11 April 2003 GST/HST Interpretation 42668 - Zero-Rating of Reinsurance

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of zero rating of provisions of section 2, Part IX of Schedule VI of the Excise Tax Act (ETA) to reinsurance policies. In XXXXX fax XXXXX to us XXXXX has requested that we respond directly to you on this issue.

Interpretation Requested

As a result of various telephone conversations between our officers and your staff, you were advised that where a policy of reinsurance is issued it is necessary to refer to the original insurance policy to determine whether the policy of reinsurance might qualify under the zero-rating provisions of the ETA. You state that it is not possible in most cases XXXXX to the original policy to determine the status of original transaction because of industry practices and the very nature of insurance policies. You request that we confirm that reference to the original policy per a company's books and records is not required where a policy of reinsurance is ceded.

Interpretation Given

From the information provided, and as previously discussed we are confirming that it will be necessary to refer to the original policy of insurance issued to determine if a subsequent policy of reinsurance ceded might qualify for zero-rating based on whether the risk originally insured is normally situated outside of Canada or the person insured was a non-resident at the time the policy was issued or whether in fact a true policy of reinsurance has been issued.

Based on our understanding of the insurance industry and as per the CICA Official Pronouncements Collection, for a reinsurance agreement to be regarded as of a reinsurance nature, it must provide for the transfer of risk. The risk should be an insurance risk and related to the insurer's business. Where an agreement even though it is called a reinsurance agreement does not have as its primary purpose the transfer of insurance risk, such an agreement will be regarded as a financing or funding agreement and not a policy of reinsurance. Where such financing or funding is intended for use in Canada it will not qualify for zero-rating.

The Canada Customs and Revenue Agency (the "CCRA") does not dictate the manner in which a registrant may establish their books and records to support their operational and financial reporting requirements. This is usually determined by practices common to a particular industry and which may be outlined as accounting guidelines in the CICA Official Pronouncements Collection. However section 286 of the ETA is applicable where a person is liable to pay the GST or may be entitled to an input tax credit or rebate under the ETA.

That section requires a person to have such books and records as are necessary to verify the extent of any liability or the amount of any entitlement under the ETA. Accordingly where a policy of reinsurance is issued, and information from the original policy is unavailable to determine the residence or non-residence of the person in Canada or whether the risk is ordinarily situated outside of Canada, the CCRA will not consider those transactions to fall within the zero-rating provisions of Schedule VI, Part IX, Section 2.

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 CCRA 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) 952-8811.

Yours truly,

John Nowak
Financial Institutions Unit
Financial Institutions & Real Property Division
Excise and GST/HST Rulings Directorate

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