Insurance companies are now facing more changes to address British Columbia transitioning back to GST and Provincial Sales Tax (PST), Quebec further harmonizing its Quebec Sales Tax (QST) rules to the GST rules, and Manitoba applying Retail Sales Tax (RST) on some insurance contracts, along with other upcoming legislative amendments.
For example, financial services will become QST-exempt on January 1, 2013. Insurers operating in Quebec may see an increase in their operating and claims expenses that could cost more than the current compensatory tax.
CRA audit activities prove expensive for insurers
The CRA has recently started to audit and assess insurers for GST/HST related to reinsurance with related parties. Insurers must ensure they’re complying with amendments to the law made in response to the State Farm court decision in 2005. These amendments require insurers to self-assess tax on all deductible expenses for supplies coming from outside Canada, with certain exceptions.
For example, an insurer may have to self-assess on reinsurance with a related party to the extent that it is considered “loading”. Loading generally includes profit margin, employee compensation and other administration and operation costs of the reinsurer. However, loading should not include the portion of the amount paid for the reinsurance attributable to claims costs (i.e., the risk part of the premium).
The law was also amended to extend the audit period for the new self-assessment rules to seven years (from the general four-year audit period). Insurers that have not yet been audited under these new self-assessment rules should prepare to deal with the CRA’s enquiries related to this reinsurance issue.
We understand that the Department of Finance is reviewing the effect of the self-assessment rules on reinsurance and is currently looking for input from insurance associations.
The CRA is also focusing its audits on other items including allocation methodology, distribution costs of segregated funds, intercompany transactions, and “arranging for” sale of insurance.
With a significant number of new GST/HST auditors, the CRA appears to be increasing its audit activities for all businesses including insurers.
Good time to deal with challenges
With all the recent and upcoming changes and increased audit activities, it may be a good time to have an indirect tax review for compliance issues and recovery opportunities, and to prepare your systems and processes to deal with these challenges.
KPMG has prepared a checklist to help you determine whether an indirect tax review may be worthwhile and to help you assess the impact on your organization of the challenges posed by the recent and upcoming changes.
Have you considered the impact of the following key changes and issues on your systems, processes, and returns?
The significant changes to the Special Attribution Method (SAM) and its numerous adjustments (e.g., transitional rules, recaptured input tax credit requirements, provincial attribution and supplies between related parties)
The upcoming further harmonization of the QST rules to the GST rules in which financial services are proposed to become QST-exempt services, which should eliminate the ability to recover the QST paid on related expenses
The new Manitoba measure to apply RST on many insurance contracts
The self-assessment rules on some deductible expenses and the effect of the CRA’s administrative position on “loading” (i.e., non-risk component of deductible expenses, such as reinsurance)
The B.C. transition back to GST and PST with all the related compliance issues and obligations (e.g., separate returns, PST self-assessment on some expenses)
The special rules for charging fees to mutual and segregated funds, taking into account the B.C. transition back to GST and PST and Quebec’s changes to QST rules and ongoing rate changes
The recently shortened deadline to recover overpaid PST in Ontario of December 31, 2012 or earlier, depending on the circumstances
The new self-assessment and rebate rules on inter-provincial supplies for non-selected listed financial institutions and on claims costs for insurers, if applicable
The legislative changes to “arranging for” financial services and the CRA’s recent related administrative policy
The tax-effective structuring of intercompany and third-party transactions
Your annual information returns and their related severe non-compliance penalties
The recent changes to the place of supply rules that could affect the GST/HST and QST you must collect on your taxable supplies
Your new remittance and reporting obligations under the GST/HST pension plan rules for employers and their pension plans.
How KPMG can help
KPMG can help you meet these challenges so you will be able to assure stakeholders that you are addressing risks. We can:
- Assist you in understanding the effect of QST changes in Quebec and HST deharmonization in B.C.
- Assist you in preparing and managing CRA audits including issues related to the self-assessment rules (e.g., reinsurance)
- Assist you in understand how Manitoba RST applies to your insurance contracts
- Review your GST/HST returns, provincial attribution, blended rates if applicable, and supporting documentation to help you correct compliance issues and identify GST/HST recoveries
- Review your allocation methodology to determine whether the method can be improved
- Review your annual information returns and reconcile information with your GST/HST returns, corporate income tax returns and other documentation
- Assist you in identifying tax paid in error or in making changes to reduce overpayments of GST/HST, QST and PST/RST on an ongoing basis
- Assist you in making changes to your systems and processes so you can meet your filing requirements
- Recommend and help implement tax planning opportunities.
For more information, contact your KPMG adviser.