23 January 2003 GST/HST Interpretation 39678 - Administrative Services Only Contracts

Dear XXXXX:

Thank you for your enquiry concerning the application of the Goods and Services Tax (GST) to your proposed operations.

Our understanding is the following:

•   XXXXX is a GST registrant.

•   An employer (the planholder) wishes to provide certain health benefits to its employees and funds (self-insures) a health benefit plan (Self Insured Benefit Arrangement or SIBA).

•   The planholder defines the various benefits offered, specific expenses included, level of coverage (60%, 80%, 100% etc. of the claim amount), the annual deductible amount, etc. on eligible claims to be paid under the SIBA.

•   Claims must qualify as eligible medical expenses under the provisions of section 118.2 of the Income Tax Act. The SIBA must qualify as a private health services plan as defined in section 248.1 of the Income Tax Act.

•   XXXXX and the planholder enter into an agreement (Administrative Services Only Contract or ASO contract) whereby XXXXX agrees to administer various provisions of the planholder's SIBA.

•   XXXXX provides third party administrator (TPA) services to the planholder, and is not a licensed insurer. As TPA, XXXXX does not provide any form of insurance nor does XXXXX assume any financial risk (e.g. does not provide a stop-loss).

•   When an employee presents health claims expenses, the planholder is contractually obligated to submit the claims to XXXXX who will adjudicate and pay claims as per the planholder's SIBA.

•   XXXXX charges two fees in respect of the administrative services it provides under such an ASO contract: a base feeXXXXX and an administration fee based on a percentage of each claim expense amount paid XXXXX[.]

•   The SIBA is funded by the planholder using various optionsXXXXX so long as it meets the criteria of a Private Health Services Plan under the Income Tax Act.

•   The plan under discussion is an unfunded benefit plan, as defined in the XXXXX.

•   The XXXXX imposes an Insurance Premium Tax on the planholder of an unfunded benefit plan in the amount of XXXXX per cent of the taxable benefits paid under the plan that are funded by the planholder and XXXXX per cent of the net administration fees paid in respect of the plan.

•   XXXXX is an administrator as defined in the XXXXX and is responsible for collecting and remitting the Insurance Premium Tax imposed on the planholder to Her Majesty in Right of XXXXX.

Interpretation Requested

You have requested an interpretation on the application of the GST to the XXXXX fee charged for your service and the administration fee charged when a claim is paid. You have also requested an interpretation on whether the GST applies to the 2 per cent Insurance Premium Tax imposed under XXXXX.

Interpretation Given

The administrative services provided by XXXXX are taxable supplies. GST applies to the consideration payable for these supplies. Included in the consideration payable for XXXXX services are the XXXXX fee, the administration fee charged when a claim is paid, and the Insurance Premium Tax to the extent that this tax is imposed on the administrative services (i.e. not to the Insurance Premium Tax imposed on the benefits paid under the plan).

Explanation

Section 1 of Part VII of Schedule V to the Excise Tax Act (ETA) exempts a supply of a "financial service". The term "financial service" is defined in subsection 123(1) of the ETA. Included in this definition is the payment or receipt of money as dividends (other than patronage dividends), interest, principal, benefits or any similar payment or receipt of money in respect of a financial instrument (A "financial instrument" means

(a) a debt security,

(b) an equity security,

(c) an insurance policy,

(d) an interest in a partnership, a trust or the estate of a deceased individual, or any right in respect of such an interest,

(e) a precious metal,

(f) an option or a contract for the future supply of a commodity, where the option or contract is traded on a recognized commodity exchange,

(g) a prescribed instrument,

(h) a guarantee, an acceptance or an indemnity in respect of anything described in paragraph (a), (b), (d), (e), or (g), or

(i) an option or a contact for the future supply of money or anything described in any of paragraphs (a) to (h).) pursuant to paragraph (f), as well as the payment or receipt of an amount in full or partial satisfaction of a claim arising under an insurance policy pursuant to paragraph (f.1). The claims processing and administration of the SIBA are services that come within paragraphs (f) and (f.1) of the definition of "financial service".

