The HST Blog : Canada Harmonized Sales Tax Lawyer Cyndee Todgham Cherniak for Assessments, PST & RST Issues in Ontario, British Columbia & Quebec

On April 28, 2010, the Canada Revenue Agency (CRA) issued Headquarter Letter (Ruling) No: 120360 in which it ruled that the taxpayer should be entitled to claim an input tax credit (ITC) for the amount of goods and services tax (GST) (can substitute HST here too) paid on the purchase of the goods for resale that were subsequently stolen from the taxpayer's store.  The taxpayer would be required to meet the other ITC documentary requirements.

In this case, the taxpayer filed a claim for recovery against its insurance and the insurance company denied that portion of the claim that was GST because the insured taxpayer could recover those amounts by other means.  This did not bother the CRA.

This is a fair ruling in the circumstances. 

Other taxpayers should rely on CRA rulings at their own risk as their factual circumstances may be different.  A taxpayer should seek a binding ruling from the CRA if they wish certainty.

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In August 2010, the Ontario Ministry of Revenue issued Tax Tip #19 "Purchase Exemption Certificates" directed at resellers of taxable insurance (insurance premiums).  The Ministry wrote:

This information will help purchasers understand when a valid Purchase Exemption Certificate (PEC) may be used.

Claiming RST Exemptions

Retail Sales Tax (RST) will continue to apply to premiums paid under a contract of insurance or benefits plan after June 30, 2010. Some purchasers may be entitled to an exemption from RST. To claim the exemption, the purchaser is required to provide the seller with a valid PEC.

Examples where a PEC may be used by the purchaser to acquire insurance products exempt from RST include:

- Contract of insurance on agricultural products, structures, equipment, livestock and recreational equipment purchased by a person actively engaged in the business of farming

- Cargo insurance for the portion where the risk is not in Ontario

- Contracts of insurance in respect of an aircraft where the purchaser of the aircraft is exempt from RST

- Contracts of Insurance entered into by Indian Bands or Band Councils.

Information Required on a PEC

A valid PEC must show:

- Name of person or name of business•

- Address•

- Name of authorized person•

- Vendor permit number, if it applies•

- Reason exemption is being claimed•

- Date the PEC is issued•

This information is useful to the small handful of persons still caught in the Ontario retail sales tax regime (where a life of input tax credits and a single sales tax did not start on July 1, 2010).  what is missing is the useful guidance on who need to know this information --- this Ministry should of started with "For Whom it May Concerns - you know who you are - don't ask us to send you this Tip, we hope you find it on your own". 

Please let me help by identifying the class of persons who might benefit from this notice - it is buyers of taxable insurance (under the Retail Sales Tax Act (Ontario) who are not the final user or consumer.  It is relevant for those persons who resell the insurance such that another purchaser is downstream.  The purchase exemption certificate allows the middleman to not have to pay ORST and apply for a refund to get it back.

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On June 30, 2010, the Ontario Ministry of Revenue released Tax Tip #15 "Vendor Permits" and informed all persons with vendor permits (registrations for Ontario retail sales tax purposes) that their vendor permits were being canceled on June 30, 2010.

The Ministry of Revenue states:

"On June 30, 2010, all current RST vendor accounts will be closed by the Ontario Ministry of Revenue. Vendors should not destroy their permits which should be kept along with other business records as required. For details on how long records should be kept see tax information bulletin Retention/Destruction of Books and Records on [the Ministry] website."

However, certain insurance providers are still in the retail sales tax system.  The Ministry indicates that they must re-register:

On July 1, 2010 all businesses primarily engaged in insurance activities will be automatically re-registered and a new vendor permit number will be issued. Tax return filing frequencies that are currently in place for RST returns will be maintained after June 30, 2010.

A door is closing and a new one is opening - HST.  This is a logistical step in the transition.

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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:

• reinsurance contracts;

• 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:
  1. Canada Pension Plan
  2. Crop Insurance Act (Ontario)
  3. Employment Insurance Act (Canada)
  4. 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.

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