8 September 1997 GST/HST Interpretation HQR00000620 - - Tax status of Fees Charged by an Attorney in a Reciprocal Insurance Agreement

This letter is in reply to the memorandum of March 25, 1997, from XXXXX of your office wherein she requested our review of the representations received from XXXXX concerning the above-noted issue.

Facts

Our understanding of the facts is as follows:

The XXXXX was created pursuant to section 15 of the XXXXX in order to provide its members (subscribers) with a cost effective alternative to other types of insurance.

These subscribers enter into a XXXXX under which the subscribers agree to exchange with each other contracts of insurance and make arrangements to insure themselves including the purchase of such excess insurance or reinsurance as the XXXXX from time to time considers necessary.

Pursuant to this agreement each subscriber must sign a power of attorney appointing the XXXXX as attorney XXXXX

In exchanging contracts of insurance amongst themselves and in this regard, it is agreed that the subscribers' attorney shall execute and deliver to the subscribers policies of insurance containing such terms and conditions as the Board has approved.

The Power of Attorney signed by the subscribers provides that the Attorney shall act on behalf of the individual subscriber in its place and stead in regards to all matters involving the Exchange, subject to the advice and direction of the Board, and also provides that the subscribers grant and give to the Attorney full and absolute power and authority to do and execute all acts, deeds, matters, and things necessary to be done on behalf of the subscribers ... as fully and effectively as if the subscribers were personally present or acting therein.

Under the Attorney's Undertaking Agreement, it is agreed that the Attorney, in its capacity as agent of all the subscribers, perform all duties required of it pursuant to the Insurance Act, and furthermore, undertake such further activities, obligations and responsibilities as required by the Board or the subscribers from time to time, for which the Board on behalf of the subscribers will pay the Attorney reasonable compensation.

The Attorney's Undertaking Agreement provides that the Attorney perform the following:

a) to do and execute all acts, deeds, matters and things necessary to be done on behalf of the subscribers

b) to commence, institute, prosecute or defend all actions, suits and other proceedings which may be necessary and expedient fully and effectively

c) to represent the subscribers' interests in any other dispute resolution process which may be necessary or expedient

d) to perform any duties required to be performed to comply with the Insurance Act

e) to perform any tasks or duties assigned to it by the Board from time to time etc ...

The Exchange Agreement provides that the Board XXXXX be established by the subscribers for the purpose of implementing the Exchange Agreement and supervising the operation of the Exchange. The Exchange Agreement also provides that the Board act in all matters affecting the Exchange as agents for the subscribers.

The Exchange Agreement provides that the Board has the power and authority to give any approvals and to make any decisions and determination required or permitted to be given or made by the subscribers with respect to the Exchange in any matters arising under or by virtue of this Exchange Agreement, including but not limited to:

a) setting the assessments required of the subscribers pursuant to this Exchange Agreement which may include a subscriber's proportionate share of the expenses of the Exchange

b) appointing and removing the Attorney and making recommendations and giving directions to the Attorney

c) determining and approving the policies of insurance to be exchanged by the subscribers including the types of coverage to be offered and the premium rates for each subscriber

d) establishing committees and delegating authority as may be required and

e) taking such steps as are necessary to comply with all applicable provisions of the Insurance Act or any other applicable governmental statutes, regulations and rules, etc.

 XXXXX is a licensed insurer under the Insurance Act.

Issue

The issue is whether the services provided by the Attorney to the Exchange are exempt financial services.

Our Comments

Our understanding of the context is, as indicated above, that a group of subscribers enter into an Exchange Agreement under which they exchange insurance and reinsurance contracts amongst themselves. For that purpose, the Board is created to overview the operations of the collective of subscribers, otherwise known as the Exchange. As indicated in the facts, the Board is the party that has the power and the authority to make all decisions and determinations required with respect to the Exchange. In addition, the subscribers also appoint an attorney not only to represent them but also to execute the Board's decisions and all other activities required to be done for the operation of the Exchange.

Considering the purpose of the Exchange, the method by which it is administered and operated, and also the Department's administrative position P-077 on Single vs. Multiple Supplies, it is our view that the Attorney is providing a single composite supply of administrative services to the Exchange which encompasses the execution of the insurance policies, the defense of all actions and the performance of any duties required to be performed to comply with the Insurance Act and other tasks and duties assigned to it by the Board. It appears that the Attorney's services would vary depending on the requirements of the Exchange and the Board and that the Attorney would not be providing any particular element of the above-noted services separately as each is contingent on the provision of another. In addition, from the Attorney's undertaking agreement, the Attorney will be remunerated for such services in an amount to be determined on an annual basis. Hence, from the above-noted information, there is a good argument to support the conclusion that the attorney is providing a single composite supply for a single consideration.

As such, whether the Attorney is acting as agent for a person at risk or not, the Department's position remains the same being that the service provided is a single composite supply of an administrative service which does not fall under the definition of financial services. As a result, the service provided by the Attorney is taxable.

If you have any questions, please contact Duncan Jones at (613) 952-9210.

Yours truly,

Danielle Laflèche, C.A.
Senior Rulings Officer
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch