GST/HST Issues for Brokers
The recent implementation of HST in Ontario and British Columbia will result in additional costs for insurance brokers
The introduction of a harmonized sales tax in Ontario and British Columbia on July 1, 2010, has resulted in a number of issues affecting insurance brokers. Since HST is a value-added tax like GST, brokers should be concerned with transactions related to their sales (i.e., revenues) as well as those related to their purchases (i.e., expenditures). Due to the complexity of HST in a country where only five provinces have harmonized their sales taxes with the federal GST and where even those provinces have different HST rates (ranging from 12 to 15%), tax compliance and reporting have become tremendously challenging.
Does GST/HST apply to brokers’ services?
From a sales and revenues perspective, the key question for brokers to ask is whether GST/HST applies to the services they provide. For example, referral services, consulting services, and administrative services should be regarded as taxable. As such, a broker would be required to register for GST/HST, collect GST/HST on its fees, and remit the GST/HST to the Canada Revenue Agency (CRA). On the other hand, “arranging for” the sale and issuance of financial instruments, such as insurance policies, should be regarded as GST/HST-exempt. Consequently, brokers would not be required to collect GST/HST on commissions charged.
What’s the correct rate to charge?
When a broker provides a taxable service, the broker must determine the appropriate GST/HST rate (i.e., 12% in BC; 13% in Ontario, Newfoundland, and New Brunswick; 15% in Nova Scotia; and 5% in all other provinces). Detailed rules govern how to determine the applicable GST/HST rate. Although in many cases the service recipient’s address will determine the rate, it is not always the case. Failure to follow the rules can result in overcharging customers or receiving a tax assessment from the CRA if the broker did not collect enough tax.
Treatment of financial services has changed
Adding to the complexity are recent changes to the tax law that are intended to narrow the circumstances under which a person would be considered to be “arranging for” the GST/HST-exempt sale and issuance of financial instruments. Although we understand that this change is not specifically directed at insurance brokers, the narrowing of this concept could nevertheless affect them. It is possible that commissions brokers earned in the past that would not have been subject to GST/HST may now be subject to the tax in cases where the criteria for “arranging for” are no longer met. Brokers and their advisers should carefully consider the administrative guidelines relating to this change that the CRA has recently released (see: http://www.cra-arc.gc.ca/E/pub/gl/p-239/p-239-e.html).
This exercise can be time-consuming if brokers are not currently appropriately tracking tax on all purchases.
One example in the CRA’s administrative guidelines may be especially relevant to brokers; it indicates that the sale of insurance can be taxable where the activities undertaken are predominantly preparatory activities of collecting information, customer assistance, and document preparation and processing, and therefore excluded from being considered “arranging for” the sale and issuance of insurance policies. Although the example deals specifically with selling insurance through telemarketing methods, the implications can apply beyond telemarketing where a broker may be involved in the same type of preparatory activities.
Where brokers have not charged GST/HST based on the “arranging for” concept, they may wish to review their contractual agreements to ensure that this remains the appropriate tax treatment in light of the changes to the law. Failure to collect GST/HST on taxable transactions could result in a tax assessment of 5, 12, 13, or 15% of the commission revenue earned by brokers, plus penalties and interest.
How does GST/HST affect brokers’ purchases?
A broker’s purchase transactions and expenditures should also be carefully monitored and accounted for. Where brokers are “arranging for” the sale and issuance of insurance policies and thus not collecting GST/HST on commissions, brokers will correspondingly have a very limited ability to recover GST/HST paid on their purchases and expenditures. For example, if an advertising agency charges GST/HST on marketing services provided to a broker to promote the broker’s business of selling insurance, the GST/HST the broker paid to the advertising agency is unrecoverable. As such, brokers should ensure that suppliers are only charging GST/HST where required, and also charging the appropriate GST/HST rate for the transaction.
Further analysis and calculations may also be required where brokers operate only in one province or in multiple provinces (one of which is an HST province). Brokers that only operate in one province may be required to self-assess or apply for a rebate for the provincial component of HST (ranging from 7 to 10%; the federal component is 5%) for the interprovincial movement or usage of goods and services they acquire from suppliers. By doing so, the broker will ultimately be able to determine its true liability for the provincial component of HST.
Where brokers operate in multiple provinces (one of which is an HST province), they are required to use a special formula to determine their ultimate liability for the provincial component of HST. It is important to note that the elements within the formula require that a broker accurately track the tax paid on all purchases. This exercise can be time-consuming if brokers are not currently appropriately tracking tax on all purchases.
Along with these issues, brokers are required to consider certain special rules when attempting to manage GST/HST; for example, brokers may have to consider special rules involving intercompany transactions, transactions involving non-residents, and even certain specific rules dealing with automobile expenses, meals and entertainment expenses, and telecommunication expenses, among other things.
Brokers should also note that the rules for financial services under the Quebec Sales Tax (QST) are significantly different than the GST/HST rules. Needless to say, all of these special situations go beyond the scope of this article and may require a broker to consult its tax advisers.
The recent implementation of the HST in Ontario and British Columbia as well as changes to the GST/HST law have certainly made insurance brokers’ tax compliance and reporting obligations more complicated. Although HST will without a doubt result in additional administrative costs as well as tax costs to brokers, proper planning can be critical in managing and mitigating these costs. n
Cliff Lee is a senior manager in KPMG’s Indirect Tax Practice for the Greater Toronto Area. He advises clients in a broad range of indirect tax areas and specializes in GST/HST issues for financial institutions.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. Information is current to August 31, 2010. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although KPMG endeavours to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the Octoer 2010 edition of Canadian Insurance Top Broker magazine.