New GST/HST Notice On Services Provided By Insurance Intermediaries - Insurance Laws and Products

In July 2023, the Canada Revenue Agency ("CRA") released GST/HST Notice 325 (the "Notice") with respect to services provided by certain insurance intermediaries. The Notice essentially makes official the 180-degree turn the CRA has taken with respect to the taxable status of commissions and other consideration payable to insurance intermediaries – including Third Party Administrators ("TPAs") and Managing General Agents ("MGAs") – after the industry requested clarification with respect to the tax treatment of a range of specific scenarios.

Background

In a 2019 technical interpretation, the CRA had stated that the predominant nature of the supply made by an MGA was a management and promotional service to the insurer that was excluded from the definition of "financial service" in Part IX of the Excise Tax Act (Canada) ("ETA") and was therefore taxable (GST/HST Interpretation Case Number 194986, May 6, 2019). At the end of 2019, the tax authorities began reassessing insurance intermediaries for uncollected GST/HST.

Following representations submitted by a coalition of industry players, the CRA agreed to clarify its view regarding the application of the GST/HST to services supplied by insurance intermediaries. The coalition notably provided examples to the CRA where clarifications were necessary.

The publication of the Notice is the result of those efforts. The Notice summarizes the CRA's current administrative position regarding the application of the GST/HST to supplies made, directly or indirectly, to an insurer by certain intermediaries. The Notice notably provides guidance to MGAs, TPAs and managing general underwriters ("MGUs") to determine whether the services they provide are subject to GST/HST or not.

Comment period

The CRA is accepting feedback on the Notice until October 31, 2023. However as the Notice states, it can already be considered by stakeholders as an "accurate summary of the CRA's interpretation of the law".

Application of the ETA to Insurance Intermediaries

As a general rule, any supply of property or services made by an insurance intermediary is to be considered as a taxable supply unless it is:

an exempt supply as provided for under Schedule V to the Excise Tax Act (Canada) ("ETA"); or
a zero-rated supply as listed under Schedule VI to the ETA.

A supply of a "financial service" (as defined under subsection 123(1) of the ETA) will generally be an exempt supply pursuant to section 1 of Part VII of Schedule V unless it is an "exported" financial service made by a financial institution and is listed in Part IX of Schedule VI as a zero-rated supply. In that context, the Notice proposes a three-step framework designed to help determine whether a supply made by an insurance intermediary is either taxable, exempt or zero-rated for GST/HST purposes:

Step 1 consists in determining whether the insurance intermediary is making a single or multiple supplies;
Step 2 analyzes the characteristics of each element of a supply and identifies its predominant element; and
Step 3 establishes whether the predominant element of the supply meets the definition of financial service in subsection 123(1) of the ETA.

Step 1: single vs. multiple supplies

Where an agreement provides for several elements of property and/or services to be supplied by an insurance intermediary to an insurer (or another person dealing with the insurer), one must first determine whether the insurance intermediary is actually making a single supply or multiple supplies for GST/HST purposes.

In many cases, each element to be supplied by the intermediary, if taken separately, could have a different tax treatment for GST/HST purposes. This makes the single vs. multiple supplies determination a critical aspect of the analysis framework. The CRA's administrative instructions regarding such determination are published in GST/HST Policy Statement P-077R2.

The Notice also underscores that it is ultimately a question of fact whether an intermediary is making a single supply or multiple supplies. In general, where several elements are provided and are inextricably intertwined and integrally connected to one another, such elements must be considered to form part of a single supply. It is also noteworthy that even if more than one contract exists between the parties, the CRA may still consider them to be a single supply.

Even where the above analysis has identified multiple supplies, the possible application of the deeming provisions in sections 138 and 139 of the ETA must still be considered:

Section 138 deems a supply to form part of another supply where they are supplied together for a single price.
Section 139 provides that services that are not financial services, or properties that are not capital properties of the supplier, to the extent they are provided together with financial services as a usual practice in the ordinary course of business of the supplier, are deemed to be financial services to the extent the pure financial service portion accounts for more than 50% of the value of the combined supply.

