Magazine article Risk Management

Ontario Insurance Sales Tax Weighs Heavy on Benefit Plans

Magazine article Risk Management

Ontario Insurance Sales Tax Weighs Heavy on Benefit Plans

Article excerpt

IN ONTARIO FINANCE Minister Floyd Laughren's budget speech on May 19, 1993, the Ontario Government announced its intention to follow the path previously taken by the provinces of Newfoundland and Quebec by imposing a provincial sales tax on insurance (other than life insurance) premiums. In turn, Bill 30 -- the Retail Sales Tax Amendment, 1993 -- which was drafted to implement these measures, was given first reading on June 1, 1993.

The initial reaction of most people to the taxation of insurance premiums is that it is an unreasonable measure. Such a tax will discriminate against the more prudent individuals or firms who are endeavoring to minimize their risks of loss and protect their future through various risk financing techniques. And in the bigger picture, Canadians argue, such taxation will cost the economy future jobs because it will add to the cost of doing business in Ontario.

Yet, perhaps the' most damaging aspect of Bill 30 involves the decision to tax benefit plans whether insured or not. In addition to premiums paid to insurers, agents or brokers for insurance, the term "taxable premiums" also includes: amounts paid by members of funded or unfunded benefit plans; and, for funded benefits plans, any amount paid into a plan by a planholder (i.e., the employer) less any amount paid to the planholder by members (i.e., the employees).

For unfunded benefit plans, taxable premiums also include amounts paid by a planholder by reason of the occurrence of a risk (e.g., insured incident or event), less amounts contributed to the planholder by members. However, neither planholder- nor member-contributed amounts entail any amount that must be included in income under the Federal Income Tax Act (unofficially interpreted to refer to payments such as those made out of salary continuance plans and cumulative sick leave plans on which income tax must be paid).

Wider Ramifications

FURTHERMORE, taxable premiums are also viewed as a contribution to an insurance scheme or compensation fund established by federal or provincial law. These include funds created by the Canada Deposit Insurance Corp. and funds such as those run by the Ontario Minister of Consumer and Corporate Relations for the protection of consumers under the Motor Vehicle Dealers Act and the Travel Industry Act.

Another unfavorable development is that "taxable premiums" also include fees paid for the administration or servicing of insurance contracts. Thus, brokers' fees and fees paid to third-party administrators of benefit plans, for example, also would be subject to taxation.

In addition to the 8 percent provincial sales tax on premiums, funded selfinsured group benefit plans are now subject to the 2 percent premium tax charged to insurance companies. This 2 percent premium tax will also be charged to associations registered under the province's Prepaid Hospital and Medical Services Act, such as Blue Cross, Green Shield and CUMBA.

Left Unscathed

WITH RESPECT TO "taxable premiums," the following types of premiums are exempted: contracts of reinsurance; insurance on agricultural property (including household property but not automobile insurance); commercial marine insurance as defined; insurance on tax-exempt aircraft as defined; payments under annuity contracts; and an amount paid to obtain a surety. Service, maintenance or warranty contracts on goods are also exempted (but buyers of warranty contracts are already paying premium sales tax on the fees paid for such contracts and, as of May 20, 1993, the exemption for replacement parts and labor under these contracts was removed). …

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