Date: 20000630
Docket: 98-1872-GST-G
BETWEEN:
HEALTHCARE INSURANCE RECIPROCAL OF CANADA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sarchuk J.T.C.C.
[1] This is an appeal by Healthcare Insurance Reciprocal of
Canada from an assessment of goods and services tax (GST) dated
March 3, 1998 and relating to the period September 1, 1996 to
November 30, 1997.
[2] At the commencement of the hearing, the parties filed the
following Statement of Agreed Facts:
1. The Appellant is an unincorporated organization. The
Appellant's principal place of business is located at 4100
Yonge Street, Suite 412, Toronto (North York), Ontario, M2P
2B5.
2. The Appellant was established on July 1, 1987. The members
of the Appellant (the "Members") are health care
institutions across Canada. A majority of the Members are
"hospital authorities" as defined in
subsection 123(1) of the Excise Tax Act (Canada)
("Act").
3. The Appellant was established in order to enable the
Members to insure the risks inherent in their activities. The
Appellant is licensed as a reciprocal or inter-insurance exchange
within the meaning of Part XIII of the Insurance Act,
R.S.O. 1990, c.I.8 and within the meaning of the insurance laws
of certain other provinces in Canada.
4. Throughout the relevant period for this appeal, the
Appellant was governed by a board of fourteen directors. The
Appellant's management consists of an Attorney and Chief
Executive Officer and four Vice-Presidents.
5. During the period September 1, 1996 to November 3, 1997,
the Appellant had from 201 to 234 Members.
6. Members' obligations are contained in a
Subscriber's Agreement and in an agreement entitled
"Health Care Comprehensive Casualty Insurance Policy, Master
Policy Number 1995/1" (the "Policy"). Both of
these agreements are contained in the Common Book of
Documents.
7. The Appellant's activities include monitoring,
arranging for the defence of, and settling claims, administering
funds, co-ordinating and implementing the inter-exchange of
insurance among the Members, risk management, regulatory
compliance, and accounting and record-keeping services.
8. Effective January 1, 1991, the Appellant became a
registrant for purposes of the goods and services tax
("GST") levied pursuant to Part IX of the
Act.
9. During the period September 1, 1996 to December 31, 1996
and in accordance with advice received from its professional
advisors, the Appellant charged and collected GST on the fees
paid to it by the Members in the amount of $148,283, and claimed
input tax credits of $119,124. Pursuant to the Public Service
Body Rebate (GST/HST) Regulations, Members claimed rebates of 83%
of the aforesaid GST amount, being $123,075 in total.
10. In the course of an audit undertaken by the Minister in
1996, the Minister's auditor received an opinion from the GST
Rulings and Interpretations Section of Revenue Canada. A copy of
that opinion is contained in the Common Book of Documents.
11. In view of the dispute with the Minister, for the period
January 1, 1997 to November 30, 1997, the Appellant did not
collect GST from the Members, but did remit to Revenue Canada the
sum of $143,662, being the difference between (i) $476,591, being
7% of the fees charged to the Appellant's Members in this
period, and (ii) input tax credits of $332,929 earned by the
Appellant during this period.
12. By Notice of (Re)Assessment No. 00000000302, dated
March 3, 1998, the Minister assessed the Appellant, for the
period September 1, 1996 to November 30, 1997, as
follows:
(a) the Minister disallowed, for the period September 1, 1996
to December 31, 1996, input tax credits claimed by the Appellant
in the net amount of $93,916, being the amount of input tax
credits claimed by the Appellant less 17% of the GST that the
Appellant charged to the Members;
(b) credited the Appellant with the amount of $143,662
remitted for the period January 1, 1997 to November 30, 1997;
and
(c) charged interest and penalties of $1,095.08 and $2,680.44,
respectively.
13. By Notice of Decision dated May 15, 1998, the Minister
confirmed the assessment.
14. The parties agree that an issue in this appeal is whether
the Appellant supplied "financial services" as defined
in subsection 123(1) of the Act to the Members, and,
accordingly, was not required to collect GST on the fees that it
charged to the Members and was not eligible to claim input tax
credits for the GST that it paid on costs and expenses it
incurred in the course of providing services to the Members. The
other issue is whether the penalties were properly levied against
the Appellant.
