RITS: HQR0000061
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XXXXX
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File: 11585-14, 11585-21,11600-5
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XXXXX
This is in reply to your letters of XXXXX (your file XXXXX with respect to issues arising XXXXX of an insurance broker XXXXX. I aplogize for the delay in responding to your letters. Specifically, the first letter XXXXX requests our rationale with respect to our position that commissions received by independent XXXXX insurance agents or brokers from XXXXX in respect of insurance policies covering risks in Canada are zero-rated under section 1 of Part IX of Schedule VI to the Excise Tax Act ("the Act"). Appendix II of the second letter XXXXX enumerates nine outstanding issues (a) through (i) which in part relate to the issue of zero-rating of broker commissions.
XXXXX itself is not an insurer but a market where insurance risks are offered and accepted. The structure of XXXXX is set out in XXXXX who trade on their own account and who are severally liable to pay claims under XXXXX insurance policies.
XXXXX are grouped into syndicates with each name being severally liable to the risk covered under XXXXX insurance policy. XXXXX operate through syndicates, member agents, managing agents and brokers each of which has their own role in the placement of insurance policies. XXXXX are subscribed to various syndicates which can range in size of XXXXX or more. In practice XXXXX is usually on several different syndicates and it is the sum of XXXXX participations in those syndicates which comprise XXXXX XXXXX insurance activity. The number of XXXXX XXXXX are XXXXX residents. It is our position that each individual XXXXX falls under the definition of "insurer" in subsection 123(1) of the Excise Tax Act.
It should also be noted that the XXXXX has appointed an "Attorney-in-Fact" who acts as XXXXX representative XXXXX for regulatory purposes.
The Attorney-in-Fact is understood to be a partner of an independent accounting firm who accepts suits against XXXXX underwriters XXXXX and who provides accounting and other services which allows XXXXX to comply with various insurance and other regulatory legislation. It is understood that policies or claims are not written out of the XXXXX In order to qualify for zero-rating under section 1 of Part IX of Schedule VI of the Act, the supply of a financial service by a financial institution must be made to a non-resident person. To determine whether a person is a resident, we must look to general legal principles as well as consider section 132 of the Act. It is our position that for section 132 to apply to XXXXX non-resident XXXXX it is necessary to determine if XXXXX as insurers, would be considered to have a "permanent establishment" as defined in subsection 123(1) of the Act. XXXXX business in XXXXX is transacted by independent insurance agents and brokers, some of whom have binding authority, in respect of XXXXX risk, referred to as coverholder business. Specifically, paragraph 123(1)(b) of the definition "permanent establishment" ("PE") addresses the situation of so called "agency PE's". Paragraph 123(1)(b) refers to a fixed place of business of another person except in the case of an independent commission agent or broker acting in the ordinary course of their business. A policy statement on the application of paragraph 123(1)(b) "permanent establishment" is currently under development which, in part, addresses the issue of when a branch of another person such as an independent agent may be considered to be a PE of a non-resident. Based on our understanding of the application of paragraph 123(1)(b), an office or branch of an independent commission agent or broker (e.g. insurance agents and brokers) will generally not result in a non-resident person being considered to have a permanent establishment in Canada for GST purposes unless the intermediary is not an independent agent. It will be a question of fact in each case whether a particular commission agent or broker is legally and economically independent.
One of the complexities of XXXXX operating structure is that a particular risk covered under an insurance policy is insured by many XXXXX some of whom may or may not include XXXXX resident XXXXX[.] The insurance agent or broker who is receiving the commission is not in a position to know the extent to which the service is supplied to a resident or non-resident XXXXX[.] Nevertheless the policy intent is that a supply of a financial service should qualify for zero-rating where the supply is made to a non-resident person. As a result, it was decided to simplify administration in this area from the supplier's perspective providing intermediary services given that almost all of the names are non-residents. Therefore, an insurance agent's or broker's intermediary services can be considered to be supplied to a non-resident and in this way the supplier is not forced to make an allocation which the intermediary is not in a position to make accurately. Where the intermediary receives commissions from several different insurers for the placement of insurance with a particular insured, the intermediary also needs to determine whether the coverage is being provided by a resident or non-resident insurer. With respect to the matter of residency, please refer to our comments on this subject in our earlier letter to you dated XXXXX enclosing a copy of our letter to XXXXX XXXXX[.] The above, along with our earlier correspondence, therefore, addresses the following issues in Appendix II XXXXX[.]
[(]b) the basis for zero-rating broker commissions;
(c) the basis for zero-rating broker commissions and fees;
(e) to whom are the brokers supplying their services (as intermediaries);
(f) regulatory requirements and permanent establishments of insurers;
(g) role of chief agents in a contract of insurance;
(h) location of risk.
