A federal tax of 10% on certain insurance premiums is due by April 30, 2019
A federal tax of 10% on certain insurance premiums is due by April 30, 2019. This federal tax may apply to a business if it has purchased insurance coverage from insurers outside Canada or if the business was covered under a global insurance policy acquired from insurers outside Canada by a parent company in 2018.
The federal tax generally applies where the business or individual purchases such insurance coverage for risks in Canada directly, or where the coverage is obtained on their behalf by a third party. This tax could also apply where a business has insurance coverage with an insurer licensed in Canada but the broker or agent is outside Canada.
Businesses may also be required to pay provincial sales taxes and insurance premium taxes if they acquire insurance coverage for risks in certain provinces from insurers unlicensed in the province. Note that the provincial rules and deadlines to pay these taxes differ significantly from the 10% federal tax.
Conversely, businesses that sell insurance coverage that cover risks in a particular province without being licensed in that province should review the provincial tax registration rules to ensure they meet all their obligations.
Don't miss April 30 deadline for 10% federal tax
An entity, such as a corporation resident in Canada, must pay a 10% federal tax on the net insurance premiums paid or payable during the preceding calendar year by April 30, in certain circumstances. This tax will generally apply where an entity enters into an insurance contract (or on whose behalf such a contract is entered into) against risk within Canada with an insurer (or any exchange) that is not authorized under the laws of Canada or any province to transact the business of insurance. For example, a corporation in Canada may be liable to pay the tax where the parent company acquired global insurance (including excess layers) outside of Canada on behalf of the entire corporate group.
The 10% federal tax on insurance premiums may also apply to a non-resident corporation carrying on business in Canada, as such a corporation is deemed to be a resident in Canada for purposes of that tax.
A business may also be required to self-assess the 10% federal tax on insurance premiums related to an insurance contract that is entered into (or entered into on its behalf) through a broker or agent outside Canada with an insurer, including any exchange, in Canada.
In general, the 10% federal tax does not apply to certain types of insurance, such as life, sickness or personal accident insurance and insurance against marine risks. The law also provides relief in some cases where a business can clearly demonstrate that the particular type of insurance is effectively not available in Canada. To qualify for this exemption, the business must file an exemption application with the CRA and provide specific information and supporting documentation.
Don't forget provincial sales tax and insurance premium taxes
Buying insurance coverage from insurers not registered in a particular province may also lead to provincial tax liabilities for some businesses.
Provincial sales taxes
Five provinces currently apply a sales tax on certain insurance contracts (Quebec, Ontario, Manitoba, Saskatchewan, and Newfoundland and Labrador). Similar to the federal rules, a business that enters into contracts with insurers not registered in the province may be required to self-assess a provincial sales tax on the related insurance premiums. Some penalties for non-compliance can be significant. For example, Quebec can impose a penalty equal to 200% of the tax amount. The sales tax rates, taxable insurance contracts, registration obligations, remittance deadlines and related non-compliance penalties vary by province.
Provincial insurance premium taxes
Further, a business may be liable to pay provincial insurance premium taxes as the insured person where the coverage is in a territory or a province in which the insurer is not licensed (otherwise, the insurer is generally liable for these taxes). In some cases, the business may be required to pay an increased levy on some of these premiums. For example, Alberta imposes a levy of up to 50% of the premiums and up to 75% of the premiums if the tax is paid late. Again, the insurance premium tax rates, rules and remittance deadlines vary by province and may be different than the ones for provincial sales taxes. In some cases, exceptions or lower rates can apply through the use of special brokers in the province.
Businesses that may be subject to the provincial sales tax on insurance contracts and insurance premium tax should review these tax regimes carefully and regularly to determine their tax obligations. Over the last few years, some provinces have made changes to these tax regimes, including new taxes, amended tax rates and modified rules. Most recently, Newfoundland and Labrador reduced its tax on automobile insurance to 13% (from 15%) on January 1, 2019 and Saskatchewan announced in February 2018 a new PST exemption for certain life, health, disability, accident and sickness insurance contracts as well as certain agriculture-related insurance contracts.
Governments are also increasing their audit efforts in this area. In addition to increased audit activities in Alberta, the federal government, Quebec and British Columbia are actively auditing these taxes.
For more information, please contact your KPMG adviser or one of the following Indirect Tax professionals:
National Leader - Indirect Tax Services
Information is current to April 09, 2019. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour 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. For more information, contact KPMG's National Tax Centre at 416.777.8500