[3] Evidence was also adduced on behalf of the Appellant from
Gregory Bruce King, the Appellant's vice-president for
finance and administration.
Statutory Provisions:
[4] 123(1) DEFINITIONS – In section 121, this
Part and Schedule V to X.
"exempt supply" means a supply included in
Schedule V;
"financial instruments" means
...
(c) an insurance policy,
"financial service" means
...
(d) the issue, granting, allotment, acceptance,
endorsement, renewal, processing, variation, transfer of
ownership or repayment of a financial instrument,
...
(f.1) the payment or receipt of an amount in full or
partial satisfaction of a claim arising under an insurance
policy,
...
(h) the underwriting of a financial instrument,
...
(l) the agreeing to provide, or the arranging for, a
service referred to in any of paragraphs (a) to
(i), or
...
but does not include
...
(t) a prescribed service;
“insurance policy” means
(a) a policy or contract of insurance (other than a
warranty in respect of the quality, fitness or performance of
tangible property, where the warranty is supplied to a person who
acquires the property otherwise than for resale) that is issued
by an insurer, including
(i) a policy of reinsurance issued by an insurer,
(ii) an annuity contract issued by an insurer, or a contract
issued by an insurer that would be an annuity contract except
that the payments under the contract
(A) are payable on a periodic basis at intervals that are
longer or shorter than one year, or
(B) vary in amount depending on the value of a specified group
of assets or on changes in interest rates, and
(iii) a contract issued by an insurer all or part of the
insurer's reserves for which vary in amount depending on the
value of a specified group of assets,
(b) a policy or contract in the nature of accident and
sickness insurance, whether the policy is issued, or the contract
is entered into, by an insurer, and
(c) a bid, performance, maintenance or payment bond
issued in respect of a construction contract;
"insurer" means a person who is 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;
Financial Services (GST) Regulations
Prescribed Services
4(1) In this section,
"instrument" means money, an account, a
credit card voucher, a charge card voucher or a financial
instrument;
"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 of a guarantee, an acceptance or an indemnity in
respect of that instrument.
4(2) Subject to subsection (3) the following services, other
than a service described in section 3, are prescribed for the
purposes of paragraph (t) of the definition
"financial service" in subsection 123(1) of the
Act:
(a) ...
(b) any administrative service, including an
administrative service in relation to the payment or receipt of
dividends, interest, principal, claims, benefits or other
amounts, other than solely the making of the payment or the
taking of the receipt.
4(3) A service referred to in subsection (2) is not a
prescribed service for the purposes of paragraph (t) of the
definition "financial service" in subsection 123(1) of
the Act 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 transfers
ownership of the instrument for a person at risk or a person
closely related to the person at risk.
Appellant's position
[5] The Appellant says it is a "person" distinct
from its Subscribers, within the meaning of "person" in
subsection 123(1) of the Act, was capable of being
registered (and in fact was registered) for GST purposes,
charging GST on its taxable supplies, and claiming input tax
credits (ITCs). I should observe that the Respondent takes no
exception to the foregoing proposition.
[6] The Appellant contends that the services provided by it
were not exempt "financial services". This position is
premised on its view that paragraphs (d), (f.1) and
(l) of the definition of "financial services" do
not apply to it because there is no "financial
instrument", i.e. no "insurance policy" within the
meaning of that term in subsection 123(1) of the Act. The
Appellant argues that the definitions of "insurance
policy" and "insurer" require two things: the
existence of a policy or contract of insurance and that the said
policy or contract of insurance be "issued by an
insurer". The Appellant does not dispute that the Master
Policy[1] is a
policy or contract of insurance but submits: (a) that it was not
issued by the Appellant; and (b) nor was it issued by an
"insurer" within the meaning of the insurance laws in
those jurisdictions in which the Appellant held a license.
