Your insurance company may face GST, HST, QST and PST challenges, tax audit queries and possibly even additional tax costs if you:
- Are required to use the special attribution method (the "SAM" formula, as explained below)
- Have risks in British Columbia, Quebec, and Prince Edward Island and have not accounted for related changes to tax costs
- Are subject to new compliance rules under the new QST rules for financial institutions, which includes a new QST annual information return and the transfer of the administration of the QST accounts of some financial institutions to the CRA (from Revenu Quebec)
- Have not set up systems and processes to deal with the return to the PST in British Columbia
- Imports services or intangibles into Canada, including financial services from related entities
- Are a branch and have deductible expenses in Canada for charges from your head office located outside Canada
- Import goods or services into a province that are not subject to the SAM formula, such as claim costs
- Do not pay GST/HST or QST to certain people who sell your products and who are not insurance brokers or do not deal directly with your customers
- Have taxable (or zero-rated) supplies as well as exempt supplies and has not reviewed your allocation methodology
- Have a product warranty business
- Are required to collect or pay taxes on insurance premiums.
If you are an insurance company you must carefully review and understand how the complicated GST/HST rules apply to your business, how the new QST rules affect your operations, and whether you have fulfilled all of your compliance obligations. If you do not fully comply with these rules or make filing mistakes, you could be subject to additional taxes, interest or non-compliance penalties or may have overpaid taxes.
Many financial institutions across Canada, including insurance companies, are subject to complicated GST/HST rules known as the SAM formula. This formula applies to a financial institution that has a "permanent establishment" in an HST-participating province and in another province, and is used to calculate the amount of provincial component of the HST (PVAT) payable by the financial institution for all the HST provinces. For insurance companies, a permanent establishment is based on whether the insurer has a risk in a province. If an insurer has risks both in a harmonized province and another province, it will be subject to the SAM formula. Quebec has generally incorporated in the QST rules similar SAM rules effective January 1, 2013.
GST/HST and QST checklist - Action items
Here are some important considerations that you should review to determine how they may affect your business:
- SAM formula - The SAM formula requires many financial institutions to track all the GST, PVAT and QST paid, and includes many adjustments for specific items including transitional rules and recaptured input tax credits (ITCs). More than 100 pages of related GST/HST regulations effective back to 2010 were passed in 2013, and these calculations have become more complex in 2013 due to the new QST SAM formula, B.C.'s return to the GST and PST and P.E.I.'s new HST. Also, some insurance companies have not dealt with all the applicable adjustments effective since 2010, and could have overpaid or underpaid PVAT or be subject to audit by the CRA.
- Increased QST costs - The new 2013 QST rules for financial institutions will increase operating and claim costs. It is important for insurance companies to understand the effect of these new rules on their tax costs and what they can do to help mitigate them.
- New QST compliance obligations - Insurance companies should determine their filing obligations for Quebec's new QST annual information return, which is similar to the GST/HST annual information return. The information on these returns should correspond to other GST/HST, QST and income tax returns. You should determine whether they have to file both returns (or a combined return, if applicable). These annual returns can come with significant penalties if they are not filed as required and on time. It appears that the CRA is now assessing these new penalties.
- B.C.'s return to GST and PST - Many insurance companies must now pay B.C. PST on certain purchases and self-assess PST on taxable items brought in the province as a result of B.C.'s elimination of the HST and return to GST and PST in 2013. Moreover, insurers' cost of claims could go up for business policyholders in B.C., since these policyholders can no longer claim input tax credits for the provincial portion of the tax. That translates into higher net-of-tax settlement costs for many insurers.
- Self-assessment rules - Under the self-assessment rules for imports, insurance companies must self-assess on both taxable imported supplies (i.e., services and intangibles) under the general rules as well as on financial services from related entities and charges from head office under special rules. These special rules require self-assessment for a component of the financial services known as "loading". The calculation of the amount required to be self-assessed under these rules has caused problems for many insurance companies. The insurance industry has been working with the Department of Finance and the CRA to clarify the definition of "loading" as it relates to reinsurance.
- Intercompany transactions - Insurance companies must properly account for GST/HST and QST related to intercompany transactions which can raise many related issues, including fair market value rules, section 150 and other financial institution related elections, SAM adjustment calculations, allocation between taxable and exempt activities and agency.
- Exempt "arranging for" services - Insurance companies and some of their service providers that rely on the GST/HST exempting provision "arranging for" services should review their agreements to ensure that they meet the exemption provision and that none of the exclusions apply. The 2009 GST/HST amendments and a related CRA's administrative bulletin have raised many questions and interpretative issues.
- Remittance of taxes on premiums - Insurance companies are generally required to remit taxes collectable and payable on insurance premiums, including sales and premium taxes, to the proper tax authority. Your business' processes and systems should be reviewed and tested for accuracy and also to ensure they meet recent changes, such as collecting PST on taxable insurance premiums in Manitoba.
- Services to mutual funds and segregated funds - Insurance companies must properly calculate the GST/HST and QST on their services to mutual and segregated funds, and remit these taxes to the proper tax authority (the CRA or Revenu Quebec). In their calculations, these companies will also have to consider the new QST rules as well as B.C.'s return to the GST and PST on April 1, 2013 and P.E.I.'s new HST.
- GST/HST and QST pension plan rules - Many insurance companies have to apply the complex GST/HST and QST pension plan rules. However, the 2013 federal budget included a new relieving measure that could reduce the complexity for some companies.
- Allocation between taxable and exempt sales - The CRA continues to review insurers' input allocation between their taxable and zero rated activities, and exempt activities.
We can help
The final GST/HST selected listed financial institution (SLFI) regulations released in 2013 are one of the most significant legislative update for the industry since the introduction of the GST in the early 1990s. With more than 100 pages of regulations, the GST/HST SLFI rules include significant penalties, complicated calculations, new compliance rules and several transitional rules for various circumstances. The new QST rules and related compliance issues only add to the complexity of indirect taxes for insurance companies. We can help you carefully navigate this maze of complicated rules and help you meet your requirements and reduce related compliance and overall tax costs.
Information is current to February 25, 2014. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500