23 June 1998 GST/HST Interpretation HQR0001135 - Application of the GST/HST to Certain Domestic Insurance Transactions

                                                                        GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
 XXXXX                                                                                K1A 0L5

Dear XXXXX

I refer to your letter of April 1, 1998, wherein you indicate that you do not consider the XXXXX to be a XXXXX for purposes of the Excise Tax Act (the "ETA"). Your letter was in reply to my March 10, 1998 letter which explained the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain domestic insurance transactions. In that letter, I also indicated that we are of the view that the XXXXX is an XXXXX pursuant to paragraph 225.2(1)(a) of the ETA.

In your letter you state that collecting GST/HST data would require extensive changes to your systems and procedures. Also, XXXXX is highly centralized with all business being constructively effected in XXXXX with the location of XXXXX head office legislated by the XXXXX to be in the XXXXX . You indicate that XXXXX is statutorily exempt from taxes on its income by virtue of provisions within the XXXXX and, therefore, the conditionality or deemed allocation of income to the Provinces is an impossibility. Further, XXXXX income is not computed with respect to the Income Tax Act (the "ITA") and you are not required to comply with XXXXX for reserve allowances or any other matter. XXXXX has XXXXX employees, XXXXX of which work in the HST area of Canada. Based on these facts, you conclude that XXXXX is not an SLFI. XXXXX a person must first be considered to be a financial institution. The XXXXX is considered to be a financial institution pursuant to subparagraph 149(1)(a)(v) of the ETA. Subparagraph 149(1)(a)(v) reads:

For the purposes of this Part, a person is a financial institution throughout a particular taxation year of the person if

(a) the person is.....

(v) an insurer or any other person whose principal business is providing insurance under insurance policies

A financial institution is considered to be an XXXXX where the conditions of paragraph 225.2(1)(a) are met. Paragraph 225.2(1)(a) reads in part:

For the purposes of this Part, a financial institution is a selected listed financial institution ... if the financial institution is....

(a) ... a corporation that, under the rules prescribed in any of sections 402 to 405 of the Income Tax Regulations, has or would, if it had taxable income for the particular year and the preceding taxation year, have taxable income earned in the particular year and the preceding taxation year in any of the participating provinces and taxable income earned in the particular year and the preceding taxation year in any of the non-participating provinces;

The XXXXX is exempt from Part I tax under paragraph 149(1)(d) of the ITA because it is a corporation whose shares are owned by Her Majesty in right of Canada. Bill C-28 proposes to amend subsection 27(1) of the ITA such that all federal Crown corporations and not only those that have been prescribed be required to treat any income or loss as their own. Based on the proposed amendment, XXXXX would have taxable income of its own with the result that it would be subject to section 403 of the Income Tax Regulations notwithstanding the exemption under paragraph 149(1)(d) of the ITA. Section 403 applies to insurance corporations and the XXXXX is considered to be an insurance corporation pursuant to subsection 248(1) of the ITA. If the Bill C-28 amendment is enacted as proposed, it will apply, for purposes of Part I of the ITA, to taxation years that begin after April 26, 1995. Paragraph 225.2(1)(a) of the ETA is effective April 1, 1997.

Finally, I note from your letter that you have estimated the amount of GST paid on inputs that relate to exempt activities to be approximately XXXXX per year. With respect to the amount that would be attributed to the provincial component of the HST, you have indicated to us that the amount would be minimal and modifying your systems to account for such an amount would be particularly onerous.

For the reasons above, XXXXX is considered to be an XXXXX and is required to calculate its tax liability for the 8% provincial component of HST for the participating provinces. As you have concerns regarding the application of the legislation to XXXXX activities, I have advised Mr. Rainer Nowak, Chief, Real Property and Financial Institutions, Sales Tax Division, Department of Finance of your concerns. The responsibility for tax policy falls within the purview of the Department of Finance.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 952-9248.

Yours truly,

J. Sitka
A/Director
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch

Legislative References: Paragraph 149(1)(v); 225.2(1)(a)

NCS Subject Code(s) - I 3