Revised GST memorandum 17.16 - GST/HST treatment of insurance claims: March 29, 2005.

On March 29, 2005, the Institute filed comments with the Canada Revenue Agency regarding their draft revision of GST Memorandum 17-16 GST/HST Treatment of Insurance Claims. The comments, which specifically address sections of the memorandum pertaining to leased vehicles, were prepared under the aegis fo TEI's Canadian Commodity Tax Committee, whose chair is Sherrie Ann Pollock of Royal Bank of Canada.

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On behalf of Tax Executives Institute (TEI), I am pleased to provide additional comments on the draft Revised GST Memorandum 17.16 D GST/HST Treatment of Insurance Claims. These comments follow up on the discussion and suggested changes presented during our December 7, 2004, liaison meeting. TEI appreciates your work in revising the memorandum; the changes will certainly provide helpful guidance for all affected taxpayers. TEI believes some additional modifications will provide additional clarity in respect of common business practices.

Background

Tax Executives Institute is the preeminent association of business tax professionals. TEI's 5,400 members work for 2,800 of the largest companies in Canada, the United States, and Europe. TEI's membership includes representatives from a broad cross-section of the business community, with members employed in all major industries and sectors of the economy. In that sense TEI is unique--we do not represent a particular group or industry.

Canadians make up approximately 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver. In addition, the bulk of TEI's U.S. and European members work for companies with substantial Canadian operations or sales.

Comments

TEI's recommendations pertain to paragraphs 31 and 35, both dealing with vehicle repairs for a leased vehicle covered by an insurance policy, and paragraph 32, dealing with repairs for a leased vehicle if the lessor is not the recipient of the service.

Paragraph 35 and the new example it contains reflect common industry practice; in TEI's view, this paragraph should be the primary example. In particular, paragraph 35 should come before paragraph 31. While paragraph 31 and the example it contains are correct from a technical standpoint, they are not illustrative of the common industry practice of the lessee arranging for repairs. In its present position, paragraph 31 may be interpreted by lessees as confirming their eligibility to claim input tax credits (ITCs), because affected taxpayers may stop reading once they encounter an example where the lessor can claim an ITC for the repair services. This is a common area of confusion when lessees are either non-registrants or are not engaged in a commercial activity. Insurance companies often mistakenly believe that a lessor is entitled to claim an ITC and often short pay the supplier or the insured as a result (lessors are considered mistaken when asserting that they are not entitled to claim an ITC). At a minimum, if paragraphs 31 and 35 are to remain in the present order, a statement cautioning the reader to also refer to paragraph 35 would help alleviate any confusion.

TEI also suggests that the examples in paragraphs 31 and 35 use consistent wording. Example 31 states that "the insurer will indemnify the lessor" while example 35 states "the insurer will indemnify the lessor/lessee." These statements are basically the same and we recommend that the sentences be changed to consistently read either "the insurer will indemnify the insured" or "the insurer will indemnify the lessor/lessee." The relevant portions of paragraph 31 and 35 are included below and changes have been identified using strike-through, bold, and suggested revision in brackets:

<begin strikethrough>31<end strikethrough> [35]. A lessor who is a registrant is eligible to claim an ITC for GST/HST paid on vehicle repairs for a leased vehicle covered by an insurance policy, if the lessor is the recipient of the repairs and the other conditions in section 169 respecting ITCs are satisfied.

The lessor is a registrant in the business of leasing vehicles. A lease agreement between the lessor and the lessee requires that the lessee acquire an insurance policy for the vehicle, which identifies the lessor as the named/additional insured. The insurance policy provides that the insurer will indemnify the <begin strikethrough>lessor<end strikethrough> [use either "insured" or "lessor/ lessee" to be consistent with paragraph 35] for its loss (i.e., the insurer does not provide a repair service). The lease agreement also provides that the title to the vehicle and any parts replaced during repairs remain vested with the lessor. The lessor contracts with the repair shop for the repair services. The invoice issued for the repairs identifies the lessor as the party that acquired the repairs and that is liable to pay for the repairs and the GST/HST.

<begin strikethrough>35<end strikethrough> [31]. A lessee who is a registrant is eligible to claim an ITC for GST/HST paid on vehicle repairs for a leased vehicle covered by an insurance policy, if the lessee is the recipient of the repairs and the other conditions in section 169 respecting ITCs are satisfied.

The lessee is a registrant and operates a restaurant. The leased vehicle is used to deliver food to its customers. The lease agreement between the lessor and the lessee requires that the lessee acquire an insurance policy for the vehicle that identifies the lessor as the named/additional insured. The insurance policy provides that the insurer will indemnify the lessor/lessee [or use "insured" to be consistent with paragraph 31] for the loss (i.e. the insurer does not provide a repair service). Under the lease agreement, the lessee agrees to be responsible for all maintenance and body damage beyond normal wear and tear. The lease agreement provides that the title to the vehicle and any parts replaced during repairs remain vested with the lessor. The lessee contracts with the repair shop for the repair services. The invoice issued for the repairs identifies the lessee as the party that acquired the repairs and is liable to pay for the repairs and the GST/HST.

Finally, the revised memorandum should emphasize those circumstances when an insurer can use the Net of GST/HST method. Accordingly, TEI recommends that the following sentence be added at the end of paragraph 32 be changed to read as follows: "Therefore, the GST/HST in respect of the repair services is not payable by the lessor and lessor is not entitled to claim an ITC even though the lessor is the owner of the vehicle. Accordingly the insurer can only use the Net of GST/HST method where the lessee can claim an ITC." The relevant portion of paragraph 32 is included below showing the suggested change identified in bold:

32. A lessor will not be eligible to claim an ITC for the GST/HST paid on vehicle repairs for a leased vehicle if the lessor is not the recipient of the service. For example, where the lessor is not a party to the agreement to have the repairs performed and does not incur a liability to pay the consideration for the repair services to the supplier under that agreement, for GST/HST purposes, the lessor is not the recipient of the repair services provided by the supplier. Therefore, the GST/HST in respect of the repair services is not payable by the lessor and the lessor is not entitled to claim an ITC even though the lessor is the owner of the vehicle. Accordingly the insurer can only use the Net of GST/HST method where the lessee can claim an ITC.

Conclusion

Tax Executives Institute appreciates the work that has been accomplished in revising GST Memorandum 17.16--GST/HST Treatment of Insurance Claims and welcomes this opportunity to present our views. We believe these suggested changes will serve to complement CRA's efforts and reflect common business practices within industry.

The Institute's comments were prepared under the aegis of the Institute's Canadian Commodity Tax Committee, whose chair is Sherrie Ann Pollock. If you have any questions or concerns, please contact Ms. Pollock at 416.955.7373 ([e-mail]) or David M. Penney, TEI's Vice President for Canadian Affairs, at 905.644.3122 ([e-mail]).