non-residents who are insured under the policy, or to the extent that the policy relates to risks ordinarily situated outside Canada. This provision, however, does not apply to intermediary insurance services provided by insurance agents or brokers since they do not issue policies. If these services are provided to a resident insurer in respect of a non-resident person, they are exempt from the tax. However, financial services provided by an insurance agent or broker to a non-resident insurer are zero-rated pursuant to the general rule in section 1 of Part IX of Schedule VI to the Act. In general, the position is based on the understanding that services are provided by the agent or broker to the insurance company paying the commission."

In order to determine whether a supply of a financial service (in this case arranging for) is zero-rated under section 1/Part IX/Schedule VI of the Act, the particular supply must be made to a non-resident person. To determine whether a person is a non-resident we must look to general legal principles. The other aspect that needs consideration is subsection 132(2) of the Act which will deem a non-resident person to be considered a resident in respect of certain activities carried on through a "permanent establishment" in Canada. In order for subsection 132(2) to be applicable it must first be determined whether the non-resident insurer has a "permanent establishment" as that term is defined in subsection 123(1) of the Act. This determination cannot be made solely on the basis of regulatory or licensing requirements which are applicable to insurers. Generally, a review of all of the facts of a given situation will be required to make a determination of the residency status (for purposes of the Excise Tax Act) of a particular non-resident insurer who maintains a presence in Canada in the form of a branch. The enclosed copy of the reply to the XXXXX provides responses to the various scenarios pertaining to non-resident insurers and the matter of zero-rating brokerage commissions by domestic agents and brokers.

If you have any questions, please contact me at (613) 952-9220 or Pierre Bertrand, Policy Manager at (613) 952-9219.

Yours truly,

Roy Osudar
Policy Unit
Financial Institutions
and Real Property Division
GST Rulings and Interpretations

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