Expanded Horizons: PST on individual insurance products

This article was provided by Chris Geldert, CPA, CA, CEA. Chris works out of the Calgary branch of Financial Horizons Group. More information about Chris can be found at the bottom of this article.

             

As an Albertan, the idea of a provincial sales tax (PST)1 is a somewhat foreign concept and is typically considered nothing more than an inconvenience when travelling throughout this beautiful country.

The PST has returned to conversation largely due to the budget that was released by the Government of Saskatchewan on March 22, 2017. 

This budget—dubbed Meeting the Challenge—addressed the economic challenges inherent to many resource-dependent provinces. Difficult decisions had to be made in order to limit the deficit and bring the province of Saskatchewan back to a balanced budget within the next three years. Some would call this being fiscally responsible.

To create a degree of revenue stability the PST was increased by 1%, the PST base was expanded, and numerous exemptions were eliminated. With a new PST rate of 6%, Saskatchewan continues to enjoy the lowest PST rate in Canada among those provinces with a PST. 

 

PST on insurance premiums

The budget expands the PST base to include insurance premiums. The inclusion of insurance premiums within the PST base is not new and is a practice applied by other provinces. The difference with Saskatchewan’s budget is that it seeks to apply PST to “all insurance” whereas other provinces traditionally limit the application to certain elements within group insurance.

The original provision of the budget was set to be effective July 1, 2017 and applicable to coverages on any insured person who is a resident of Saskatchewan. No grandfathering or restrictions were provided, meaning that the PST would also be applicable to the “over-funding” component of permanent life insurance.

In essence the province of Saskatchewan is, among other aspects, taxing the savings element of life insurance to an unprecedented extent. The insurance premium, including any “over-funding” contribution, is already subject to a 3% premium tax in the province of Saskatchewan of which the PST is to be applied after. The result is a tax upon a tax.

 

Industry Response

Several leading insurers, along with the Canadian Life and Health Insurance Association (CLHIA) and Advocis, have raised the concerns of the industry with government officials. To date, there have been direct meetings, local media advertisements, and op-ed pieces in an attempt to educate and influence the misguided decision to apply PST to individual insurance in the province of Saskatchewan.  

In a letter dated March 30, 2017, the CHLIA summarized the primary issues:

There are some very compelling public policy reasons that other provinces have not applied their retail sales tax to individual life, disability or health insurance products. Firstly, such products include a significant savings element. Taxing savings runs counter to the need for Saskatchewan residents to take control of their financial futures. In addition, it introduces a distortion in the marketplace in that savings through banks, credit unions, mutual funds and securities would not be subject to such tax. Secondly, applying retail sales tax to individual insurance premiums introduces a negative incentive for individuals to take prudent steps to provide financial protection for their families. Without private insurance, individuals often end up relying on the public system for support.

We would also note, that in the context of Saskatchewan’s large farming industry, that life insurance policies are an essential tool in financing the transfer of family farms and other businesses from one generation to another. The budget measure will make it even harder to preserve that cornerstone of Saskatchewan’s economy.2

As a result of the reaction, consolations were made. The implementation of the tax changes has been deferred to August 1, 2017 and limited grandfathering will be offered.    

 

Exemption from PST

Barring an exemption, any premium payable after August 1, 2017 on individual life3, disability, or health insurance premiums will be subject to PST. The Ministry of Finance offered clarification on the exemptions available to insurance premiums on May 31, 2017. Included within the exemptions are the following: 4

  • Individual permanent life insurance policies in effect prior to August 1, 2017;
  • Annuity contracts;
  • Insurance in respect of life, heath or well-being of individual who is not “ordinarily resident”5 in Saskatchewan.

For clarity, a resident of Saskatchewan can expect to have his or her financial protection increase by 6% just for the privilege of being a resident of Saskatchewan. This applies equally to policies currently in-force and new policies (with the exception of individual permanent life insurance policies in effect prior to August 1, 2017). This is a significant cost which will likely result in lower overall coverage.

 

Next Steps

Congratulations to those who continued reading, especially those outside of “Rider Nation”.

The situation in Saskatchewan sets a precedent and could ease the way for other provinces seeking revenue stability. With the deficits being run up federally it is not unthinkable to see GST being applied to these products in the future. Even if you and your clients are not immediately affected by this, be cautious.

You are encouraged to be proactive in order to avoid the furtherance of increasing costs of protection for your clients. For more information on the steps being taken you are invited join Advocis’ campaigns

Perhaps it would be prudent to close by sharing the outcome of the last time a political party applied a tax on individual insurance products:

“In 1985, the Quebec government introduced a tax on individual and group insurance products, under Pierre-Marc Johnson. Defeated in 1986 by Robert Bourassa, the new government not only cancelled the tax on individual insurance products, but reimbursed those who had paid it. But Quebec kept the tax on group insurance. Quebec learned the lesson that it isn’t a good policy to tax premiums, because it interfered with the market by discouraging savings within insurance products and encouraged people to buy banking products,” – Ron Sanderson, director, Policyholder Taxation and Pensions for the CLHIA. 

For residents of Saskatchewan please consider signing the Canadian Taxpayers Federation - petition.

 

The term PST will be used throughout the article for simplicity and the writer recognizes other provinces have differing terms including the harmonized sales tax.

From the CLHIA letter dated March 30, 2017 addressed to the Honourable Kevin Doherty.

The term “individual” is used to differentiate from “group” insurance and does apply to ownership, i.e. individual vs. corporate.

For full details please review Information Bulletin PST-73.

“Ordinarily resident” means an individual’s place of residence as determined for income tax purposes.


July 2017

This article was provided courtesy of Chris Geldert, CPA, CA, CEA. 

Chris Geldert joined the Financial Horizons family in 2013 and is excited to be able to continue providing first class resources advisors should come to expect from their MGA. As a Chartered Accountant with over a dozen years in the insurance industry Chris works to bridge the gap between client’s professional advisors. From developing and presenting strategies, to providing independent recommendations on products suited to the client’s needs and risk comfort levels, Chris works to assist advisors grow their practice. 

The writer can be contacted at:

Disclaimer: This article is intended to provide general information only and should not be considered as legal, accounting or taxation advice. Before acting on any of the information contained within this article, or before recommending a course of action, make sure your clients seeks advice from a qualified professional. Any examples or illustrations used in this article have been included to help clarify the information presented in this article and should not be relied on by you or your client in any transaction.