Ottawa proposes to clarify tax rules on imported reinsurance services

The federal government recently announced it intends to “clarify” the rules for calculating sales tax on reinsurance premiums in certain cases.

In its 2016-17 budget document, the ruling Liberals propose “to clarify that two specific components of imported reinsurance services, ceding commissions and the margin for risk transfer, do not form part of the tax base that is subject to the self-assessment provisions contained in the (goods and services tax and harmonized sales tax) imported supply rules for financial institutions and to set out specific conditions under which the special rules for financial institutions do not impose GST/HST on reinsurance premiums charged by a reinsurer to a primary insurer.”

Canadian insurers often “transfer a portion of their risk related to insurance policies to a nonresident affiliated reinsurer,” Ernst & Young LLP and tax law firm Couzin Taylor LLP stated, in November, 2014, in a tax alert.

“Generally, financial institutions must self-assess GST/HST on any outlays or expenses incurred outside of Canada that are deductible for Canadian income tax purposes and that relate to the financial institution’s Canadian activities unless one of several exceptions applies,” EY and Couzin Taylor said at the time. “Certain non-arm’s-length supplies of financial services are subject to self-assessment to the extent the outlay or expense constitutes ‘loading.'”

The tax alert in 2014 was issued after the federal Ministry of Finance published a letter “clarifying its intentions on the requirement to self-assess GST/HST on reinsurance.” That letter, EY and Couzin Taylor warned, was “not binding on the Canada Revenue Agency (CRA) or in a court of law, but it could serve as a strong tool of persuasion in any related discussions with the CRA.”

However as of late 2014, to the best of the knowledge of the authors of the EY and Couzin Taylor alert, the federal government had “not issued any directives to” CRA audits. As a result it was “possible that CRA auditors may continue to administer the imported services provisions in a manner that is not entirely consistent with the policy intentions expressed by Finance,” EY and Couzin Taylor added.

In its budget document for 2016-17, released March 22, the federal government said it intends to change the definitions of several terms — including loading and external charges — under section 217 of the Excise Tax Act, which stipulates goods and services tax on imported taxable supplies.

“As currently written, the definition of loading could be interpreted as being far more comprehensive than intended, particularly because it includes error and profit margin,” EY and Couzin Taylor wrote in 2014. “Given the potential for inconsistent interpretation of ‘loading’ in the context of reinsurance premiums, industry associations sought further clarification from Finance.”

If passed into law, the measures announced with the federal budget “will allow a financial institution to request a reassessment by the Minister of National Revenue of the amount of tax owing by the financial institution under the special GST/HST imported supply rules for a past specified year of the financial institution, as well as any related penalties or interest, but solely for the purpose of taking into account the effect of this measure,” the government stated in its budget document. “A financial institution will have until the day that is one year after the day that these amendments receive Royal Assent to request such a reassessment.”