Step 2: predominant element of the supply

To the extent one single supply of multiple elements has been identified or where multiple supplies are instead made by the intermediary, it is then necessary to identify all of the elements of each supply. Finally, the predominant element of each supply should be determined.

As stated in case law, the CRA considers that the test to determine the predominant element of a supply is to find the element that gives the supply commercial efficacy. In this respect, the Notice states that such determination requires identifying objectively, from the recipient's perspective, the service provided by the insurance intermediary in exchange for the consideration. The Notice also mentions that the way the consideration for the supply is calculated is not, in and of itself, a determining factor.

Step 3: whether the supply is a financial service

Once the predominant element of a supply has been identified, it is then necessary to determine whether it is a supply of a financial service.

Generally, under Part IX of the ETA, a supply is a financial service, as defined in subsection 123(1), if it is listed within any of paragraphs (a) to (m) of such definition (collectively, the "Inclusionary Paragraphs"). However, if such supply also falls within any of the exclusions listed in paragraphs (n) to (t) of the definition (collectively, the "Exclusionary Paragraphs"), it is deemed not to be a financial service.

Inclusionary Paragraphs

The Notice focuses on Inclusionary Paragraph (l) which refers to "arranging for" a service that is referred to in any of Inclusionary Paragraphs (a) to (i) and is not referred to in any of Exclusionary Paragraphs (n) to (t).

More precisely, the Notice considers a scenario where an intermediary is involved in the insurer's supply of a financial service such as the issuance or renewal of an insurance policy.

The CRA notes that in order for an insurance intermediary's supply to be considered as "arranging for" an insurer's supply of a financial service, the following factors described in GST/HST Technical Information Bulletin B-105 are pivotal:

the purpose of the supply must be to act as an intermediary to bring parties together to make the insurer's supply of the financial service;
the insurance intermediary must have sufficient direct involvement in the insurer's supply of insurance policies that it can be said that the intermediary causes the supply to occur (although it is not necessary for the insurance intermediary to be involved in each individual transaction); and
there should be a high degree of reliance on the insurance intermediary by the insurer or the recipient of the insurer's supply of the financial service.

Certain Exclusionary Paragraphs

Even if a supply made by an insurance intermediary is included in one or more of the Inclusionary Paragraphs, the supply can still be excluded from the definition of "financial service" to the extent its predominant element is also caught by one of the Exclusionary Paragraphs.

The Notice specifically focuses on Exclusionary Paragraphs (r.4) and (t). Exclusionary Paragraph (r.4) excludes from the definition of "financial service" a service that is preparatory to the provision, or the potential provision, of a service referred to in any of Inclusionary Paragraphs (a) to (i) and (l), or that is provided in conjunction with a service referred to in any of those Inclusionary Paragraphs, and that is either:

a service of collecting, collating or providing information, or
a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or a similar service.

For its part, Exclusionary Paragraph (t) also excludes certain services that are prescribed under the Financial Services and Financial Institutions (GST/HST) Regulations (the "Regulations"). A prescribed service for purposes of this paragraph generally includes any administrative service (including an administrative service in relation to the payment or receipt of claims or benefits, but excluding a service that is solely the making of the payment or the taking of the receipt). This means that a prescribed administrative service could include a service in relation to the payment of an insurance claim that does not involve any independent decision-making.

However, an administrative service is generally not a prescribed service (and not excluded from the definition of financial service) if it is supplied with respect to an instrument (which is defined as money, an account, a credit card voucher, a charge card voucher or a financial instrument such as an insurance policy) by certain persons at risk (directly or indirectly through closely related groups or agents).

A "person at risk" in respect of an instrument means a person that is financially at risk by virtue of the acquisition, ownership or issuance by that person of the instrument or by virtue of a guarantee, an acceptance or an indemnity in respect of the instrument, but does not include a person who becomes "at risk" in the course of, and only by virtue of, authorizing a transaction, or supplying a clearing or settlement service, in respect of the instrument.

