23 March 1998 GST/HST Interpretation HQR0000951 - GST on Paramedical Services Used in the Underwriting of a Life Insurance Policy

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

Dear XXXXX :

This is in response to your letter of November 20, 1997, and further to our meeting of January 30, 1998, concerning the application of the Goods and Services Tax (GST)Harmonized Sales Tax (HST) to paramedical services used in the underwriting of life insurance polices.

Our understanding of the facts is as follows:

In XXXXX 19 xx , the XXXXX received a letter from Mr. J.A. Venne, Director, Special Sectors, concluding that "...paramedical services supplied by registered nurses, registered nursing assistant (sic) and licensed practical nurses to your client companies do not meet the exempting provisions of section 6 of Part II of Schedule V to the ETA." The letter concluded that these services are taxable at the rate of 7%.

Life and health insurance policies may be issued on a "nonmedical basis" (based only on information obtained from a questionnaire completed by the sales agent and the applicant at the time the policy is applied for) or on the basis of additional medical information. The type and extent of additional medical information required is the task of the Chief Medical Officer (CMO). All life insurers have a CMO, either on a fulltime or on a contract basis.

Medical information is generally obtained in three ways: a report from the applicant's attending physician (physician's report), a paramedical report or a full medical examination.

Paramedical services are normally restricted to such things as taking the applicant's medical history (i.e., a series of questions asked by the registered nurse, or other health care professional during the course of the interview), taking blood pressure, pulse, measuring height and weight and a urinalysis. The results of the findings are forwarded directly to the CMO of the life insurer as are the results of any tests performed by an outside laboratory.

A full medical examination requires a more detailed examination of the various body systems in addition to weight, height, pulse and a urinalysis. The applicant will be examined by a physician appointed by the CMO of the life insurer and the physician will order tests, which may include a blood profile, a urinalysis or an electrocardiogram, as may be required to satisfy the insurer's underwriting criteria. The results of the physician's examination are forwarded directly to the CMO of the life insurer as are the results of any tests performed by an outside laboratory.

INTERPRETATION REQUESTED

You ask that the following statements be confirmed:

A medical examination, whether performed by a physician, a registered nurse, or other health care provider, is an integral part of the underwriting process for the issuance of a life insurance policy, and is therefore exempt by virtue of the provisions of paragraph (h) of the definition of "financial service" found in subsection 123(1) of the Excise Tax Act (ETA).

Paramedical examinations, along with any tests conducted during the course of those examinations, conducted for life insurance purposes, undertaken during the underwriting of a life insurance policy are exempt under sections 5 and 10 of Part II of Schedule V on the basis that they constitute health care services carried out under the direction of the CMO of the insurer.

Interpretation Given

Based on the information provided it is the department's position that a medical examination, whether performed by a physician, a registered nurse, or other health care provider, is not an integral part of the underwriting process for the issuance of a life insurance policy. Consequently, these services are not exempt by virtue of the provisions of paragraph (h) of the definition of "financial service" found in subsection 123(1) of the ETA.

Paramedical services along with any related functions performed by nurses or health care professionals operating as independent agents (i.e., under contractual agreements with underwriting companies or other entities) conducted for lifehealth insurance purposes undertaken during the underwriting of a life insurance policy are taxable at either 7 or 15 percent. There are no exempting provisions for such services pursuant to sections 5 or 10 of Part II of Schedule V to the ETA.

ANALYSIS

We agree that the underwriting of an insurance policy is included under paragraph (h) of subsection 123(1) of the definition of "financial service" as an exempt financial service. The position of the department is that the process of the underwriting of a financial instrument applies, in this instance, to an insurer as it is the insurer who is undertaking to enter into the contract of insurance.

In the underwriting process as it applies to the insurance industry, it is our view that the underwriter must evaluate whether to accept or reject a risk for insurance. In the process of underwriting an insurance policy, the insurer usually considers the following: an application for insurance rating the risk and evaluating the potential for loss deciding whether to accept the risk for insurance extent of coverage of insurance and the cost to insure

Underwriting is a multistage process involving an approval (or rejection) of the risk by the underwriting department of the insurer which is required before the policy will be issued. Normally the whole process of underwriting is performed by the insurer who underwrites and issues an insurance policy. Underwriters base their underwriting decisions on specific data which enable them to evaluate the risk element in underwriting. The information and services normally used by underwriters may include actuarial services (necessary for rating the policy), inspection, investigating, credit rating and administrative services. After weighting all necessary information obtained through those services the underwriter decides whether the risk in question is the type the insurance company wants to underwrite, or is willing to underwrite.

The underwriter may, if needed, rely on specific expertise or obtain services from other sources. While the information provided by paramedicals is important in the overall process, paramedical services are an input to the underwriting of life insurance policies and, in our view, are not underwriting. In a similar way, where in the process of the underwriting of other financial instruments such as bonds, the underwriter uses financial analysis purchased from another company, such a service would be treated as a taxable input rather than as a financial service of the underwriting of the bonds.

