Impact of HST on Brokers

The federal government has sought to harmonize provincial sales taxes with the federal GST for over a decade now— its only success so far was in 1997 when Nova Scotia, New Brunswick, and Newfoundland all introduced harmonized taxes.

Now, with the federal government’s agreement to offer “transitional assistance” to Ontario, in the amount of $4.3 billion (CDN) in the form of two transfer payments, the idea of a harmonized sales tax has apparently become enticing enough for Ontario to introduce a harmonization tax, effective July 1, 2010. Not to be left out of the party, B.C. has also recently announced its intent to harmonize and will also receive transitional assistance of $1.6 billion from the federal government.  Many anticipate that it is only a matter of time before the remaining provinces, with provincial sales tax, will also implement the harmonized tax.        

The news is welcome to a few business sectors, who consider current provincial sales tax (PST) as less efficient and effective because it becomes embedded in business purchases, cascading down the supply chain and is ultimately reflected in higher prices to consumers. By harmonizing provincial sales taxes with GST governments will create a single federally administered sales tax where most businesses would be reimbursed for all of the HST paid on business purchases. Consequently, it is anticipated that significant tax savings will be realized by the construction, manufacturing, forestry, retail, and transportation industries, amongst others.

Unfortunately, excluded from the list of industries that will experience tax savings is the financial services sector, including the insurance industry.

Tax Shift Will Hurt Insurance Brokers
In an effort to preserve the amount of tax revenue to various governments, the HST, in effect, shifts the tax burden away from the construction, manufacturing, forestry, retail, and transportation industries and towards consumers and exempt entities, such as the financial services sector. As a result, the financial services sector will have increased costs given the limited ability to recover any HST paid on business expenses.

The impact to the insurance industry will be significant—as many of business expenses, which were subject to the 5% GST but were not previously subject to provincial sales tax, will be now be subject to HST at 12% to 13%, depending on which province the business is registered in. The most notable areas where brokers, and other insurance professionals, will see an increased tax burden are rent and other occupancy costs, and purchased services such as advertising (e.g., radio, television), administration, and professional fees.

Another problem is that despite an almost national implementation of the HST, there will still be differences in the manner that the tax will be applied from province to province.  Most notably, the HST rate in B.C. will be 12% while the HST rate in Ontario and the Maritime provinces will be 13%.  Furthermore, certain restrictions on reimbursements of HST will exist in B.C. and Ontario, but not the Maritimes. 

Added Burden of Tax Complexities
In addition to the increased tax burden, the insurance industry will also face tax compliance complexities.

For instance, insurers, brokers, and agents that do provide some taxable services will be required to determine whether GST or HST should be applied; 12% HST in B.C., 13% HST in Ontario and the Maritime Provinces, 5% GST in Alberta, Saskatchewan, Manitoba, PEI, and Quebec.  Note that this doesn’t even take into consideration that provincial sales tax may still also apply in Saskatchewan, Manitoba, and PEI, as well as QST in Quebec. 

Also, insurers, brokers, and agents that operate in both harmonized and non-harmonized provincial jurisdictions (e.g., Alberta and B.C.) will be required to determine provincial HST liability through the use of a complex attribution formula.

Yet, insurers, brokers, and agents that operate in only harmonized or non-harmonized provincial jurisdictions (e.g., only Ontario, or only Manitoba) will be required to determine provincial HST liability through the process of self-assessing tax and/or claiming rebates of tax where necessary.

Even Refunds are Restricted
Even where HST, paid on business expenses, may be refundable to insurers, brokers, and agents, certain specific expenses are categorically restricted from being refundable (at least on a temporary basis) such as telecom, energy, and automobile expenses.

It goes without saying that navigating the already complex tax rules has become that much more difficult for insurers, brokers, and agents. With July 1, 2010 lurking around the corner, necessary steps must be taken to prepare for the financial impact of harmonization, including any budgeting and product pricing concerns, as well as the compliance and administrative impact of harmonization, which may involve costly systems and procedural changes.

Cliff Lee is senior manager at KPMG and David Schlesinger is indirect tax partner at KPMG.  Both are based out of Toronto.

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