Seven Example Scenarios

Seven examples are provided by the CRA in the Notice. These include situations in which a range of services are provided by insurance intermediaries, such as MGAs and TPAs, to licensed and non-licensed insurers. In each of the first five examples, the intermediary's supply to the insurer is exempt, while in the sixth and seventh examples it is not.

Example 1 concerns a typical scenario in which a Canadian MGA enters into a managing general agent agreement with a Canadian licensed insurer. In this scenario, the MGA's supply to the insurer is a financial service covered under Inclusionary Paragraph (l) (and not excluded under any of the Exclusionary Paragraphs) that is exempt for GST/HST purposes.
In Example 2, a Canadian TPA develops an employee benefit plan to market to employers and contracts with Canadian licensed insurers to issue group insurance policies to employers. In this case, the TPA receives a commission from the insurers for group policies sold to employers which is also exempt for GST/HST purposes.
Example 3 provides for a Canadian corporation entering into an agreement with a Canadian licensed insurer. The Canadian corporation is appointed by the insurer to act on the insurer's behalf to distribute and manage travel insurance policies sold to Canadian residents and the intermediary receives a commission based on the premiums received on policies sold by such intermediary. Again, the intermediary's supply to the insurer is viewed as an exempt financial service.
Example 4 illustrates a scenario where a Canadian TPA enters into two agreements with a Canadian insurer, where under agreement A, the TPA solicits customers to buy the insurer's group life and health insurance policies, and under agreement B, the TPA administers all policies it has distributed under agreement A. The TPA only receives consideration (i.e., commissions) under agreement A based on the policies distributed. In this case, the TPA's supply to the insurer under both agreements is a financial service covered under Inclusionary Paragraph (l) (and not excluded under any of the Exclusionary Paragraphs) that is exempt for GST/HST purposes.
Example 5 involves a Canadian corporation entering into an agreement with a Canadian insurer where the intermediary distributes the insurer's car replacement insurance policies to customers who purchase new cars through Canadian car dealers. A commission is paid to the intermediary based on each policy issued through the intermediary's network of dealers. Again, the intermediary's supply to the insurer is exempt for GST/HST purposes in this example.
In Example 6, a Canadian corporation that is not authorized to carry on an insurance business develops a car replacement program under which, in the case of a total loss, the corporation will pay a customer the difference between the cost of the replacement car and the primary insurer's settlement amount. An insurer that is licensed issues a contractual liability insurance to the corporation providing coverage for the corporation's obligations towards the customers. In this case, the supply of the car replacement contracts to the customers is not an exempt financial service because the corporation is not issuing an "insurance policy" as defined in subsection 123(1) of the ETA. Premiums payable by the corporation to the licensed insurer are nonetheless exempt.
Finally, Example 7 provides for a Canadian corporation that owns an insurance claims adjudication and settlement system. The corporation adjudicates drug benefit claims made by insured employees covered by group health insurance policies issued by insurers. Employees receive the drug benefits directly at the point of purchase. For the corporation's services, an insurer pays a fee for each claim adjudicated through the corporation's system. By taking into account the insurer's perspective (i.e., the recipient of the supply), the CRA concludes that the predominant element of the corporation's supply is an administrative service. Even if such service were included in any of the Inclusionary Paragraphs, the CRA would conclude that it should be excluded under Exclusionary Paragraph (t) as a prescribed service under paragraph 4(2)(b) of the Regulations. Moreover, subsection 4(3) of the Regulations would not be applicable to exclude the supply from being a prescribed service considering the corporation is not a "person at risk" in this scenario.

Concluding Comments

The publication of the CRA's official position regarding the exempt status of commissions payable by insurers to insurance intermediaries, including TPAs and MGAs, in typical real-life scenarios had long been awaited and requested by participants in the industry.
Clarifications regarding the application of the "arranging for" Inclusionary Paragraph (l) could also assist businesses acting as intermediaries in connection with financial services supplied by financial institutions outside the insurance industry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Canada: New GST/HST Notice On Services Provided By Insurance Intermediaries