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A taxing problem for insurers and policyholders.

A federal tax on goods and services sold in Canada which takes effect jan. 1 will have an unfair and burdensome impact on property/ casualty insurers and policyholders, according to conference speakers. Under the Goods and Services Tax (GST) law, Canadian manufacturers, suppliers and service providers will be required to collect a 7 percent tax. Although commercial enterprises are initially charged the GST on their purchases, most will be able to obtain a full credit for it when they collect and remit the tax on their sales, because it is intended that ultimately the final consumer foot the bill. However, financial services companies, including insurers and brokers, will be considered exempt," or barred from collecting the tax from their customers and claiming a credit for the GST they will pay on claims and operating expenses. insurers will also incur at least $350 million in taxes on claims payments after jan. I related to pre-1991 policies without any reimbursement.

"The property/casualty industry has been seriously disadvantaged versus other commercial enterprises in the GST marketplace because of its exempt status under the proposed legislation," said Ross Hillis, director of accounting for Royal Insurance Company of Canada. "There are different rules for different participants in the business economy which tends to violate the concept of the level playing field."

Even other financial institutions such as banks should have an easier time recouping some of the extra costs imposed by the GST. Banks will be able to pass on costs to their customers, while insurers who are operating in a soft market will find it difficult to increase premiums, explained Paulette Kennedy, vice president of finance and administration for Sedgwick James Inc. Furthermore, as Terri Goldenberg, vice president of claims for Commercial Union Assurance Company of Canada, pointed out, the ability of insurers to increase rates is also limited by regulatory bodies. "Eventually, however, any added costs will have to find their way into premiums," she added.

Ms. Goldenberg said the legislature's decision to render insurers exempt is inconsistent with the government's goal to minimize the cost of compliance for businesses.

Rather, the administrative costs incurred by insurers will increase as they attempt to appropriately allocate input tax credits and develop new claims procedures to assist in minimizing the impact," she said.

Mr. Hillis and Ms. Goldenberg offered several ways for insurers to minimize the impact, including net-of-GST, a concept that has been successfully employed by insurers in Great Britain where a similar value-added tax exists. Through net-of-GST, a policyholder files a claim for the amount of loss plus the tax, but the insurer reimburses him only for the loss. When the insured hires repairmen and others to restore his operation, he pays them for their services plus tax. Then the insured claims an input tax credit. In the end, the scheme does not infringe on insurers' profits or policyholders' premiums or settlements.

To be sure that a net-of-GST payment discharges an insurer of its liability to a policyholder, a claim should be paid after the insured receives a GST credit from the government, but that may slow the settlement process, said Ms. Goldenberg. An alternative is for the policyholder to waive or amend the policy by signing an agreement, a release or proof of loss which discharges all liability of the insurer for a payment net-of-GST, she said.

Certain legal and administrative issues may prevent the use of net-of-GST, the speakers agreed. "Since the net-of-GST payment procedure will reduce or avoid certain revenues otherwise receivable by the government, there is [additional] concern as to its acceptability," said Ms. Goldenberg. She said there are serious concerns that the scheme would be considered tax avoidance. The Insurance Bureau of Canada is seeking a legal opinion on the matter, and the issue has yet to be addressed by the Ministry of Finance. However, Mr. Hillis said, a preliminary opinion indicates a "generally positive outlook" for its application to property damage claims.

Ms. Kennedy raised several other issues regarding net-of-GST's acceptability. For one, not all businesses may claim an input tax credit. Those involved in health, child and parental care and education are exempt from these taxes, and therefore are not eligible for credits, she explained. The delay in claim payments caused by deferring them until an input tax credit is granted may present cash flow problems for some businesses.

Furthermore, the additional administrative work load associated with the net-of-GST claims settlement process is initially over-whelming," she said. "It goes far beyond simply recording GST paid on purchase and input tax credits taken." New policy wordings, waivers and/or amending agreements will have to be developed. Small and medium-size businesses and brokers may not have the inhouse expertise to cope with the changes and may need to contract out the extra work load. And as the GST law is amended, additional paperwork will be required.

Mr Hillis offered other suggestions for insurers that want to minimize the impact of GST. Because covered legal defense expenses are not included in the indemnity provision of most policies, insurers will have to pay a GST on them without being able to recover. ... A way around this is to bring such services in-house, said Mr. Hillis.

Insurers should also seek relief for the GST they will have to pay on claims payments after jan. 1 under policies issued before that date, he said. The Insurance Bureau of

Canada and the Association of Canadian Insurers continue to lobby government officials on the matter as well as other aspects of GST. "It can be said with reasonable certainty that the government now understands the serious problems GST legislation in its present format is causing the industry," said Mr. Hillis. "However, as the ultimate decision will be based on high-level political considerations, the outcome is clearly uncertain."
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Title Annotation:RIMS Canadian Risk Management Conference; tax on goods and services in Canada
Author:Schussel, Mark L.
Publication:Risk Management
Date:Nov 1, 1990
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