In a matter that appears destined for the Tax Court of Canada, insurers are gradually learning that they might now owe GST/HST plus penalty interest on a portion – or, according to the Canada Revenue Agency (CRA), possibly all – reinsurance premiums paid to non-resident affiliates back to November 2005.
Between 1991 and 2005, reinsurance contracts between non-resident reinsurers and their Canadian affiliates were audited and always accepted as wholly exempt from GST. Some estimate the retroactive application of the tax back to 2005 could amount to hundreds of millions of dollars for the industry.
As insurers receive their tax assessments in 2013, this threatens to become a hot topic in the Canadian insurance community. The topic is already on the agenda for the 2013 Canadian Insurance Financial Forum in May, and will likely be discussed at the Canadian Commercial Insurance Summit (CCIS) in June.
According to the CRA, any part of a reinsurance contract between a non-resident reinsurer and its Canadian affiliate is subject to tax on the “loading” portion of the contract. What is the “loading” portion of the contract?
Sixteen factors designating loading are outlined in legislation that became law in July 2010. Among others, they include:
• supply of a financial service that is attributable to administrative expenses;
• an error of profit margin;
• business handling costs;
• commissions;
• communications expenses;
• claims handling costs;
• acquisition costs;
• premium collection costs; and
• management fees.
“This brings us to the nub of the problem,” Michael Firth, a partner in the tax services section of PwC, wrote in the Spring 2012 edition of its Insurance Review. “How much of the value of any particular reinsurance contract is attributable to the 16 offending components of ‘loading’ and is therefore subject to tax?”
Firth notes in the article that “a concern expressed with the definition of ‘loading’ across the entire financial sector is that it is artificial, impractical and an unrealistic approach to the myriad financial services that flow into Canada.”
More objectionable for some in the insurance community is that the CRA has made collection of the tax retroactive for seven years – to the time the new imported services taxation rule was first announced in a Department of Finance press release in November 2005.
Draft legislation appeared two years later, in 2007, after which time the Senate Finance Committee called for the GST clause to be struck from the Bill. The tax clause survived and was signed into law in July 2010.
“The overreach is outrageous, the retroactivity is outrageous,” Firth told Insurance Business. “It’s a very dangerous message for Canada to be sending to global capital.
“It only takes two letters to go from Canada to ‘banana.’ We are a banana republic at this point.”
