Confusion Surrounds HST

Much confusion has arisen as the new Harmonized Sales Tax (HST) draws near its implementation date of Jul. 1, 2010. This is due in part to recent an announcement made by the Department of Finance and a subsequent Canada Revenue Agency (CRA) notice. The Department of Finance proposed to change the definition of “financial service” to exclude certain services that facilitate financial services such as management, administration, marketing and promotional services, on Dec. 14, 2009. CRA released GST/HST Notice No. 250 on Feb. 11, 2010, in response to the proposal. By excluding the aforementioned services from the definition, they would now become taxable for GST/HST purposes. In the CRA notice, many examples it constituted as excluded services — as part of “arranging for” financial service — completely reversed a number of the CRA’s own published positions on what was previously constituted as GST/HST exempt services.

Under the current legislation, the vast majority of products and services that insurance companies offer — including providing insurance policies and selling of investment products — are considered financial services, and, as such, GST/HST exempt. As a consequence, the new HST implementation will see increased operating costs and claims as insurers will be unable to claim input tax credits.

The new legislative proposals/ The CRA Notice 250

The Department of Finance’s announcement was intended to amend and clarify that investment management services, services that facilitate financial services and services of managing credit will be GST/HST-taxable and would apply retroactively to past transactions where the supplier treated these services are taxable.

The first exclusion from exemption identified by the Finance department is the service of the facilitatory service, which includes the provision of one or more of the following:

• market research, product design, document processing or preparation, customer assistance, advertising, promotional or similar activities; and

• collection, collation or provision of information.

The second exclusion from exemption identified in the Finance release is the service of managing credit when supplied to a person that is granting, or prospectively granting, credit. Managing credit includes (and hence may not be limited to): redit checking; valuation; authorization services; making decisions relating to a grant or an application for a grant of credit; crediting and maintaining records relating to a grant or an application for a grant of credit on behalf of the credit provider; and monitoring payment record or dealing with payments.

The notice provided details and several examples on the types of services that could be potentially subject to GST/HST. Some key examples in the notices include the following:

Investment dealers’ trailer fees

Investment dealer who arranges to purchase units of mutual fund for investors receives “trailer commissions or fees” from the fund manager. The prospectus describes these fees as being paid in recognition of investment advice and ongoing administrative services provided by the deal to the investors. In this situation, the CRA says the services provided by the investment dealer, including advice, arranging for the purchase of the units and ongoing administrative service, are GST/HST taxable.

Arranging for car loans

An automobile dealership has a financing department where employees help customers obtain financing. The dealership receives a commission from the financial institution for every successful loan. Employees obtain customer information, help customers select a type of loan, determine interest rates and make recommendations on the acceptance of loans. In this example, the CRA says the automobile dealership’s services to the financial institution are GST/HST taxable.

Telemarketing agency

An insurance company provides specialized group insurance coverage for members affiliated with a particular organization. The insurance company uses a telemarketing agency to contact the group members, explain the insurance coverage and answers questions on it, screen the eligibility of applicants, prepare the applications and forward them to the insurance company for final approval. In this situation, the CRA would say that the service provided by the telemarketing agency to the insurance company would be GST/HST taxable.

Insurers, and the financial institutions and business who provide services to them, should review the examples to assess whether any could apply to a transaction. Brokers (insurance brokers and agents) who provide services similar to those provided by auto dealership and telemarketing entities in the CRA’s example could be considered “arranging for” financial services and thus excluded from the GST/HST exemption. If insurance brokers and agent agreements are considered taxable sales, it would have significant consequences for insurers.

Budgeting may be required for increased tax costs as GST or HST payment may be required on services previously note taxed.

Update from the finance department

Minister of Finance Jim Flaherty issued a statement on Mar. 26, 2010, to clarify that the Dec. 14, 2009 announcement was intended only to address uncertainty arising from certain court decisions and not as a change in policy. The legislative proposal was not to impose new taxes and CRA is currently reviewing and updating the guidance it has published.

Although there appears to be assurance no new changes will be implemented, there will continue to be uncertainty until the legislation is passed. It is currently unclear on what or how the CRA’s position will be changed and whether certain or all positions will be reversed with respect to previously GST/HST exempted services. As of the date of this article, there have not been any written revisions to CRA Notice 250 or announcements detailing which activities considered as “arranging for” financial services will continue to be exempt from GST/HST.

Actions recommended for insurers and financial institutions

Insurers and financial institutions should review all supplier arrangements and vendor contracts that bring the services and product to market and confirm with CRA which situation could have GST/HST implications. Insurers should consult and confirm with CRA continuously, along with tax experts, to gain a full understanding of the potential impact to their organization of any revisions to the previously exempted financial services, if they do, in fact, become taxable.

Any entities, including insurance brokers, adjusters, and other related service providers, assisting with any same or similar arrangements mentioned by Notice 250 should review their own operations to identify potential taxable consequences. They maybe now required to register for GST/HST and to charge GST/HST on certain services provided.

With any changes in tax legislation comes complications. It is important to gain as much knowledge and prepare early to anticipate any potential effects HST changes might have as the implementation date of July 1 looms. As if the strain of operational and claim costs increasing as a direct result of harmonization is not enough, further challenges are ahead for insurers and financial institution in complying with the incomplete HST harmonization rules.

Stephen Lee is a manager at Matson, Driscoll & Damico Ltd. with more than seven years in financial advisory services practice.

The content of this article is for general information purposes, Readers are advised that they should always seek professional advice in connection with their particular circumstances.