[7] As to the first point, the Appellant contends that it did
not issue the Master Policy and says this fact is evident from
the language of the Master Policy and the certificates of
insurance which describe the "Insurer" to be the
subscribers to Healthcare Insurance Reciprocal of Canada through
the Attorney. Counsel submitted that the relevant GST provisions
are to be enforced in a manner that respects the intentions and
written arrangements of the Appellant's subscribers which was
to provide for self-insurance through a reciprocal arrangement as
a way to achieve long-term savings and insurance costs and
stability of coverage. Thus, the Appellant was not an insurer in
that "it is and holds its licenses as merely the medium
through which its subscribers contractually exchange risks with
each other".
[8] With respect to the second point, the Appellant says that
the "true issuers" of the Master Policy were the
subscribers. However, counsel argues, section 123 of the
Act defines an "insurer" as a person who is
licensed or otherwise authorized under the laws of Canada or a
province to carry on an insurance business. Section 379 of the
Insurance Act (Ontario) (Insurance Act (ON)),
(R.S.O. 1990, ch. I.8, as amended) specifically provides that
members of a reciprocal, such as the subscribers, are not to be
considered insurers.
[9] Thus, it is argued, the Master Policy cannot be an
"insurance policy" for the purposes of Part IX of the
Act because it is not issued by an "insurer"
within the meaning of that term in the relevant insurance laws.
It follows, according to counsel, that the Appellant cannot be
considered to be making supplies of exempt financial services
within the meaning of paragraph (l) of the definition
since it refers to agreeing to provide services such as those
described in paragraphs (d) and (f.1) which
necessarily require the existence of an insurance policy within
the meaning of that term in the Act.
Respondent's position
[10] The Respondent does not dispute that the Appellant is a
person within the meaning of subsection 123(1) of the Act,
was registered for GST purposes and was entitled to charge GST on
its taxable supplies and to claim ITCs. However, the Respondent
takes the position that the Appellant is an "insurer"
for the purposes of subsection 123(1) of the Act because,
inter alia, it is licensed under the Insurance Act
(ON). The individual subscribers to the Appellant are not
insurers for the purposes of either the Insurance Act (ON)
or the Excise Tax Act. The Respondent argues that it is
the Appellant who issues and processes insurance policies
("financial instruments") and pays amounts in
satisfaction of claims arising under insurance policies. The
individual subscribers do not. The essential aspect for each
subscriber is that it is insured. The vehicle of the reciprocal
is designed to provide greater availability and lower premiums
than using a standard source of insurance. The insurance issued
to a subscriber is from the Appellant; it may not and does not
come directly from the other subscribers, which are not insurers.
It is the reciprocal as a whole which self-insures; individual
subscribers do not self-insure. The result does not change
because the individual subscribers pay premiums to and fund
shortfalls of the Reciprocal. The Appellant therefore supplied
exempt financial services.
Analysis
[11] A reciprocal insurance exchange is a form of mutual
insurance by a group of organizations having in common certain
activities. The type of insurance the reciprocal can offer
encompasses all classes of insurance for which an insurance
company may be licensed under the Insurance Act (ON)
except life, accident, sickness and surety.[2] Subsection 42(1) of the Insurance
Act (ON) specifically includes reciprocal exchanges[3] as one of the classes
of insurers which may be licensed. Furthermore, section 379 of
that Act stipulates that no person shall be deemed to be
an insurer within the meaning of this Act by reason of
exchanging with other persons reciprocal contracts of indemnity
or inter-insurance. As is the case with all insurance
companies that offer insurance to the public, the reciprocal is
licensed and monitored on a continuous basis by the Ontario
Superintendent of Insurance. Subsection 390(1) of the
Insurance Act (ON) authorizes the suspension or revocation
of a license where an exchange contravenes any provision of that
Act.
[12] The Insurance Act (ON) contemplates that a
reciprocal exchange is an organization separate from its
Subscribers who can only "exchange" insurance through
the reciprocal exchange and not directly. The insurance coverage
issued to a subscriber is from the Appellant, it does not come
directly from the other subscribers and indeed, it cannot, given
the language of the Insurance Act (ON). It is the
reciprocal as a whole which self-insures, individual subscribers
do not. It is only through the reciprocal arrangement that such
self-insurance is achieved. It is fair to say that this
legislation requires the reciprocal, the Appellant in this case,
to assume a capacity in doing business by inter alia
issuing policies (since the subscribers are forbidden to do so by
law), collecting premiums, and investing funds. It is also
subject to regulation and is responsible for attending to claims
and responding to suits on behalf of subscribers. Put another
way, it carries out an important functional responsibility, i.e.
the insurance responsibility. It is for these reasons that
reciprocals soliciting or undertaking risks situate in Ontario
must apply for and secure a license from the Ontario Insurance
Commission.
