RITS: HQR0000065
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XXXXX
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File: 11585-14, 11585-21
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This is in reply to a memorandum from XXXXX concerning the GST status of commissions received by an independent insurance agent or broker from XXXXX in respect of insurance policies covering risks in Canada. The issue is whether these commissions pertain to supplies that are zero-rated under section 1 of Part IX of Schedule VI to the Excise Tax Act (the "Act"). A related issue, is if these supplies are zero-rated, rather than exempt, should these supplies be included in the small supplier threshold prior to October 1992 such that the supplier was required to register.
We apologize for the delay in responding to your enquiry as it was necessary for us to confirm with the Department of Finance the policy intent underlying zero-rating of brokerage commissions to non-resident insurers. Paragraph 20 of GST Memorandum 700[-]1[-]2 Insurance Agents and Brokers states that financial services provided by a financial institution (such as an insurance agent or broker who is defined as a financial institution for GST purposes and is arranging for a financial service) to a non-resident insurer are zero-rated pursuant to the general rule in section 1 of Part IX of Schedule VI to the Act. This position is based on the existing legislation and on the understanding that the intermediary's services are provided by the financial institution (insurance agent or broker) to the insurance company paying the commission. Location of risk covered under an insurance policy as a criterion for zero-rating is only applicable to supplies by a financial institution (in this case an insurer) under section 2 of Part IX of Schedule VI.
In order to qualify for zero-rating under section 1 of Part IX of Schedule VI of the Act, the supply of a financial service by a financial institution must be made to a non-resident person. In the case of XXXXX, the Department has taken the position that the individual XXXXX are the insurers under subsection 123(1) of the Excise Tax Act. To determine whether a person is a resident, we must also look to general legal principles as well as consider other pertinent provisions of the Act including the definition of "permanent establishment" in subsection 123(1), and section 132 of the Act.
It is our position that for section 132 to apply to XXXXX non-resident XXXXX it is necessary to determine if XXXXX as insurers, would be considered to have a "permanent establishment" as defined in subsection 123(1) of the Act. XXXXX insurance is transacted through domestic independent agents and brokers. Some of these agents and brokers have binding authority, in respect of Canadian risk referred to as coverholder business. Specifically, paragraph 123(1)(b) of the definition "permanent establishment" ("PE") addresses the situation of so called "agency PE's". Paragraph 123(1)(b) refers to a fixed place of business of another person except in the case of an independent commission agent or broker acting in the ordinary course of their business. A policy statement on the application of paragraph 123(1)(b) "permanent establishment" is currently under development which, in part, addresses the issue of when a branch of another person such as an independent agent may be considered to be a PE of a non-resident. Based on our understanding of the application of paragraph 123(1)(b), an office or branch of an independent commission agent or broker (e.g. insurance agents and brokers) will generally not result in a non-resident person being considered to have a permanent establishment in Canada for GST purposes unless the intermediary is not an independent agent acting in the ordinary course of business. In the determination of whether a particular agent or broker is "independent" the policy position will consider whether the agent is legally and economically dependent or independent of the non-resident person and whether that agent is acting in the ordinary course of business.
It will always be a question of fact in each given case whether a particular commission agent or broker is legally and economically independent. It is our understanding that based on the review of the operations of XXXXX, your office will be taking the position that the company is an independent agent or broker who deals with several insurers. Since XXXXX office would not be considered to be an agency PE, their supplies can be considered made to a non-resident. This position is reasonable where, for example, the insurance agent or broker is an independent commission agent who is acting on its own account for several insurers.
Where an insurance agent or broker (such as XXXXX receives a commission for the supplies referred to above, the agent or broker is not in a position to know whether the XXXXX insuring the risk are resident or non-resident given XXXXX operating structure. In the case of XXXXX there are approximately XXXXX who are resident out of XXXXX on a worldwide basis. XXXXX are grouped into syndicates at the XXXXX insurance market for the purpose of acceptance of insurance risks. An individual XXXXX may participate in several syndicates. As a result, it was decided that it is reasonable in the circumstances not to deny zero-rating to the supplier of a financial service to a non-resident, and from the supplier's perspective, to simplify administration. Therefore, an insurance agent's or broker's services can be considered to be supplied to a non-resident and in this way the supplier is not forced to make an allocation which it is not in a position to make accurately.
We understand that XXXXX is requesting that ITCs be allowed with respect to their supplies of zero-rated brokerage commissions. Enclosed is a copy of our letter dated October 6, 1994 regarding registration of XXXXX insurance brokers. Policy position P-035 addresses zero-rated financial services and the small supplier threshold. Section 148 as it read before October 1992 provided that supplies of financial services were to be included in the $30,000 threshold. If it can be established that XXXXX exceeded the $30,000 threshold prior to October 1992 XXXXX would be considered a registrant and would have been required to be registered but for the Policy P-035. However, after September 1992 zero-rated supplies were taken out of the $30,000 threshold and unless it can be established that a person is a registrant (i.e. a person who is over the small supplier threshold) the date of application for voluntary registration may be a key factor in determining entitlement (after September 1992 to date of application for voluntary registration) to claim ITCs.
If you have any questions on this matter please contact me at (613) 952-9220 or Pierre Bertrand, Policy Manager at (613) 952-9219.
Yours truly,
Roy Osudar
Policy Unit
Financial Institutions
and Real Property Division
GST Rulings and Interpretations
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