How brokerage mergers could create tax benefits

Tax filing season is on the horizon, which means it’s time for Canadian brokerages and insurance companies to consider how they’ll treat GST, HST or QST payments, Yakoob Vayani, a partner at KPMG in Canada in Indirect Tax, Advisory, told a recent Canadian Insurance Accountants Association webinar.

He noted organizations should work to ensure their elections (a choice taxpayers make among several possible reporting options) related to GST/HST remain valid and will continue to produce the desired results. The elections are made under Sections 150 and 156 of Canada’s tax code.

Specifically, Section 150 allows corporations “that are members of a closely related group (each member of which, among other things, must be closely related to each other) to elect to treat certain taxable supplies made between them as supplies of financial services and therefore exempt from GST/HST.”

Accomplishing this requires companies to perform a cost/benefit analysis of the elections they currently have in place.

“Start by reviewing intercompany transactions received or provided by the organization with the objective to understand who is doing what to whom,” Vayani said. “The goal is to file or reconsider any new elections recently filed, keeping in mind a Section 150 election must now be in place for at least 365 days, and then file any revocations on the new prescribed form that has been released by the CRA.”

What’s the benefit for Canada’s P&C insurance industry?

“I’ll just share one example. The insurance broker community continues to experience significant M&A activity, and in some cases new acquisitions may remain separate legal entities for extended periods of time for various reasons,” said Vayani.

“Implementing processes to file these [Section] 150 elections [as soon as possible] after acquisitions, where appropriate, will reduce tax leakage in the organization.”

Tax leakage is revenue that’s lost when a business entity with presence in multiple tax jurisdictions uses a patchwork of loopholes to try and avoid certain taxes.

Vayani also noted concerns around imported taxable supplies and self-assessment continue to be a hot topic in both CRA and provincial tax audits. They include imports from third parties as well as those from related parties.

“As a result of the changes in the GST and PST regime in Canada, particularly on digital goods and services provided by non resident suppliers to Canadian users, we have found a significant number of non-resident, non-registering entities have now registered for Canada GST and PST,” he added.

“Where a broker may have been required to self assess taxes in the past, [they] may now be acquiring supplies from a supplier who has now registered for the tax and there may not be a need for the recipient or the insurance broker in Canada to self assess those taxes.”

In response, he offers two recommendations:

• Review any imports and identify or review the current processes in place to capture the important taxable supplies, and
• Review current systems and update your supplier registration statuses, particularly for non-resident suppliers, to ensure taxes aren’t being self assessed in cases where a supplier is registered, and where tax is being paid. This will help ensure the systems capture those taxes accurately.

Feature image courtesy of iStock.com/Shutthiphong Chandaeng