With respect to item a) XXXXX group of companies and to item d) late filed XXXXX please refer to our letter of XXXXX[.] With respect item i) the tax status of split commissions, Attachments III and IV of Appendix I show various scenarios wherein an intermediary has an agreement with an insurer to place insurance policies with insureds. In order for an insurance policy to be placed for a Canadian insured with a XXXXX risk or for a foreign insured with a Canadian risk, the insured will deal with a broker who may have to utilize a sub-broker for the purpose of effecting coverage. The broker normally gets paid by the insurer and will share (i.e. pay) the sub-broker for his service of arranging for a financial service. XXXXX provide guidance on "arranging for" under paragraph 123(1)(l) of the definition of "financial service". The sub-broker's service falls under paragraph 123(1)(l) of "financial service" and a commission received in respect of the provision of the intermediary's service may also be zero-rated under section 1/Part VI/Schedule VI of the Act where the supply is made to a non-resident. Determination of zero-rating status of the financial service is relevant to ITC claims by the supplier.
Where an insured requires insurance, the insured may utilize an intermediary to effect the necessary coverage. That intermediary may or may not be the same broker or agent that has an agency agreement with the insurer. For GST purposes, the insurance policy generally establishes the fact that a supply of insurance is made between the insurer and the insured. The payment of the premium in respect of the insurance policy is the consideration for the supply of that financial service. Where an insurer effects supplies of insurance through an intermediary, i.e. an agent or broker, the manner in which monies are transmitted by the insured to the insurer does not change the nature of these supplies.
The same rationale applies to intermediaries who, in the course of rendering their services of arranging for a financial service, are required to obtain essential information from the insured (e.g. risk to be covered, application for insurance, claims processing, policy administration, transmission of premium to insurer). The intermediary generally has agreements with insurers with respect to the manner in which insurance policies are effected with insureds. In some cases such intermediaries may utilize the services of other intermediaries to effect the supply of the insurance between the insurer and the insured. The other person may, for example, process the application for insurance and collect the premium from the insured and retain a portion of the premium for his efforts before remitting the remainder to the broker who ultimately effects the insurance contract with the insurer by way of its agency agreement with the insurer.
Where an intermediary retains a portion of the premium for the purpose of effecting insurance with the insurer, that amount represents the consideration in respect of arranging for. Similarly, a third-party intermediary retaining a portion of the premium for its efforts generally will also represent consideration in respect of arranging for. Zero-rating status as a financial service under section 1/Part IX/Schedule VI of the Act will only apply if the other person is providing a financial service to a non-resident.
When insurance is placed, the premium is paid by the insured either directly (i.e., insurer billed) to the insurer or indirectly through an intermediary (i.e., agent billed) who is required to forward the premium to the insurer thereby effecting coverage. It is the insurer who pays commissions (out of the applicable premiums) to the intermediary usually under an agency agreement. Agency agreements are generally used by insurers to appoint the intermediary as an agent for the purposes of soliciting for the placement of insurance with insureds, binding the insurer to the risk and premium collection (i.e. agent billing). Usually the insurance agent or broker withholds part of the premium which it collects from the insured at rates provided for in the agency agreement.
Where an agent collects premiums from the insured and retains a part thereof as its remuneration in arranging for, that amount retained would represent the consideration. For example, the insured approaches Broker A requesting property and casualty insurance. Broker A solicits the insurance with Broker B who has authority to bind an insurer through an agency agreement with the insurer for a 20% commission. Broker A and Broker B have an agreement to share commissions on an equal basis. Broker A bills the insured $5,000 for the premium, retaining $500 as its commission forwarding ($5000-500=$4500) the remainder to Broker B. Broker B will forward the premium less its commission to the insurer i.e., $4,000. The insurer is required to pay $1,000 as a commission to Broker B per the agency agreement. Broker B is required to pay Broker A $500 under their agreement to split commissions. The insured then receives the insurance policy from the insurer through these brokers.
Where a broker is claiming ITCs (with respect to zero-rated supplies of financial services) and is using a revenue-based approach, the Department recognizes, for example, in Policy Position P-063 that a registrant may use output based methods as long as such a method reasonably reflects consumption or use of inputs in commercial activities. If in a particular reporting period a registrant provides support that a revenue-based is fair and reasonable that method would be acceptable (e.g. total brokerage commissions from supplies made to non-residents/total revenues). In using a revenue-based formula method, it would be expected that Broker A would include $500 in its numerator and Broker B would also include $1,000 in its numerator. It would be reasonable for whatever amount that Broker A or B includes in the numerator, would also be shown in the denominator under such a revenue-based formula or method.
If you have any questions on the above matters 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
Enclosures: XXXXX
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