On April 15, 2010, the Ontario Ministry of Revenue reminded Ontario businesses in Tax Tip #4 'Insurance Premiums" that the 8% Ontario retail sales tax will continue to apply to the insurance premiums previously subject to Ontario retail sales tax (ORST).
Tax Tip # 4 states, in part:
In the 2009 Ontario Budget, the government announced a comprehensive tax package that includes moving to an HST at a rate of 13 per cent effective July 1, 2010. Generally, insurance premiums are currently exempt from the federal Goods and Services Tax (GST) as financial services and the treatment under HST will be the same as under GST.
Ontario will continue its application of tax at a rate of 8 per cent on the same types of insurance premiums currently taxed under RST.
Tax Tip #4 does not provide information on what insurance is currently subject to ORST and what types of insurance are not currently subject to ORST. The assumption is made (probably incorrectly, that residents of Ontario know what insurance is subject to ORST).
This posting is not going to set to the entire list of what is and what is not subject to ORST. It will cover some of the highlights.
ORST applies to premiums paid under certain contracts of insurance, group insurance plans, contributions paid into funded plans, and on benefits paid out of unfunded plans, casualty and property insurance (excluding auto), including amounts paid for:
- A builder's risk policy: If a contractor takes out insurance on a building under construction, the insurance premium is subject to ORST. This type of policy is not the same as a performance or payment bond which is not subject to ORST.
- Mortgage insurance: Mortgage insurance insures the life of an individual and is not insurance on property. If the insured is a resident of Ontario and the policy is group life insurance, ORST must be collected on the premium regardless of where the property is located. If the mortgage insurance is an individual life insurance policy, ORST is not payable on the policy. If a non-resident of Ontario purchases mortgage life insurance relating to property in Ontario, ORST is generally not payable.
- Ontario property insurance: Premiums paid on property located in Ontario are taxable even if the purchaser of the policy is not a resident of Ontario.
- Trip cancellation insurance: This insurance is taxable when sold to an Ontario resident.
- Baggage insurance: This insurance coverage is taxable when sold to an Ontario resident.
There are many forms of insurance that are not subject to ORST. Generally, ORST does not apply in respect premiums for:
- contracts of insurance (other than contracts of group insurance or trip cancellation insurance) for the life, health or physical well-being of insured individuals. This can include individual life insurance purchased by a corporation or organization for creditor protection, buy-sell funding agreements, charitable donations, etc., that is payable to the corporation or organization on the death of the insured;
- payments under annuity contracts;
- an amount payable to obtain a surety;
- a contract for the service, maintenance or warranty of tangible personal property;
- property damage insurance in respect of property wholly outside Ontario, or other insurance (but not group insurance) in respect of risk, perils or events wholly outside Ontario;
- trip interruption insurance. This insurance covers benefits and risks incurred totally outside Ontario, and is exempt if calculated and shown as a separate charge on the customer's invoice;
- insurance contracts entered into by individual foreign representatives and officials located in Ontario who are members of diplomatic missions, consular posts and international organizations;
- premiums, assessments or contributions paid under the:
- Canada Pension Plan
- Crop Insurance Act (Ontario)
- Employment Insurance Act (Canada)
- Workers Compensation Act;
- a contract of life insurance that includes an individual insured and members of his or her family or any other individual related to the insured by blood or adoption, under a single policy; and
- automobile insurance premiums.
Certain types of insurance are not subject to ORST if a valid purchase exemption certificate is provided. If one relies on an exemption (as opposed to a purely non-taxable status), they would review the law to ensure that the exemption will continue after July 1, 2010.
Ironically, this non-harmonization of insurance premium helps Ontario businesses (other than insurance companies) because group policies often have agreed monthly or annual rates and, therefore, keeping the tax rate unchanged results in predictability for the remaining term of the policy. In a discussion with a client last week (exempt business), we discussed how the expense would remain the same and adjustments to their budget for H2 2010 would not require changes regarding the property insurance and the employee group benefits.
Insurance companies, on the other hand, are disadvantaged because they will be paying HST on commercial rents, electricity, custom computer programs, contracted third party insurance appraiser services, etc. and are not able to recover the additional HST by way of input tax credit. Eventually, costs will increase and those cost increases will be passed on to businesses.