17 December 2003 GST/HST Ruling 45758 - Commissions from an Insurance Agency

Please note that the following documents, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ces documents, bien qu'exacts au moment émis, peuvent ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction described below.

Statement of Facts

Our understanding of the facts is as follows:

•   XXXXX and XXXXX own two companies: XXXXX (Agent A) and XXXXX (Agent B) XXXXX owns XXXXX% of each company and XXXXX owns XXXXX% of each.

•   Agent A and Agent B are both licensed to carry on XXXXX the business of a life insurance agency.

•   There is no contract between Agent A and Agent B. Agent B performs the following for Agent A:

•   Preparation and producing of all insurance and investment proposals for clients.

•   Price comparisons, yield comparisons and unit price comparisons for clients.

•   Completion of all head office paperwork for insurance and segregated fund applications.

•   Ordering and follow-up of doctors' and specialists' reports required for medical underwriting.

•   Ordering and follow-up of all financial reports required for financial underwriting.

•   Daily update of all underwriting requirements.

•   Communication between head office and Agent A regarding the progress of all contracts not yet issued.

•   Completion of all paperwork for pensions, RRIFs, LIFs and RRSPs required by CCRA and banks and any and all financial institutions.

•   Fund transfers requested by client and follow-up with head office on any and all such money transfers.

•   Daily meeting with Agent A on status of all pending underwriting and investment policies.

•   XXXXX (the Insurer) has entered into a contract with Agent A to XXXXX[.]

•   Agent A is compensated by the Insurer. Compensation includes commission, bonuses and allowances subject to criteria set out in the contract.

•   Agent A compensates Agent B for the services provided to it.

Ruling Requested

Is the amount paid by Agent A to Agent B subject to GST?

Ruling Given

Based on the facts set out above, we rule that the amount paid by Agent A to Agent B is subject to GST.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act (ETA), or to our interpretative policy; and that you have fully described all necessary facts for which you requested a ruling.

Explanation

Generally, the supply of a financial service is exempt. Section 1 of Part VII of Schedule V to the ETA exempts from the GST/HST a supply of a financial service that does not fall under the zero-rating provisions in Part IX of Schedule VI [which pertains to services provided to a non-resident]. The term "financial service" is defined in subsection 123(1) of the ETA to generally mean services relating to transactions of money, financial instruments, deposit-taking accounts, etc., as well as certain services provided by insurance adjusters, tax discounters, agents, brokers and salespersons. Such financial services are exempt from the GST/HST regardless of whether they are supplied by financial institutions or by other persons.

An insurance policy is defined as a financial instrument in subsection 123(1) of the ETA.

Paragraph (l) of the definition of financial service found in subsection 123(1) of the ETA provides that a financial service includes "the agreeing to provide or the arranging for, a service referred to in any of paragraphs (a) to (i)." Paragraph (d) of the definition defines a financial service as "the issue, granting ... of a financial instrument". Therefore, the service of arranging for the issuance of an insurance policy will qualify as a financial service.

The term "arranging for" is not defined in the ETA. It is the position of the CCRA that this term refers generally to the activities of an intermediary (for example, an insurance broker) of bringing together in an active manner two or more parties for the provision of a financial service.

The term "arranging for" service should go beyond the activities of merely "referring" one party to another party (for the provision of a financial service). In general, the intermediary would be expected to expend time and effort to assist both parties whenever necessary for the eventual success of the provision of the financial service by one party to the other party. An "arranging for" service does not mean the service of "recommending", "advertising" or "marketing" alone.

Therefore, to qualify as an arranging for service, the provider of the service must be actively involved in bringing together the two parties for the provision of a financial service as described above. There must be a clear nexus between the activities of the intermediary and the supply of the financial service. Whether or not a service will qualify as a service of arranging for the provision of a mortgage is a question of fact. It will depend on the amount and the extent of the supplier's activities in providing the service.

As outlined in GST/HST policy statement P-239 - Meaning of the Term "Arranging for" as Provided in the Definition of "Financial Service", to qualify as a service of "arranging for" the supply of a financial service, each of the following elements should be present:

•   the intermediary will help either the supplier or the recipient or both, in the supply of a financial service;

•   the supplier and/or the recipient count on one or more intermediaries for assistance in the course of a supply of a financial service; and

•   the intermediary is directly involved in the process of the provision of a financial service and will, therefore, expend the time and effort necessary with the intent to effect a supply of a service described in paragraphs (a) to (i) of the definition of financial service.

Therefore, in determining if an intermediary's service qualifies as an "arranging for" service, it is necessary to consider all the facts surrounding the transaction, including the degree of involvement of the intermediary in the supply of the financial service, and where applicable, the normal activities of an intermediary in the industry.

In this case, Agent A is acting as the intermediary in arranging for the supply of the financial service from the supplier (the Insurer) to the recipient (the insured). Agent B's role is to provide administrative services to Agent A to enable Agent A to fulfill its responsibilities under its contract with the Insurer. Administrative services are not financial services. They are subject to tax under subsection 165(1) of the ETA.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, 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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

For your reference and assistance, enclosed is a copy of GST/HST Policy Statement P-239, Meaning of the Term "Arranging For" as Provided in the Definition of "Financial Service".

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
Senior Rulings Officer
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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