[13] The legal status of a reciprocal exchange was considered
in Ontario School Boards' Insurance Exchange v. Peel Board
of Education et al.[4] The Plaintiff was an insurance reciprocal duly created
and licensed under Part XIII of the Insurance Act (ON).
Peel Board of Education moved for an Order striking out the
statement of claim on the ground that as an unincorporated
association, the Plaintiff had no legal capacity to sue in its
own name. In rejecting Plaintiff's motion, Molloy J. made the
following comments:
6. OSBIE is deemed to be an insurer under the provisions of
the Insurance Act. A reciprocal insurer is described by
John Weir in the Annotated Insurance Act of Ontario,
[Toronto: Carswell], 1986 as follows:
A reciprocal insurance exchange is a voluntary arrangement
whereby a group of entities (individual or incorporated) contract
with each other to share their individual losses (self – or
third-party generated) in a collective predetermined manner: s.1
– definitions.
Liabilities/losses are generally funded from an initial
contributions pool with any deficiencies made up via open-ended
assessments against each individual subscriber/member pursuant to
the formulae set out in the subscriber's agreement.
A 'reciprocal' is a sophisticated form of
not-for-profit self/mutual insurance requiring a structure and
professional expertise not unlike an insurance company. A
reciprocal (but not an individual subscriber/member) is an
'insurer' for the purposes of the Insurance Act
and related legislation.
[my emphasis added]
7. The issue before me is whether the Insurance Act
expressly or by implication bestows upon reciprocals the power to
sue or be sued in their own name. S. 380 of the Insurance
Act provides:
(1) Reciprocal contracts of indemnity or inter-insurance may
be executed on behalf of subscribers by any other person acting
as attorney under a power of attorney, a copy of which has been
duly filed as hereinafter provided.
(2) Despite any condition or stipulation of any such power of
attorney or of any such contract of indemnity or inter-insurance,
any action or proceeding in respect of any such contract may be
maintained in any court of competent jurisdiction in Ontario.
8. It seems to me that s. 380(2) confers upon a reciprocal
such as OSBIE the right to sue and be sued in its own name in
respect of its reciprocal contract of insurance. ...
13. I agree with that distinction. The cases in which the
capacity to sue have been found not to arise have been situations
involving entities such as political parties, trade unions or
administrative bodies: see Westlake, supra, Hollinger Bus
Lines v. Ontario Labour Relations Board, (1952) 3 D.L.R.
162 (Ont. C.A.); McKinney v. Liberal Party of Canada et al
(1987), 61 O.R. (2d) 680 (S.C.O.); Wheeler v. Darcey,
(1995), 25 O.R. (3d) 412 (Gen. Div.). By contrast, the
reciprocal insurer is not an administrative body but rather is
engaged in a commercial enterprise akin to that of an insurance
company. Section 42(1) of the Insurance Act empowers the
licensed insurer (which OBSIE is) to "undertake contracts of
insurance" and "carry on business in Ontario".
Section 42(2) of the Insurance Act provides:
[my emphasis added]
A licenseissued under this Act authorizes the
insurer named therein to exercise in Ontario
all rights and powers reasonably incidental to the carrying on
of the business of insurance named therein that are not
inconsistent with this Act or with its Act or
instrument of incorporation or organization (emphasis added).
14. In my opinion an entity which is carrying on business as
an insurer and which is specifically empowered to exercise all
rights incidental to carrying on that business of insurance must
necessarily have the right to take legal action to enforce those
rights. A legal action to enforce the contract of reciprocal
insurance, or to obtain damages for its breach, or for inducing
its breach is, in my opinion, incidental to OBSIE's business.
As such, OBSIE must, by implication have the power to sue and be
sued at least insofar as that business is concerned.
