Wednesday, March 24, 2010

HST on Insurance and Investments

I just received an email from Advocis, the insurance and financial services association I'm a member of. The topic was on GST/HST Notice No. 250

CRA has indicated that trailer commissions, front-end
load commissions, deferred sales charges, commissions on various
insurance products and redemption fees paid by investors do not constitute a
supply of a financial service and will be subject to GST. It is not clear at this
point in time whether financial advisors will be required to register for GST
purposes and remit GST.

Currently the insurance and investment products are exempt from PST/GST/HST. Its been this way for years. In this latest notice CRA has indicated that they have decided to remove this exemption from certain policies. That means any new insurance or investment policies will now be GST-able or in BC HST-able. That means we have gone from no sales tax to 12% overnight. There is nothing in the notice which indicates who gets to deal with this change. Do the insurance companies take over the administration of remitting the tax? Does every advisor now need to register for GST/PST/HST? Unlike some products where the CRA says HST will actually lower prices because there will be a "flow-through" of PST that will not be the case with this change. There has never been GST or PST anywhere in the supply chain so we cannot pass along any savings. Furthermore, as well as the tax, there is going to be added cost in administration of these policies so base costs will be going up as well. 

I think this is a terrible idea, why would the CRA want to discourage people from investing and purchasing insurance? Last time I checked CRA makes buckets off taxes on investments.

CRA has provided some handy dandy examples of when the service would be deemed non-exempt. according to the example below. CRA doesn't clarify exactly how this will apply to real world commissions, does it impact the commissions paid to the MGA? what about overrides or bonuses?

Example 2
In the course of providing services to investors, an investment dealer arranges to purchase units of a mutual fund for an investor. A commission is paid to the investment dealer at the time the units are purchased. In addition, the investment dealer will receive a fee referred to as a "trailer commission or fee" from the fund manager. The prospectus describes these fees as being paid in recognition of the investment advice and ongoing administrative services rendered by the investment dealer to the investors. The “trailer commission or fee” is paid annually subsequent to the arrangement for the purchase of the units. The services provided by the investment dealer, including advice, arranging for the purchase of the units and on-going administrative services for which the investment dealer is paid the commission and subsequent fees would not be a supply of a financial service.
For example, If I were to invest $100,000 of your money in an RRSP, I would be paid a commission of approximately 3% or $3000 (for a back end load policy), however, the MGA I placed the business through would also get paid 2%, for a total of 5%. Now is the 3% taxable or the 5%? We are talking CRA here, so lets assume they are going to be greedy and they tax the 5% commission paid to the MGA and the advisor. In BC the HST will be 12% so we are looking at 12% HST on $5000 of total commission. That is $600 in new taxes you will have to pay. This new tax just cost you 60 base points of return.

Furthermore, CRA is proposing that these changes be effective Dec 14, 2009. a full three and a half months in the past!

Coming into force
These proposed amendments would apply to investment management services rendered under an agreement for a supply if any consideration for the supply becomes due or is paid without becoming due after December 14, 2009. They would also apply to an investment management service rendered under an agreement for a supply if all the consideration for the supply became due or was paid on or before December 14, 2009, unless the supplier did not, on or before that day, charge, collect or remit any amount as or on account of tax in respect of the supply or in respect of any other supply that includes an investment management service and that is made under the agreement.

This means every advisor or insurance company has to go back into their records, and somehow collect GST on past sales? lunacy!

More as this unfolds.

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