GST/HST Rulings and Interpretations Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
K1A 0L5
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Case: HQR0000772
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August 12, 1997
Dear XXXXX
Thank you for your letter of April 3, 1997 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to insurance claims.
Interpretation Requested
In your letter, you state that you have had certain difficulties with body shops repairing your vehicle under an insurance claim. You stated that they have you sign an authorization to do the repairs. When the repairs are done, they give you one bill for the GST and send another bill to the insurance company for the cost of the repairs.
You feel this method is incorrect and could probably invalidate your claim for an input tax credit (ITC) in respect of the GST that you paid. The correct method, you feel, would be for you to pay the entire amount and have the insurance company reimburse you, and would like our confirmation of this.
Interpretation Given
From your letter, it is unclear if the body shops are incorrectly invoicing you (we would need to see the actual invoices they have given you). However, if the body shops present you with an invoice strictly for the GST, they are "invoice-splitting", which is unacceptable for GST purposes. You may not be able to claim the GST you paid as input tax credits (ITCs) on your GST tax return. If the body shops give you an invoice showing the entire amount of the repair (and, with your name listed under "customer" or "billed to"), and then requests you to only pay the GST portion while the insurance company pays the balance of the invoice on your behalf, this may be an acceptable method of invoicing (providing, of course, that the remainder of the provisions of section 169 of the Excise Tax Act (Act) are met), and you will be able to claim the full ITCs on the GST you paid.
As we understand in your letter, you are a GST registrant who uses the repaired vehicle primarily in the course of your business activities, and therefore you would be entitled to claim an ITC for the GST portion of the repair expense. Since you, the insured, can recover the GST paid on the repair, then the GST is not part of the your loss. Therefore, in such situations, the insurer (i.e., your insurance company) will not reimburse you 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 ITCs since it is providing a financial service that is exempt of the GST when it compensates you under the terms of an insurance policy or contract. After being compensated by an insurer in respect of an insurance claim, in the absence of "Net-of-GST", it would be possible for a registrant to claim an ITC or a rebate, thus receiving reimbursement of the GST portion from both the insurer and the department.
Therefore, if you paid the entire invoice cost and the insurance company reimbursed you, they would reimburse you on a "Net of GST" basis, since the vehicle in question is a vehicle "used by a registrant primarily in the course of a commercial activity." Likewise, if the body shop presented you with an invoice for the entire repair service (with you listed as the recipient of the service), and sent a copy to the insurance company, and the insurance pays the body shop directly on a "Net of GST" basis, you would still be required to pay the GST portion of the invoice, but you would be able to claim an ITC with respect to the GST paid, providing the documentary requirements stated in section 169 of the Act are met. GST Memorandum 400-2, Documentary Requirements, which I have included, outlines these documentary requirements.
Memorandum 70010, GST Treatment of Insurance Claims, 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 and in GST Memorandum 400-2.
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. Furthermore, since the invoices are evidence of one's liability for the consideration and the related GST, this liability would rest with the insurer since it is the insurer who agreed to pay the consideration for the service. Consequently, you, as the insured, would not be able to claim any ITC as you were not liable for the GST in this situation. Therefore, where the insurer is invoiced for, and pays for, the repair, it is also liable to pay the GST, and, in this case, no one can claim an ITC.
The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST Memoranda Series, do not bind the Department with respect to a particular situation.
For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST Memoranda Series so that you will know what documentation the Department requires if you wish a ruling on this matter. I have also enclosed a copy of the GST Memorandums mentioned above.
Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4393 or contact your nearest Revenue Canada Tax Services Office.
Yours truly,
Karl P. Marten
Financial Institutions Unit
Financial Institutions & Real Property Division
GST/HST Rulings and Interpretations Directorate
Encl.: GST Memorandum 700-5-10, GST Treatment of Insurance Claims
GST Memorandum 400-2, Documentary Requirements
Section 1.4 of Chapter 1 of the GST Memoranda Series
Legislative References: ss. 123(1) insurance policy; ss. 169(4), ss. 223(2)
NCS Subject Code(s): I 7; 11783-2123(1) "insurance policy"
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