The rationale applied by Molloy J. in my view confirms that
all of the necessary insurance functions and requirements of the
Insurance Act (ON) are fulfilled by the reciprocal, in
this case the Appellant and not the subscribers. This conclusion
can be supported by reference to other subsections of the
Insurance Act (ON) such as subsection 48(2) which fixes a
minimum standard of financial stability specifically applicable
to a reciprocal; subsection 387(1) which requires that
surplus insurance funds and the reserve fund of the exchange
shall be invested by the reciprocal in the class of securities
authorized for a joint stock insurance company; section 391
requires the attorney for an exchange to pay to the Treasurer of
Ontario an annual tax in respect of premiums or deposits
"collected by the exchange" in the same manner as if
they had been received by a licensed insurer; section 388
gives statutory recognition to the fact that liability on a
contract of indemnity, inter-insurance or insurance is taken by
the exchange on behalf of the subscribers; and subsection
381(g) provides that the exchange through the attorney
must provide evidence satisfactory to the Superintendent that it
requires its subscribers to maintain "a premium deposit
reasonably sufficient for the risk assumed by the exchange".
This is explicit recognition that the risk is undertaken by the
reciprocal even though it is the subscribers who ultimately
underwrite the risk. In this context, I note that the Reinsurance
Agreements entered into by the Appellant operate to indemnify it
for any loss or losses sustained on any Certificates of Insurance
issued to its insured under the Master Policy. As well, the Notes
to the Appellant's financial statements state that:
Reinsurance
During the year, the Reciprocal ceded insurance on an
"excess-of-loss" basis to reinsurers for premiums of
... Such reinsurance arrangements limit the Reciprocal's
liability in the event of large losses. Notwithstanding the
reinsurance arrangements, the Reciprocal maintains the liability
to the Subscribers. The Reciprocal expects to fully collect all
amounts recoverable from reinsurers.[5]
[14] I am unable to accept the Appellant's position that a
reciprocal arrangement is nothing more than an exchange of
private contracts managed by an entity which has no
responsibility beyond the administration of the arrangement.
Aside from the fact that the language used in the enabling
legislation clearly indicates that a reciprocal exchange such as
the Appellant is declared to be within the purview of the statute
regulating the conduct of the business of insurance it is
indisputable that the subscribers can only function as an
insurance organization through the Appellant. The subscribers do
not have legal title to or responsibility for the Appellant's
investments consisting of cash, treasury bills, short-term
commercial paper, bond and common and preferred shares. The
Appellant as a licensed and audited entity has liabilities, being
claim reserves, accounts payable, premium taxes, etc. and has
underwriting revenue and underwriting profit.[6] The Appellant has a Board of
Directors which is required "to manage or supervise the
management and the business and affairs of the Reciprocal",
as distinct from the business and affairs of the individual
members. The subscribers' pay "premiums" to the
Appellant which comprise such elements as the Board determines,
including but not limited to, claims, adjusting and defence
costs, reinsurance, premium taxes, reserves and operating
expenses. As is the case with insurance companies, reciprocals
must base premiums on a proper assessment, usually by an actuary,
of the experience of losses and the likelihood of future claims
by policy holders or members of the reciprocal exchange. In the
Appellant's case, its board must in each year, on the advice
of the Actuary and the Attorney, determine the premium required
to be paid by each subscriber and the deductible available to
each for the purposes of the reciprocal.[7]
[15] The Appellant has argued that the language used in
certain of the contracts of insurance establishes that the
issuers of the policies are the subscribers. The Insurance
Act (ON) imposes a number of conditions which the Appellant
and its subscribers must observe before the Appellant can engage
in the business of insurance. Thus, the subscribers can only
engage in the insurance business by designating an attorney and a
reciprocal exchange to do so on their behalf. In these
circumstances, the subscribers have voluntarily availed
themselves of the benefits and privileges of exchanging insurance
and have agreed by implication to do so through a reciprocal
exchange which in turn must meet the requirements laid down in
the provincial insurance statutes. It follows that all aspects of
the carrying on of an insurance business including the issuing of
policies falls within the purview of the authority granted to the
Attorney. The fact that the Master Policy may describe the
subscribers as the insurers does not make them so since the
insurance statutes specifically state that they cannot be and are
not the insurers. Indeed, if they were this would be a
contravention of the Insurance Act (ON) which would likely
lead to a suspension or revocation of the Appellant's
license.
