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XXXXX
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File: 11585-14, 11585-21, 11600-5
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We are responding to your letters of October 30, 1995 and June 6, 1996 concerning the application of the Goods and Services Tax (GST) to insurance broker's commissions for services provided to non-resident insurers. We apologize for our delay in responding to you on this matter. You outline several scenarios in which a broker deals with the non-resident head office or a non-resident branch of an insurer and you wish to know if the commissions received by the broker are in respect of exempt or zero-rated supplies of financial services.
Paragraph 1 in Part VII of Schedule V of the Excise Tax Act ("Act") exempts, "a supply of a financial service that is not included in Part IX of Schedule VI" . Paragraph 1 in Part IX of Schedule VI zero-rates, "a supply of a financial service made by a financial institution to a non-resident person...". The services of an insurance broker generally fall under paragraph (l) of the definition of "financial service" in subsection 123(1) of the Act, i.e., "...the arranging for, a service referred to in any of paragraphs (a) to (i)...". As a result, to the extent that the broker supplies financial services to a resident they are exempt and to the extent the financial services are supplied to a non-resident they are zero-rated.
It is our view that there are two main issues pertaining to non-resident insurers:
1. when does a non-resident insurer who carries on business in Canada have a permanent establishment (P/E) for purposes of the GST; and
2. when is a non-resident insurer with a P/E in Canada subject to the deeming provisions of subsection 132(2) of the Act?
Question 1
When does a non-resident insurer who carries on business in Canada have a P/E for purposes of the GST?
Every non-resident insurer that wishes to insure risks in Canada is required to have a Chief Canadian Agent ("CCA"), with or without a branch infrastructure. It is a question of fact whether the non-resident insurer carries on business in Canada through this office or makes supplies through this office. Policy Statement No. 051 contains the Department's position regarding non-resident persons carrying on business in Canada. Accordingly, if a non-resident insurer has a CCA, with or without a branch infrastructure, through which it makes supplies of insurance in the ordinary course of business, it has a P/E in Canada for the purposes of the GST. The Department, in the near future, will be publishing a policy statement regarding the application of paragraph 123(1)(a) of the definition "permanent establishment". A second policy statement with respect to the application of paragraph (b) of that definition will be released after its formal approval for publication.
Question 2
When is a non-resident insurer with a P/E in Canada subject to the deeming provision in subsection 132(2) of the Act?
Since the status of the broker's services of arranging for the issuance of an insurance policy is dependent upon the residency of the insurer, general legal principles should first be examined to determine whether an insurer is a resident in the particular circumstances. Generally, when neither management or control of the insurer is in Canada, the insurer would not be a resident under common law.
However, subsection 132(2) of the Act provides:
"For purposes of this Part, where a non-resident person has a permanent establishment in Canada, the person shall be deemed to be resident in Canada in respect of, but only in respect of, activities of the person carried on through that establishment."
Our view of the GST application to the services of insurance brokers provided to non-resident insurers in specific scenarios is as follows:
Scenario 1
The non-resident insurer does not have a "branch" in Canada. There is only a Chief Canadian Agent (CCA) whose only responsibilities are those imposed by the Office of the Superintendent of Financial Institutions (OSFI). Specifically, the CCA's only function is regulatory requirements, e.g., filing requirements, ensuring sufficient assets are maintained in Canada to cover Canadian risks. Under this arrangement, the insurance policies are written through the head office and reported and countersigned by the CCA as required by OSFI.
It is our view that, since the activities of the CCA are limited to regulatory requirements, the issuance of the insurance policy would not be considered an activity of the non-resident insurer carried on through a Canadian P/E. As a result, the broker's service for the arranging for the issuance of an insurance policy for the non-resident insurer is zero-rated.
Scenario 2
The non-resident insurer has an operating branch (with one person designated as the CCA), but the branch operates with limited approval capacity, i.e., it may only cover some degree of risk in Canada. Other policies of a type of risk or dollar limit not covered by the Canadian branch would be negotiated by the non-resident insurer's head office or some other non-resident branch directly with the broker. Regardless of where the policy is approved, OSFI requires that all insurance policies or portions of insurance policies covering Canadian risks must be reported on the financial statements of the Canadian branch.
Under the second scenario, since the operating branch is a fixed place of business through which the non-resident insurer makes supplies, i.e., issues insurance policies, it is a P/E for GST purposes. Any activity in relation to insurance policies that are written in whole or in part through the non-resident insurer's operating branch in Canada is deemed to be an activity of the non-resident carried on through the Canadian P/E. Therefore, the broker's service of arranging for the issuance of the insurance policy would be exempt.
It is a question of fact whether activities with respect to the issuance of the insurance policy flow through the Canadian P/E. For example, an insurance broker submits a proposal to the Canadian branch of a non-resident insurer on behalf of the broker's client. The Canadian branch performs the work necessary to evaluate the risk. Subsequently the branch determines that it will not cover the risk and the proposal is forwarded to the non-resident's head office for consideration (assume the non-resident insurer's head office is in the U.K.). After reviewing the risk evaluation submitted by the Canadian branch, the U.K. head office approves the application and forwards the insurance policy to the broker for the client's signature. Although the insurance policy is written in the U.K., the Canadian branch has an involvement in making the supply of the insurance policy. Since the financial service of issuing an insurance policy is performed in part in Canada, paragraph 142(1)(g) deems it to be supplied in Canada. Therefore it is our position that this supply is made through the Canadian P/E and the broker's service of arranging for the insurance policy is exempt.
Scenario 3
A foreign insurer has a CCA with one or more P/E(s) but there is no branch infrastructure.
As noted above, it is our view that a CCA through which the insurer makes supplies may constitute a P/E in Canada for purposes of the Act. It is a question of fact whether the activities with respect to the issuance of the insurance policy flow through the Canadian P/E (broker's services exempt) or if the CCA only serves a regulatory function and the policy is issued by the non-resident head office or a non-resident branch (broker's services zero-rated).
Scenario 4
A non-resident insurer has a Canadian subsidiary. In this case it is the subsidiary that is in the insurance business in Canada and not the non-resident. The insurance policies are issued by the Canadian subsidiary. As a result, supplies made by the insurance broker or agent with respect to the "arranging for" of insurance policies are exempt.
Scenario 5
A non-resident insurer chooses to cover Canadian risks without a licence to do so. In such cases (with some exceptions) Part I of the Act imposes a special 10% tax on premiums paid by the Canadian insured to the unlicensed non-resident insurer. (Note that OSFI is responsible for the administration of this premium tax).
Since the non-resident insurer is not licensed to carry on an insurance business in Canada, it is assumed that the policy is issued by the non-resident head office or a non-resident branch. As a result, the broker's service of arranging for the issuance of the insurance policy is zero-rated for GST purposes.
The foregoing comments represent our general views with respect to the subject matter of the above scenarios. These comments are not rulings and, in accordance with the guidelines set out in GST Memoranda Series 1.4, do not bind the Department with respect to a particular situation. Should you wish to obtain a ruling with respect to any specific fact situation, please do not hesitate to contact us.
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
XXXXX RITS: HQR0000063
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