GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
K1A 0L5
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XXXXX
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Case : HQR0000493
XXXXX File : 3
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We are writing in reply to your memorandum dated January 3,1997, wherein you requested our views with respect to the fiscal status of certain transactions taking place between the XXXXX (the "insurer") and members of the XXXXX as they related to a professional liability insurance program being operated by the XXXXX
We have received various documents from your office including contractual arrangements entered into by the XXXXX and the insurer with respect to the contract of insurance, copies of the XXXXX bylaws as well as documents from the XXXXX lawyers and accountants. Based upon the information submitted, our understanding of the relevant facts are as follows.
The XXXXX has entered into contractual arrangements with the insurer relating to a professional liability insurance program in which members of the XXXXX are required to participate. This program is funded by a separate levy which the XXXXX charges its members upon which the XXXXX also charges the GST.
Pursuant to the group insurance policy issued by the insurer, the insurer agrees to issue insurance coverage as follows:
1) Named Insured : XXXXX
2) Limit of Liability: XXXXX each occurrence with a XXXXX aggregate
3) Group deductible amount: For any of coverage's A, B, C and D, whether combined or individually, the deductible amount will be XXXXX less, as applicable, the individual member deductible amount.
4) Individual member deductible amount: XXXXX per occurrence or the amount paid under coverage's A, B and D combined whichever is smaller. This deductible is applicable only if an amount is paid under coverage's A andor B.
5) Policy premium: XXXXX flat amount.
6) Insured: as defined in the policy. This policy is also subject to an admin. agreement entered into concurrently with it.
7) Coverage A Individual coverage to pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages....
Coverage B PartnershipCorporation coverage to pay on behalf of the insured all Sums which the insured shall become legally obligated to pay as damages....
Coverage C Named Insured to pay on behalf of the named insured all sums which the named insured shall become legally obligated to pay because of any negligent acts, errors or omissions of any member, defined person or insured as defined herein.
8) Definitions
"Insured" means with respect to coverage's A and D, each member, each defined person with respect to acts or omissions committed prior to being suspended and the estate, heirs, etc...., with respect to coverage's B and D, each partnership..., each predecessor partnership...etc.,...
"Named Insured" XXXXX
"Defined person" XXXXX,...
"Member" means a member or retired member in good standing of the XXXXX in the categories of XXXXX
Deductible
The insurer's obligation to pay damages and all amounts required to provide coverage D applies only to amounts in excess of the individual deductible amount stated in the declarations and the insurer shall be liable, in regard to damages, only for the difference between the individual deductible amount so stated and the limit of liability applicable to each occurrence subject to....
Administrative Agreement
Concurrent with the issuing of a group insurance policy by the insurer, the insurer and XXXXX also entered into an administrative agreement under which the insurer agrees to issue a group insurance policy to XXXXX and to issue individual certificates of insurance thereunder to each member accepted for coverage. The XXXXX agrees to administer the issuance of the policy and of the certificates, the collection of premiums, and to assist as set out in the admin. agreement, in the claims process.
Additionally, the XXXXX has agreed to establish a Professional Liability Claims Fund and to place the insurer in funds to the extent necessary for the insurer to meet its obligations for amounts which are less than or equal to the limit of the group deductible.
The XXXXX agrees:
1) To maintain sufficient funds so as to meet the obligations of the insured and the named insured;
2) to provide a claims manager at the expense of the XXXXX to investigate all occurrences and report to the XXXXX
3) to retain adjusting and investigative assistance and to instruct persons providing such assistance and to retain and instruct legal counsel as it deems expedient, to negotiate, defend and settle any claim or suit in accordance with the authority in the admin. agreement. To instruct the claims manager to provide copies of all documentation, etc. to the insurer.
4) To establish with the insurer agreed upon adjusters and legal counsel and provide the insurer with the opportunity to advise on claims settlements on files over XXXXX but under XXXXX which are being reported to the insurer.
The insurer agrees:
1) to place the institute in funds to pay for all amounts which are agreed and required to be paid, etc.,
2) to support the XXXXX and not to challenge the XXXXX decision to accept a claim under the terms of the policy within the XXXXX level when the investigations were originally entered into but which had subsequently escalated beyond the amount of the institute's authorizations,
3) to do such things and make such arrangements at its own cost and in compliance with provincial insurance legislation as are necessary for the policy to be issued and for the XXXXX to be in a position to administer the issuing and handling of certificates of insurance; provided the costs of insurance and handling of such certificates are to be borne by the XXXXX can be considered to be an "insurer" within the meaning of that definition pursuant to subsection 123(1) of the Excise Tax Act (the "Act"). This is due to the fact that the XXXXX is licensed XXXXX to collect the provincial sales tax on the levy they charge to their members for this program. As well, whether the XXXXX may claim ITCs on legal and other fees incurred in the provision of this program to their members and in defending claims filed against their members.
During the course of the audit, it is our understanding that the XXXXX is of the view that it is entitled to claim ITCs on the GST it has paid on legal services and other services received as these services are inputs for use in its own commercial activities. The XXXXX is of this view as it feels it has satisfied the requirements of subsection 169(1) and section 141.01 of the Act. It is of this view as it characterizes its commercial activities in connection with the professional liability insurance program as managing and administering, for the benefit of its members and in consideration of their levies, a group insurance program under which insurance is provided by a licensed insurer.
Our Comments
With respect to your question as to whether the XXXXX may be considered an "insurer" for purposes of the Act, it is our view that they cannot be so considered. This is due to the fact that the XXXXX is not "licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an insurance business or under the laws of another jurisdiction to carry on in that other jurisdiction an insurance business" as required by the Act. The fact that they are licensed XXXXX to collect provincial sales tax on their levies to their members would not qualify them as an "insurer" for purposes of the Act.
With respect to the fiscal status of the supplies being made as a result of their contractual arrangements with the insurer, our comments are as follows:
1) it is our view that the insurer is making an exempt supply of a group professional liability insurance policy to the XXXXX and the insureds (members of the XXXXX rather than the XXXXX providing a taxable supply of insurance or administrative services to its members. As such, the XXXXX should be advised that it has charged GST to its members in error;
2) that as a result of the XXXXX also being a recipient of insurance (i.e., coverage C in the group professional liability insurance policy) that a portion of the total amount of the premium charged by the insurer to the XXXXX is for this coverage for which the XXXXX and not its members is the recipient;
3) that the XXXXX is supplying a financial service to the insurer for no consideration to which it is not eligible to claim ITCs, i.e., it is managing and administering an insurance policy for which it is "at risk" within the meaning of the "at risk" rules in the Financial Services (GST) Regulations. This is due to the fact that, in the administrative agreement between the XXXXX and the insurer which is an integral and inseparable part of the insurance contract, the XXXXX has agreed, among other things, to supply an indemnity to the insurer with respect to a portion of the insurers obligation to provide liability insurance coverage to the members of the XXXXX Accordingly, the XXXXX is providing a financial service to the insurer for no consideration. As such, the XXXXX is not eligible to claim ITCs on GST paid with respect to inputs (such as legal defense costs) in the provision of financial services to the insurer.
Should you have any questions with respect to the issues raised herein, please contact Duncan Jones at (613) 952-9210.
J. Duncan Jones
Manager, Financial Institutions Unit
Financial Institutions and Real Property Division
GST Rulings and Interpretations Directorate
Policy and Legislation Branch
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