New developments in GST for insurance intermediaries

On July 25, the Canada Revenue Agency published Notice 325, "Services rendered by certain insurance intermediaries". The purpose of this publication is to provide guidance to certain insurance intermediaries, often referred to as :

• general agents (GA)

• associate general agents (AGA)

• tierce parties administrators (TPA)

According to the CRA, the activities of these intermediaries may include :

• Developing an insurance policy;

• Promoting and selling an insurance policy;

• Recruiting, training and directing subcontractors;

• Paying insurance claims;

• Providing administrative services.

These intermediaries may have a direct agreement with an insurer to provide their services, or they may have an agreement with another person who has an agreement with an insurer.

New directives

The application of GST generally depends on whether insurance intermediaries make an exempt supply of a financial service by "arranging" for the issue of an insurance policy.

Both insurers and insurance intermediaries should review the CRA publication guidelines and their contracts to determine whether the GST status of their supplies is consistent with these guidelines.

In order to make this determination, it must first be established whether, under the terms of the agreement, the intermediary is making a single supply or multiple supplies in the course of the particular transaction.

The nature of each supply must then be established by considering its predominant element and determining whether it meets the definition of a financial service. This will determine whether the supply is taxable or exempt for GST purposes.

In Notice 325, the CRA recognizes the importance of this two-part test. But even more importantly, the CRA reiterates that the "predominant element" test is used to qualify the supply, because only this element is taken into account in applying the inclusion and exclusion paragraphs of the supply of a financial service. The CRA also states that :

• This element is essential to the commercial effectiveness of the supply;

• The purchaser's point of view must be taken into account in determining the predominant element of the supply made by the insurance intermediary.

CRA points out that once the predominant element of the supply has been identified, it must also be determined whether the insurance intermediary is making a supply of a financial service. At this stage, it is necessary to review the inclusions set out in the definition of "financial service" and then to ensure that the exclusions set out therein do not apply.

The publication contains a number of examples to help insurance intermediaries determine whether the services they provide to insurers qualify as financial services or not. In this regard, the importance of the purpose of the intermediary's supply is mentioned, namely that the intermediary must act with the objective of bringing the parties into contact so that the insurer can make a supply of a financial service, namely the issuance of an insurance policy. The following elements will be taken into account in the analysis:

• The intention of the parties to the agreement;

• The degree of direct involvement of the intermediary, which must be sufficient for the supply to take place;

• The achievement of the supply of the financial service is highly dependent on the insurance intermediary.
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Points to remember

These CRA guidelines are an excellent starting point in a review of the activities of insurance intermediaries. In this regard, insurance intermediaries should review the content of their agreements with insurers to support the parties' intent regarding the eventual provision of a financial service and the important role of the intermediary in this regard.

The examples presented in the Notice can also be used as a guide by insurance intermediaries to help them determine whether or not their activities consist of the making of exempt supplies.

What about QST?

Given the principle of general harmonization of the QST regime with that of the GST, it is to be expected that Revenu Québec will use the same guidelines for applying the QST to supplies made by insurance intermediaries.

For more information

Don't hesitate to contact one of the Mallette tax specialists or associates in your region for more information: mallette.ca/join us.