[16] While not proof of the fact, it is interesting to note
how the Appellant itself characterized its services. In the 1997
report of the Attorney and Chief Executive Officer,[8] the following comments
are found:
The Healthcare Insurance Reciprocal of Canada (HIROC) is the
largest health care liability insurer in Canada. Established as
the Hospital Insurance Reciprocal of Ontario in 1987, HIROC
provides Subscribers in Ontario, Manitoba, Newfoundland and
Labrador, and Saskatchewan with comprehensive insurance coverage,
risk management, advisory services and exceptional claims
management expertise.
And
... As Canada's health care liability insurance
specialist, we provide our Subscribers with a comprehensive range
of exceptional client services, including risk management
programs, innovative insurance products and claims management
expertise, that deliver solid protection and long-term financial
stability in the rapidly changing health care environment.
The Attorney also made reference to the Appellant's
innovative underwriting services stating:
... By leveraging our relationships within the insurance
and reinsurance industries world-wide and by maximizing economies
of scale, out underwriting managers have delivered a
progressively broad range of innovative, cost-effective
insurance products that consistently meet our clients' needs.
These include coverage for Environmental Impairment Liability and
Crime Insurance (employee dishonesty) and liability coverage up
to $20 million that includes Directors and Officers
liability.
Furthermore, HIROC's privileged access to the marketplace
allows us to offer unique liability products not currently
offered by commercial underwriters. Among them, coverage that
includes injunctive relief from lawsuits that do not include
claims for damages and, more recently, HIV/AIDS supplementary
payments.
I note as well that in selling its product, the Appellant
often described itself as the insurer.[9]
[17] Did the reciprocal supply financial services? Subsection
123(1) defines "financial service" to include in
paragraph (d) the issue, granting, allotment, ...
renewal, processing ... of a financial instrument the
definition of which includes an insurance policy. Subsection
(f.1) relates to the payment ... of a claim arising
under an insurance policy while subsection (l) includes
the agreeing to provide, or arranging for, a service referred to
in paragraphs (a) to (i). I am satisfied that the
Appellant was a licensed insurer and fulfilled the criteria set
out above including the issuing of the insurance policy. It
therefore supplied financial services. I have concluded that the
Appellant was, during the relevant time, a licensed insurer that
provided a financial service to its Subscribers by inter
alia the underwriting of a financial instrument, in this
case, an insurance policy, as those terms are defined in
subsection 123(1) of the Act.
[18] In the alternative, the Appellant submitted that if it
did provide financial services, such services are specifically
excluded from exempt status because they are administrative
services. Counsel argued that paragraph (t) of the
definition of "financial service" in subsection 123(1)
of the Act read together with
paragraph 4(2)(b) of the financial service (GST)
regulations excludes "any administrative service" from
the definition of "financial service". It is the
Appellant's position that the fees it receives from
subscribers are paid in consideration for its provision of
administrative services.
[19] I am of the view that at the exclusion provided in
paragraph 123(1)(t) does not apply in the present
circumstances. This is not a case where the Appellant merely
provided data processing or administrative services in isolation
since as I have found, the Appellant did provide the underlying
financial instrument, i.e. an insurance policy. The services
described by the Appellant's counsel as not excluded by
subsection 4(3) of the Regulation cannot in my view be separated
from the financial service of providing insurance itself. As
well, on the evidence, it would be reasonable to conclude that
any administrative services provided by the Appellant were
supplied by a person at risk. Accordingly, the Appellant's
activities fall within the scope of paragraphs (d),
(f.1), (h) and (l) of the definition of
financial services and are exempt.
[20] Counsel for the Respondent advised the Court that the
Minister of National Revenue was not contesting the appeal with
respect to the penalty issue. To that extent the appeal is
allowed. In all other respects, the appeal is dismissed.
Signed at Ottawa, Canada, this 30th day of June, 2000.
"A.A. Sarchuk"
J.T.C.C.
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