18 September 1997 GST/HST Interpretation HQR0000708 - Credit Insurance and Bad Debts

                                                                        GST/HST Rulings and Interpretations
Directorate Controller
 XXXXX                                                                                Place Vanier, Tower C, 10th Floor
 XXXXX                                                                                25 McArthur Road
 XXXXX                                                                                Vanier, Ontario
 XXXXX                                                                                K1A 0L5

                                                                        September 18, 1997

Dear XXXXX

Thank you for your letter dated May 21, 1997 addressed to the Director, Financial Institutions Division, Policy and Legislation Branch, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain domestic insurance transactions.

Background

As a consequence of your regular export credit insurance The XXXXX has received approval to provide domestic credit insurance as an ancillary part of your regular business.

 XXXXX treats domestic insurance activities as GST exempt in contrast to zero-rating for export credit insurance. XXXXX is guided by P-058 - Recovery of Bad Debts dated March 4, 1993, regarding insurance claim payments.

 XXXXX has made reference to sections 222, 225 and 231 of the Excise Tax Act (the "Act") and also to P-058 concerning the GST effect of an insurance claim payment that relates to the indemnification of an account receivable that becomes a bad debt and has requested an interpretation of these sections.

Interpretation Requested

You have requested answers to the following questions:

QUESTION

1. Is the obligation of a credit insurance insurer, under sections 222 and 225 of the Act, to account for an amount equal to the tax fraction of the amount collected through subrogation from the debtor in determining the net tax for the reporting period in which the amount is collected, subject to the insured having deducted the tax related to the bad debt in the first place under subsection 231(1) or (2) of the Act?

QUESTION

2. Does the insurer have the same obligation if the amount collected through subrogation is collected through the insured who recovered such bad debt from the debtor before remitting it to the insurer, or can the insurer presume that the insured has added back such bad debt recovery when determining the net tax for the insured's reporting period in which such bad debt was recovered, as provided for under subsection 231(3) of the Act ?

Interpretation Given

The following answers have been provided:

ANSWER

1. Section 221 of the Act imposes an obligation to collect the GST. Pursuant to section 222 of the Act any amount that a registrant collects as tax is deemed to be held in trust for the Crown except in the case of a bankruptcy of a person. Further, section 225 of the Act requires a registrant to include amounts collected, in the net tax calculation for the reporting period and to remit any positive amount of net tax. Under the GST, liability to pay the tax rests with the recipient of the supply. However, the GST registrant is required to account for the tax collected or collectible in a particular reporting period. If the recipient of the supply refuses to pay, the persons collecting amounts as or on account, i.e. the insurer, through subrogation, will still be required to remit the tax due on the transaction regardless of the fact it has not been collected from the recipient. The obligation of the credit insurance insurer under section 222 and 225 of the Act is to account for an amount equal to the tax fraction of the amount collected through subrogation from the debtor in determining the net tax for the reporting period in which the amount is collected. This is provided that the original supplier has not already accounted for the GST collectible in respect of the supply which gave rise to the account receivable i.e. where the insured has not already made a deduction of the tax related to the bad debt under subsection 231(1) or (2) of the Act. It is not the intention of the Department to collect tax twice on the same supply nor to interfere with the usual course of business activities.

ANSWER

2. In the event that the amount collected through subrogation is collected through the insured who recovered such bad debts from the debtor before remitting it to the insurer, the insured would be required under subsection 231(3) of the Act to add an amount equal to the tax fraction of the bad debt recovered in determining the net tax for the reporting period of the insured in which the amount is recovered. This would be where the insured has previously made a deduction of the tax related to the bad debt under subsection 231(1) or (2) of the Act.

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 Memoranda Series, do not bind the Department with respect to a particular situation.

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

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact the undersigned at (613) 952-3413.

Yours truly,

T.R. Côté
Rulings Officer
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate

Policy and Legislation Branch