Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
Place de Ville, Tower A, 5th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 241678
Business Number: […]
Dear [Client]:
Subject: GST/HST INTERPRETATION
Application of GST to profit sharing amounts paid by an insurance broker to its parent company
Thank you for your correspondence of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to profit sharing amounts received by your client, […] (Holdco1) from its subsidiary, […] (BrokerCo).
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
From a review of your incoming letter and the additional documentation you supplied, we understand the following:
1. BrokerCo is a corporation located in […][province X] which supplies insurance brokerage services.
2. BrokerCo is owned 50% by Holdco1 and 50% by […] (Holdco2) (Holdco1 and Holdco2 together are referred to herein as the Holdcos). Holdco1 is not licensed as an insurance broker in Canada.
3. Holdco1 is 100% owned by […][an individual]. Holdco2 is 100% owned by […][another individual]. These two individuals (the Owners) are also directors of BrokerCo, and both directors are licensed as insurance brokers [...].
4. BrokerCo entered into agreements with […] (MGA1) and also with […] (MGA2), who are both managing general agents in the insurance industry.
5. Under its agreement with MGA1, BrokerCo generally provides the services of an insurance broker in soliciting and securing applications for insurance policies to be issued by various insurers. It provides these services to MGA1.
6. Under its agreement with MGA2, BrokerCo is required to enter into separate Broker Agreements with various insurers to whom it provides the services of an insurance broker.
7. In conjunction with its agreement with MGA2, you provided one example, a Broker Agreement made between BrokerCo and […] (Insurer), which includes the following provisions: […][terms of the Agreement]
8. Insurer is licensed as an insurer […].
9. There is no written agreement in place between BrokerCo and either of the Holdcos for the provision of services.
10. You provided financial statements for BrokerCo’s fiscal year ending [mm/dd/yyyy] and Holdco1’s fiscal year ending [mm/dd/yyyy]. In BrokerCo’s Income Statement, an amount roughly equal to what would otherwise have been BrokerCo’s net income (except for a certain adjustment) was deducted as a commission expense. Holdco1’s [yyyy] Income Statement reports an amount of commission income equal to approximately half of the total commission expense that was deducted from BrokerCo’s [yyyy] Income Statement. This distribution of net income was done in accordance with a resolution signed by the directors of BrokerCo in [mm/yyyy] […]. This resolution does not stipulate whether services are supplied by the Holdcos in exchange for the profit sharing amounts they receive.
11. You have indicated that the Owners both performed brokerage agent services on behalf of BrokerCo, however they were not paid employees of BrokerCo nor did they receive any other form of compensation directly from BrokerCo. Rather, each individual received wage/salary income from their respective Holdco, as reported on a T4 slip issued by the respective Holdco.
12. Holdco1 is registered for GST/HST purposes and has charged GST in respect of the profit sharing amounts it received from BrokerCo.
INTERPRETATION REQUESTED
You would like to know whether the profit sharing amounts paid by BrokerCo to Holdco1 constitute consideration for an exempt supply of a financial service made by Holdco1 to BrokerCo.
We acknowledge your request for a ruling, however, we are unable to provide a ruling on this question. As outlined in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, a ruling provides the position of the Canada Revenue Agency (CRA) on specific provisions of the legislation as they relate to a clearly defined fact situation of a particular person, supported by relevant documentation. As there is no agreement or other documentation in place that details that services were supplied by Holdco1 to BrokerCo and we are not otherwise able to fully identify whether supplies were made by Holdco1 to BrokerCo or what the nature of those supplies is, we are unable to provide a ruling. We instead provide the following interpretation based on the information you have supplied.
INTERPRETATION GIVEN
In order to determine if a payment made by BrokerCo to Holdco1 is consideration for an exempt supply of a financial service, it must first be determined if a supply was made by Holdco1 to BrokerCo. A “supply” is defined in subsection 123(1), generally, to be the provision of property or a service in any manner. It is a question of fact whether a supply, or supplies, was made by Holdco1 to BrokerCo and whether the payments received by Holdco1 are consideration for those supplies.
Where more than one element is provided by a supplier to the recipient (for example, to BrokerCo), there may be a single supply or multiple supplies being made. This distinction is important, for example, in cases where a combination of elements is supplied, some of which would be exempt for GST/HST purposes and some of which would not, if supplied separately. It is a question of fact whether a person is making a single supply or multiple supplies.
Generally, all supplies of property and services made in Canada are taxable unless they are exempt under Schedule V. If it can be established that Holdco1 is making a supply(s) to BrokerCo, it is possible that one or more of these supplies may be exempt from GST/HST. For example, section 1 of Part VII of Schedule V exempts a supply of a financial service.
A financial service, as defined in subsection 123(1), means anything that is described in any of paragraphs (a) to (m) and that is not excluded by any of paragraphs (n) to (t) of that same definition. Certain paragraphs of the definition of "financial service" are particularly relevant to the activities of insurance agents and brokers, for example:
- An insurer’s issuance or renewal of an insurance policy is included in paragraph (d) of the definition of financial service and is not excluded by any of paragraphs (n) to (t) of that definition.
- Paragraph (l) of the definition of financial service includes arranging for a service that is referred to in any of paragraphs (a) to (i) of that definition and is not referred to in any of paragraphs (n) to (t) of the definition.
An insurance broker may be involved in (or arrange for) an insurer’s supply of a financial service, such that the broker’s service is included in paragraph (l) as a financial service. Generally, a supply by an insurance broker of this service of arranging for the insurer’s supply is exempt under section 1 of Part VII of Schedule V.
However, supplies that are in the nature of management and administration are generally taxable supplies that are not exempt.
Based on the limited information provided, it is not clear whether Holdco1 made a supply or supplies to BrokerCo for which the payments by BrokerCo were consideration. Further, if it is the case that Holdco1 made one or more supplies to BrokerCo, we are unable to determine exactly what the nature of each supply was. Where no specific service agreement is in place, there may be various reasons why a subsidiary would pay an amount to its parent company. For example, management services may be supplied by the parent company to its subsidiary, for which consideration is paid. Alternatively a supply may not take place at all, but rather one party may act as a billing agent of the other, or otherwise act as agent of the other.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the interpretation given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 236-330-8100. Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Sincerely,
Frankie Fenton
Senior Rulings Officer
Insurance and ITC Allocation Unit
Financial Institutions and Real Property Division
GST/HST Rulings Directorate
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