Notwithstanding, the Financial Services (GST/HST) Regulations (the Regulations) prescribed under paragraph (t) of the definition of "financial service" exclude certain specified administrative services from the definition of "financial service".

Subsection 4(2) of the Regulations states in part that, subject to subsection 4(3) of the Regulations, the supply of a service of transferring, collection or processing of information, and a supply of any administrative service, including an administrative service in relation to the payment or receipt of claims, benefits or other amount, other than solely the making of the payment or the taking of the receipt, is prescribed for purposes of paragraph (t) of the definition of "financial service". Therefore, supplies of services that fall within paragraph 4(2) are excluded from the definition of a financial service and accordingly are taxable supplies, unless subsection 4(3) of the Regulations applies.

Subsection 4(3) provides that a service referred to in subsection 4(2) of the Regulations is not a prescribed service for purposes of paragraph (t) of the definition of "financial service" where the service is supplied with respect to an instrument by:

(a) a person at risk,

(b) a person that is closely related to a person at risk, where the recipient of the service is not the person at risk or another person closely related to the person at risk, or

(c) an agent, salesperson or broker who arranged for the issuance, renewal or variation, or the transfer of ownership of the instrument for a person at risk or a person closely related to the person at risk.

For the purposes of section 4 of the Regulations, "instrument" means money, an account, a credit card voucher, a charge card voucher or a financial instrument; and "a person at risk" 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.

Accordingly, where a third party supplies only administrative services in respect of an instrument (i.e. subsection 4(3) of the Regulations does not apply), the supply of administrative services is excluded from the definition of financial service and is subject to GST.

Subject to Part IX, subsection 165(1) of the ETA provides that every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply, calculated at the rate of 7 per cent on the value of the consideration for the supply. As defined in subsection 123(1) of the ETA, "consideration includes any amount that is payable for a supply by operation of law".

Pursuant to subsection 154(1) a provincial levy means: "a tax, duty or fee imposed under an Act of the legislature of a province in respect of the supply, consumption or use of property or a service". Paragraph 154(2)(b) provides that the consideration for a supply of property or a service includes any provincial levy that is payable by the recipient, or payable or collectible by the supplier, in respect of that supply or in respect of the consumption or use of the property or service, other than a prescribed provincial levy that is payable by the recipient. The prescribed provincial levies are set out in the Taxes, Duties and Fees (GST) Regulations. The main exclusions under these regulations are provincial retail sales taxes and provincial land transfer taxes. The Insurance Premium Tax imposed pursuant to the XXXXX is not a prescribed provincial levy and is therefore included in the consideration for a supply of property or service.

Based on the information submitted, administrative services supplied XXXXX to a planholder pursuant to an ASO contract would be excluded from the definition of "financial service" by virtue of paragraph (t). As such, these services would be taxable supplies and GST applies to the consideration payable for these supplies. Included in the consideration payable are the XXXXX fee, the administration fee charged when a claim is paid, and the Insurance Premium Tax to the extent that this tax is imposed on XXXXX administrative services (i.e. GST would not apply to the Insurance Premium Tax imposed on the benefits paid under the SIBA).

The foregoing comments represent our general views with respect to the subject matter outlined above. 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 (CCRA) with respect to a particular situation. In order to provide a ruling, we require all pertinent facts to be established and copies of all related contract documents to be provided. In the absence of the aforementioned information, we provide this interpretation of the relevant provisions of the ETA.

For your convenience, please find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series and Policy Statement P-136, Administrative Services Only with Stop-Loss. This policy statement clarifies the application of the GST/HST to supplies made under an Administrative Services Only (ASO) Contract. In addition, the CCRA issued Technical Information Bulletin B-052 entitled GST/HST Treatment of Products and Services of Life and Health Insurance Companies. This bulletin provides an overview of the GST/HST status of certain products and services supplied by life and health insurance companies.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-954-7945. For General Enquiries about the GST or Harmonized Sales Tax (HST) please call the following toll-free number: 1-800-959-5525.

Yours truly,

Susan Mills
Technical Officer
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate