Some businesses and individuals may be required to pay a 10% tax on 2014 cross-border insurance premiums.
Some businesses and individuals may be required to pay a 10% tax on 2014 cross-border insurance premiums by April 30, 2015, where those premiums were paid to insurers not authorized to write insurance in Canada. Generally, the tax applies where the business or individual purchases 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.
While the 10% tax on cross-border insurance premiums has been in place for several years, it has become a regular audit issue for many businesses. For example the tax may apply to a business where a parent company acquires global insurance outside of Canada on behalf of the entire group of companies, including coverage for risks in Canada. Companies that fail to pay the 10% tax on premiums may be subject to interest and penalties.
Businesses with cross-border insurance coverage should also review whether they may be required to pay significant provincial taxes and levies related to insurance.
The Excise Tax Act provides rules that apply to every person resident in Canada, including a non-resident corporation carrying on business in Canada, who enters into an insurance contract (or on whose behalf such a contract is entered into) with an insurer that is not authorized under the laws of Canada or any province to transact the business of insurance. In this situation, the business is required to pay, no later than April 30, a 10% tax on the net premiums paid or payable during the preceding calendar year.
A business may also have to self-assess the tax where it has risk covered by an insurance contract that it entered (or was entered into on its behalf) through a broker or agent outside Canada with an insurer authorized to transact the business of insurance in Canada.
However, the 10% tax does not generally apply to:
An exception may also apply where a business can clearly demonstrate to the CRA that the insurance is effectively not available in Canada. To do so, the business must file an exemption application that provides specific information and supporting documentation, including coverage denial letters from authorized insurers.
Three provinces apply a sales tax on certain insurance contracts (Quebec, Ontario and Manitoba). Similar to the Excise Tax Act rules, businesses may be required to self-assess the provincial sales tax on insurance premiums where they enter contracts with non-registered insurers. The tax rate, deadlines to remit the tax and penalties for non-compliance vary by province. Penalties associated with this self-assessment obligation can be severe. Specifically, Quebec can impose a penalty equal to twice the amount of tax owing on insurance.
In addition, in most territories and provinces, an insured person can be liable for insurance premium taxes where the coverage is in a territory or province in which the insurer is not licensed (otherwise, the insurer is liable for these taxes). Some provinces also impose on the insured persons elevated levies on premiums paid to these unlicensed insurers. For example, Alberta may impose a levy of up to 50% of the premium and up to 75% if paid late. Here too, the deadlines and method of remittance vary by province and are usually different from the remittance of provincial sales taxes.
We can help you determine if your insurance coverage is subject to the 10% tax on cross-border insurance premiums or subject to any of the provincial taxes and levies. Where a particular insurance coverage is not believed to be available in Canada, we can assist you by reviewing your exemption application and supporting documentation. Businesses should also carefully review whether they must self-assess provincial taxes on certain insurance contracts.
For more information, contact your KPMG adviser.
Information is current to April 14, 2015. 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 endeavor 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