KISS-ing the Taxman

Our instinctive prejudice against taxation runs deep, the age-old entrenched umbrage persisting despite the logic behind its collective benefit. George Harrison set our resentment to music:

Let me tell you how it will be

There’s one for you, nineteen for me

‘Cause I’m the taxman, yeah, I’m the taxman

Should five per cent appear too small

Be thankful I don’t take it all

‘Cause I’m the taxman, yeah I’m the taxman

If you drive a car, I’ll tax the street,

If you try to sit, I’ll tax your seat.

If you get too cold, I’ll tax the heat,

If you take a walk, I’ll tax your feet.

Don’t ask me what I want it for

If you don’t want to pay some more

‘Cause I’m the taxman, yeah,

I’m the taxman …

(Parlophone Records, 1966)

Nevertheless, representatives from the insurance industry and the Canada Revenue Agency have been working to break down some of the barriers, building a more fair and respectful framework in which to conduct business.

Taxes, on many levels, are intrinsic to insurance. The merits of particular levies may be debatable, but overall the various assessments provide a basis of measurement, stability and protection — for both consumers and the domestic industry — twinned with the ministrations of regulators. All countries regulate and assess financial transactions within their own borders, protecting their public and various stakeholders, while supplementing government income. Canada, of course, is no exception to this worldwide practice.

The ease (or difficulty) of navigating through a nation’s tax system is frequently seen as a measure of that nation’s support for international commerce. In Canada, insurance taxes are most often built into premiums and are remitted automatically to governments by insurers, without specific client awareness. Exceptions, however, can lead to administrative complications and frustrations — and even to unintended impressions of obstructionism.

Canadian brokers, in their role representing Canadian businesses as well as individuals, naturally favour tax systems that are fair, user-friendly and practical. Broker resources can be devoted less to red tape around taxes and more to clients’ needs. Business consumers can get on with their businesses.

Broker associations emphatically have no interest in assisting anyone to avoid legitimate taxes or in encouraging unlicensed placements. Having said that, the Toronto Insurance Conference (TIC) and the Insurance Brokers Association of Canada (IBAC) are dedicated advocates of eliminating unnecessary administrative burdens. Similarly, the Canada Revenue Agency (CRA) is following the mandate of ‘fairness’ introduced in 2007 and reinforced over the last several budget years. The CRA has a natural reason to seek out efficiencies benefiting both taxpayers and also CRA staff. Both the TIC and IBAC have met periodically with CRA representatives over the past several years to foster open communication, clarify tax application and simplify the associated administration.

When premium taxes are not collected in usual manner through licensed insurers, governments generally levy other “excise” taxes. Each province has its own regulations; federally, these situations fall within the scope of the Excise Tax Act. This legislation outlines both the requirement that insurance be placed with a Canadian-licensed insurer, and also that brokers through whom insurance is placed must be Canadian-licensed. It specifies that: “The contract shall, for the purposes of (the act), be deemed to have been entered into or renewed, as the case may be, through the broker or agent directly retained or instructed by the insured and not through any other broker or agent.”

For some time, CRA auditors looking at cross-border placements focused little on the broker portion of these criteria. More recently, as public emphasis on strict compliance grew, a trend developed toward an increasingly literal interpretation of the excise tax legislation. Auditors examining corporate insurance files were directed to seek specific demonstrations of “direct retention and instruction (of the Canadian broker) by the insured.” Unfortunately, business is not always so linear.

For CRA staff, the challenge of sorting through multi-directional emails, conference call notes and records of simultaneous discussions was confusing at best, as well as disproportionately time-consuming and inefficient. Given that multiple insurers and brokers were involved, and despite businesses’ genuine intention to work with properly licensed Canadians, the expectation of specific paths of communication often worked against practicalities; meeting this expectation created redundancies and obstacles. At worst, the obligation for redundant instruction increased potential for contradictions and errors, to the business consumer’s disadvantage. Some companies working in Canada felt that as international organizations they were in fact being penalized.

Raising the issue on behalf of business consumers during a meeting with the tax authorities, brokers found a receptive audience. CRA staff, also frustrated with the existing practice, met internally. Ultimately, they were able to agree that the narrow interpretation of the Excise Tax Act did more harm than benefit to business consumers, the insurance industry and the CRA’s own objectives.

Therefore, in late 2011, the CRA’s interpretation of the Excise Tax legislation was adjusted to recognize the business realities of complex placements. In a letter from Pierre Bertrand, director-general of the excise & GST/HST rulings directorate at the CRA (posted with permission on the TIC website at www.ticonf.com), the amended position was confirmed. An official rulings bulletin is also expected later this year.

The essentials have not changed. Coverage must be placed with licensed insurers. If a broker is involved, there must be a licensed Canadian broker. Now, however, auditors will simply look for primary evidence of that licensed broker’s involvement in the name of the brokerage appearing on the policy documents.

These are, of course, only the minimum requirements to avoid the application of excise tax. A broker’s ultimate duty is still fully owed to the client and is still subject to the requirements of provincial regulators. In order to best serve the customer’s interests, the broker on record still needs substantive involvement and interaction with the client, however that communication occurs.

Even where additional international intermediaries are involved, the advice and advocacy of the local broker is still invaluable to the client. The Canadian broker has ‘boots on the ground’ for inspections, personal contact with client’s local people and, as needed, can speak the local language. Then, allied with the international broker and armed with local market knowledge, the Canadian broker can offer the client more leverage to negotiate with insurers, ensuring that coverage is consistent, meets local standards and is reasonably priced.

This is only one instance of a successful dialogue between broker associations and the CRA. The CRA has been open to other suggestions for reducing unnecessary administrative work related to unlicensed placements. Despite the disadvantages of unlicensed cover, and reiterating that broker associations in no way encourage such arrangements, occasionally business reasons may force companies to obtain coverage from an insurer not licensed in Canada. When this happens, the client must also pay the Federal Excise Tax (FET), as well as other parallel provincial taxes.

Clients may apply for an exemption from the FET in specific circumstances, when licensed coverage is simply unavailable. Canadian broker associations have been working with the CRA for some time to streamline the exemption-request process, sharing information about current market availability to eliminate unnecessary work and duplicated documentation.

As a first step, a project to develop export lists such as those used in the United States has been launched, with input from brokers and insurers across Canada. Currently used as a reference for CRA auditors, the lists categorize types of insurance exposures for which no licensed coverage is available in Canada, or for which there is only limited capacity. The lists are subject to an annual review process. They are open to amendment proposals from any quarter. It is hoped that with additional years’ practice and verification, CRA will ultimately accept the export lists as official confirmation of lack of market availability.

Looking at the complicated tangle of insurance taxes in other jurisdictions, and the enormous costs incurred to administer and interpret the snarl, there is a lesson to motivate all parties in our Canadian industry to keep talking. The old adage tells us that it is unlikely in the extreme that insurance taxes will ever go away. But with initiatives to improve communication and mutual understanding between business and tax authorities continuing to flourish, at the very least we can alleviate some of the associated pain