We, therefore, do not agree that any examinations, whether performed by a physician, a registered nurse, or other health care provider, are exempt by virtue of the provisions of paragraph (h) of the definition of "financial service" in subsection 123(1) of the ETA.

We have also reviewed your comments and observations with respect to paramedical examinations performed on behalf of the insurance industry by nurses and health care professionals operating as independent agents (i.e., under contractual agreements with underwriting companies and other entities) and offer the following comments.

As acknowledged by you, our letter of June 1996, to your association confirmed and reiterated the department's position that the supply of paramedical services is a taxable supply for purposes of the ETA.

In general terms, most health care services are exempt of the GST/HST. While the exempting categories are quite wideranging, they are still very specific. If a particular service does not fall within the listed exemptions found in Part II of Schedule V to the ETA, it is taxable unless provided by a small supplier, or exempt under some other provision in the ETA.

As discussed in our letter of June, 1996, there are no provisions found in the ETA to exempt the supply of paramedical services by any of the nursing professions as these supplies are not viewed as a "nursing service" by the Department.

Consequently, the supply of paramedical services by a nurse (i.e., registered nurse, registered nursing assistant, a licensed or practical nurse or a registered psychiatric nurse) to clients (e.g. insurance underwriters or companies) is a taxable supply for GST/HST purposes at 7 or 15 percent. In addition, paramedical services provided by other health care professionals such as selfemployed phlebotomists and laboratory technologists are also subject to the GST/HST.

Virtually all health care services provided by medical practitioners who, under the laws of a province, are entitled to practice the professions of medicine or dentistry are exempt of the GST/HST pursuant to section 5 of Part II of Schedule V to the Act. The department considers a wide range of health care services to be exempt health care services when performed by a "medical practitioner" as defined under section 1 of Part II of Schedule V to the ETA. For example, a medical examinationreport (not relating to claims or settlements) to ascertain the medical condition of an individual for life insurance purposes is exempt of the GST/HST.

Section 10 of Part II of Schedule V to the ETA exempts the supply of a prescribed diagnostic, treatment or other health care service, when made on the order of a medical practitioner or practitioner. For purposes of the ETA the word prescribed means prescribed by regulation or determined in accordance with rules prescribed by regulation. The Health Care Services (GST) Regulations have prescribed laboratory, radiological and other diagnostic services generally available in a health care facility. Consequently, if a physician or other practitioner orders these diagnostic services, the consideration charged for the testing procedures is exempt of the GST/HST pursuant to section 10 of Part II of Schedule V to the ETA.

For example, if the CMO of a Life Insurance company orders a laboratory, radiological or other diagnostic test for an individual, the consideration for the supply of this service is exempt whether billed to the individual patient, insurance company or other entity. It is important to note the exempting provisions apply to the laboratory, radiological and other diagnostic services (e.g. cholesterol, LAPA chest xray or sonography), not the ordering of the diagnostic test. Registered nurses or other health care professionals operating as independent agents (i.e., under contractual agreements with insurance underwriting companies or other entities) do not perform any laboratory, radiological or other diagnostic services, they obtain samples of body fluids and transport these samples to licensed testing facilities, who in turn perform the diagnostic testing.

In summary:

A summary report prepared by a physician (who is not the client's primary caregiver) as a result of reviewing a client's medical file is subject to the GST/HST as no consultative, diagnostic, treatment or other health care service has been rendered.

A report prepared by a physician (who is the client's primary caregiver) for purposes of determining eligibility for insurance coverage is exempt of the GST/HST under section 5 of Part II of Schedule V to the ETA.

Paramedical services carried out by nurses operating as independent agents (i.e., under contractual agreements with insurance underwriting companies or other entities) are subject to the GST/HST.

Paramedical services carried out by other health care professionals such as phlebotomists or laboratory technologists operating as independent agents (i.e., under contractual agreements with insurance underwriting companies or other entities) are subject to the GST/HST.

Most health care services provided by medical practitioners who, under the laws of a province , are entitled to practice the profession of medicine are exempt of the GST/HST under section 5 of Part II of Schedule V to the Act.

Laboratory, radiological or other diagnostic services generally available in a health care facility are exempt pursuant to section 10 of Part II of Schedule V to the Act when made on the written order of a medical practitioner or practitioner. For purposes of the Act a registered nurse does not meet the definition of either a medical practitioner or practitioner.

In view of the apparent confusion in the industry regarding the tax status of paramedical services and in the interest of fairness and national consistency, the department is implementing the following policy:

Prior to April 1, 1998, all paramedical services will be treated as tax exempt supplies. Effective April 1, 1998, charges made for paramedical services as described above, will be taxable at either 7 or 15 per cent for GST/HST purposes.

Notwithstanding the above policy, registrants have the option of treating their supplies of paramedical services as taxable services for prior years. If the registrant chooses this option, they are required to remit the applicable GST/HST and they are entitled to claim an input tax credit for GST/HST paid on related purchases. This policy will be communicated to identified registrants and national associations.

I would like to thank you for bringing your concerns to my attention. I trust that the above information clarifies our position with respect to your request for the interpretation.

Yours truly,

E.H. Gauthier
Director General
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch