1 August 1996 GST/HST Interpretation 11783-2[1] - Insurance Claim Settlement - General Accident Claims

Dear XXXXX

XXXXX[.] This letter is in reply to the Facsimile message of June 25, 1996 from XXXXX along with attachments and subsequent telephone conversations with Tim Côté from this office and a telephone conversation of August 21, 1996 between Duncan Jones from this office and XXXXX has requested our opinion concerning the settlement of insurance claims for the above-noted general accident claims.

Statement of Facts

The facts of this case as indicated in the written information provided and subsequent telephone conversations are as follows:

XXXXX (the lessor) engages in leasing vehicles to customers (the lessee).

Two lease customers, XXXXX and XXXXX were involved in separate accidents that resulted in both of the vehicles owned by the lessor being "written off".

Although the lease customers were unrelated they were both insured with XXXXX (the insurer).

A lease agreement between the lessor and lessee requires that the lessee acquire and pay for an insurance policy on the leased vehicle naming the lessor and the lessee as the insured parties.

The insurer has indicated with respect to vehicles that are "written off" that they will pay the lesser of the actual cash value of the vehicles which is determined by their appraiser, or the book value of the vehicles which is the value determined by the lease payments outstanding at the time of the loss plus the purchase price at the end of the lease period.

The insurer has determined a cash value of the vehicles and subsequently made a cash settlement with the lessor under the terms of the insurance contracts on the lease payout value for both vehicles that were "written off". The lessor was unable to collect GST on these amounts in either case.

Question

You wish to know whether GST is applicable on the amounts paid by the insurer to the lessor on the vehicles that have been "written off" under the insurance policy.

Our Position

Contracts or policies of insurance covering property losses contain provisions under which the insurer agrees to indemnify the insured for loss or damage to property. Usually, insurance claims arising under property insurance polices are settled by the insurer either paying the cost of the repairs to the damaged property, the cost of replacing the damaged property or making a cash settlement with the insured once the amount of the loss has been determined.

The last option of making a cash settlement in respect of a loss suffered by the insured, is a financial service as provided under the definition of "financial service" under paragraph 123(1)(f.1) of the Excise Tax Act and is therefore exempt from GST under Part VII of Schedule V. The cash settlements which were made under the insurance policies to indemnify the lessor for his losses on the two vehicles would not be subject to GST. Accordingly, in the above situations, the lessor would not be required to collect the GST on the amounts from the insurer.

If you have any questions or should you wish to discuss this further, please contact Tim Côté at (613) 952-3413 or Duncan Jones at (613) 952-9210.

Yours truly,

J. Sitka
A/Director
Financial Institutions and
Real Property
GST Rulings and Interpretations