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Attention: XXXXX
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Case #: HQR0000457
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File: 11585-21
May 1, 1997
Dear XXXXX
This letter is in reply to your letters dated December 11, 1996 and March 04, 1997 with respect to the services provided by the XXXXX and the applicability of the Goods and Services Tax (GST).
We have examined the issues referred to in your letters. Based on the information provided, we confirm the Department's position that XXXXX is an insurer and is providing a financial service as defined in subsection 123(1) of the Excise Tax Act (ETA). Please refer to our analysis which follows.
Analysis
Your letter of March 04, 1997 summarizes the issues brought forward in your initial letter of December 11, 1996 and relates these issues to the definitions of "insurer", "insurance policy" and "financial service" in subsection 123(1) of the ETA.
You emphasize that the legal authorities discussed in your first letter establish that a reciprocal has two components, the subscribers and a central authority, that the authorities further establish that the exchange of insurance is undertaken by the subscribers, and that "the central authority is the organization that provides the structure and services to manage and administer the exchange among the subscribers". The Department does not dispute the structure and organization of reciprocals but we do not draw the same conclusions with respect to establishing who, between XXXXX and the subscribers, issues the insurance.
It has been previously agreed that the ETA recognizes XXXXX as a "person" for GST purposes. The ETA defines "insurer", in part, as a "person who is licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an insurance business ...". The Department remains of the position that XXXXX is a person and, since it is licensed under the XXXXX, it is an insurer for GST purposes. The subscribers are persons but are not licensed under XXXXX XXXXX and therefore, are not insurers for GST purposes. We agree that the subscribers pay a premium for insurance coverage but this does not mean that the subscribers are insurers as defined in the ETA. Consequently, the contract issued by the insurer is an "insurance policy" within the meaning of the ETA, XXXXX is issuing an insurance policy which is a financial instrument for GST purposes, and XXXXX is providing a "financial service" for GST purposes.
In your letters you also state that the reciprocal is not financially at risk. As noted in the previous analysis provided to you by the Department, the XXXXX and a recent court case explicitly state that it is the reciprocal which assumes the risk. In this regard, XXXXX XXXXX states, in part, "... a premium deposit reasonably sufficient for the risk assumed by the exchange". XXXXX defined reciprocal insurance exchanges as "... unincorporated organizations which rely on their members or subscribers to underwrite the risks inherent in their activities". XXXXX went on to say "Herein lies the difference between reciprocals and conventional insurance companies. The subscribers of XXXXX need not come up with a large capital outlay from the outset, other than the premiums paid, while conventional insurance companies must in order "to cover future claims"."
In conclusion, it is the Department's position that XXXXX is an insurer, that XXXXX is issuing an insurance policy,that XXXXX is financially at risk and therefore, XXXXX is providing exempt supplies of financial services. XXXXX is not eligible to claim input tax credits on GST paid with respect to its exempt activities and further, XXXXX should not be charging GST to its member subscribers with respect to administrative services which appear to be directly related to its own activities as an insurer.
Should you have any questions with respect to the above, please do not hesitate to contact me at (613) 952-9577 or Duncan Jones at (613) 952-9210.
Sincerely,
Marilena Guerra, C.M.A.
Rulings Officer
Financial Institutions and Real Property Division
GST Rulings and Interpretations Directorate
Policy and Legislation Branch
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