21 October 2002 GST/HST Interpretation 41266 - Application of Policy 136R - Self Insured Benefit Arrangements

Dear XXXXX:

Thank you for your letter of XXXXX concerning the application of policy statement P-136R - Administrative Services Only with Stop-Loss to the scenario you describe.

Background

The statement of facts is as follows:

1. An employer agrees to offer certain accident and sickness benefits to its employees. Typically, such benefits might include extended health care (including prescription drug and vision care benefits), dental, and possibly medical travel benefits. The latter benefit pays transportation and accommodation expenses for employees who live in remote areas and have to travel for medical treatment.

2. The employer determines that it will:

•   Self-insure the extended health care benefits, with a claims administrator/insurance provider (the "insurer") providing claims administration services on a "cost plus" basis and also a "stop loss" policy for claims in excess of $100,000 per employee;

•   Self-insure all of the dental benefits with the insurer providing only claims administration services on a "cost plus" basis; and,

•   Self-insure medical travel benefits with the insurer providing claims administrative services on a "cost plus with premium" basis.

3. The employer and the insurer prepare a document describing each type of benefit (for example, extended healthcare), including descriptions regarding the specific expenses included, the level of coverage (e.g. XXXXX of claim amounts), the annual deductible amount, and the amounts to be charged by the insurer.

4. The employer and insurer have the ability to purchase or amend any benefit without adjusting or changing the other benefits. For example, the insurer may determine that its premiums for policies issued in connection with extended health care must be increased in order to reflect changes in provincial hospital programs. As a result, the employer might decide to provide fewer extended health care benefits or agree to pay the increased premiums. Changes would be made to the extended health care benefit only; other benefits (for example, dental) would not be affected.

5. The insurer prepares separate invoices for each benefit. With respect to the invoices sent to the employer by the insurer, "cost-plus" benefits are billed monthly and "cost plus with premium" surpluses/deficits are reported on a quarterly or annual basis. Insured benefits are billed on a monthly basis. That is, the dental benefits would be billed monthly, the medical travel benefits on a quarterly or annual basis and the extended health care benefits would be billed monthly.

Interpretation Requested

You are seeking confirmation that the GST applies as follows:

1. The supply of administrative services in connection with extended health care benefits is exempt from GST pursuant to the Financial Services GST/HST Regulations (the Regulations) on the basis that the insurer is a person at risk by virtue of the issuance of a stop loss policy.

2. The supply of administrative services in connection with the dental benefits is taxable. The administrative services are excluded from the definition of financial service, as they are not being provided by a person at risk.

3. The supply of administrative services in connection with the medical travel benefit is taxable. The administrative services are excluded from the definition of financial service, as they are not provided by a person at risk.

Interpretation Given

Based on the information provided, we are provided the following interpretations:

1. The supply of administrative services in connection with extended health care benefits is exempt from GST pursuant to the Regulations on the basis that the insurer is a person at risk by virtue of the issuance of a stop loss policy.

2. The supply of administrative services in connection with the dental benefits is exempt from GST pursuant to the Regulations on the basis that the insurer is a person at risk by virtue of the issuance of a stop loss policy on the extended health care benefits.

3. The supply of administrative services in connection with the medical travel benefit is exempt from GST pursuant to the Regulations on the basis that the insurer is a person at risk by virtue of the issuance of a stop loss policy on the extended health care benefits.

Explanation

Subsection 4(1) of the Regulations defines the terms instrument and person at risk. "Instrument" means money, an account, a credit card voucher, a charge card voucher or a financial instrument and "person at risk", in respect of an instrument in relation to which a service referred to in subsection (2) is provided, means a person who is financially at risk by virtue of the acquisition, ownership or issuance by that person of the instrument or by virtue of a guarantee, an acceptance or an indemnity in respect of the instrument, but does not include a person who becomes so at risk in the course of, and only by virtue of, authorizing a transaction, or supplying a clearing or settlement service, in respect of the instrument.

Based on the fact scenario you have described, it is our view that the instrument is the employer-employee agreement, i.e. the self-insured benefit arrangement (SIBA). As specified in policy statement P-136R - Administrative Services Only with Stop-Loss, when an insurer issues a stop-loss that covers one or more benefits contained in an employer's SIBA, the insurance company is considered to be a person at risk. Consequently, the supply of all of the administrative services provided by the insurer with respect to the SIBA are financial services and not excluded from that definition pursuant to paragraph (t). Although it is possible to structure the agreement between the employer and the insurer as a series of separate supplies, we do not agree that this affects the position outlined in the policy statement. Since the instrument is the SIBA, the insurer is either a person at risk in respect of the SIBA or is not a person at risk.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-952-9577.

Yours truly,

Marilena Guerra
Financial Institutions Unit
Real Property and Financial Institutions Division
Excise and GST/HST Rulings Directorate