Tax Insights: GST/HST exemptions for managing general agents and other insurance intermediaries

Issue 2023-20

In brief

On July 25, 2023, the Canada Revenue Agency (CRA) released GST/HST Notice 325, “Services Provided by Certain Insurance Intermediaries” (Notice 325) for public comment. The publication is intended to provide guidance to:

• managing general agents (MGAs)
• managing general underwriters (MGUs)
• third party administrators (TPAs),

on the GST/HST status of services that they provide to insurers and distributors of insurance products. The activities undertaken by these intermediaries include:

• designing, promoting and selling insurance policies
• recruiting, training and managing insurance agents
• paying insurance claims and providing administrative services

The application of GST/HST generally depends on whether the insurance intermediaries are supplying an exempt financial service of “arranging for” the issuance of an insurance policy. Insurers and their intermediaries should review the guidance in this notice and their agreements and contracts to determine the GST/HST status of the services being provided. Interested parties are invited to provide comments on the notice by October 31, 2023.

In detail

Determining whether the supply is a financial service

To determine whether a person is supplying a financial service, Canadian courts have adopted a two‑part test which looks at:

• what the supplier provided to earn its compensation
• based on the “predominant element” of the supply, whether the service falls within the definition of a "financial service” and, in particular, the inclusionary or exclusionary paragraphs

In Notice 325, the CRA acknowledges the two‑part test and the importance of the “predominant element” to characterize the supply, noting that:

• it is the “element upon which the commercial efficacy of the supply critically depends”
• the “perspective of the recipient must be taken into account when determining the predominant element”

When discussing what is a financial service, Notice 325 references that MGAs, MGUs and TPAs may be involved in an insurer’s supply of a financial service and, in particular, an insurer’s issuance or renewal of an insurance policy. For the service to be considered an exempt supply of “arranging for” a financial service, “the purpose of the supply must be to act as an intermediary to bring the parties together to effect the insurer’s supply,” which depends on:

• the intentions of the parties under the agreement
• the degree of “direct involvement” of the intermediary and whether it is sufficient to “cause the insurer’s supply”
• whether there is a “high degree of reliance” on the intermediary by the insurer

Examples

The publication contains seven examples, which provide guidance on various arrangements involving the distribution of an insurance policy. However, the examples provide only minimal guidance on MGU arrangements in which the MGU is primarily involved in the actual underwriting and issuance of insurance policies on behalf of an insurer (as opposed to the promotion, distribution and selling of the policy to the insured).

The following examples, for which the CRA has confirmed that the intermediary is providing an exempt financial service, do provide meaningful guidance to the industry:

• Example 1: An MGA arrangement in which the MGA:
  • is responsible for promoting and selling life and health insurance policies
  • relies on third parties (independent agents) to facilitate the sale of insurance and who receive a separate commission directly from the insurer pursuant to a separate agreement with the insurer
  • is responsible for submitting insurance applications, training and supervising the independent agents, and ensuring that the agents are licensed to sell insurance
• Example 2: A TPA arrangement in which:
  • a corporation develops and markets an employee benefit plan for employers that involves issuing a group insurance policy to the employer
  • the TPA receiving a commission for selling the group policy is responsible for:
    • structuring the insurance products (e.g. designing insured benefit, marketing materials and setting premiums)
    • recruiting, training and monitoring third party agents and brokers
    • receiving and reviewing insurance applications, determining rates, issuing quotes and enrolling employees into the plan and confirming coverage
    • collecting premiums from the employer, and receiving, verifying and paying insurance claims on behalf of the insurer
• Example 3: A corporation is responsible for distributing and managing travel insurance policies, with the corporation:
  • marketing and distributing the policies through its own employees or subcontracted agents (that the corporation will hire, train and monitor)
  • designing and drafting the policies, insurance certificates and administrative documents, setting premium rates pursuant to insurer’s guidelines and collecting premiums
  • investigating and paying claims in accordance with insurer’s guidelines
• Example 4: A corporation that is a TPA enters into two separate agreements with an insurer – an agreement to:
  • distribute the insurer’s group life and health policies from which the TPA is paid a commission
  • administer the policies that the TPA has distributed (from which the TPA does not receive any additional compensation), which involves:
    • registering individuals (e.g. employees of the group policy holder), providing insurance certificates and policy information, billing customers and collecting premiums
    • managing claims (e.g. determining eligibility and entitlement to benefits, forwarding applications for benefits to the insurer and processing and paying eligible claims)
• Example 5: A corporation that is retained by an insurer to distribute “car replacement insurance policies” through independent car dealerships to customers that have purchased a new automobile.

Examples 6 and 7 involve situations where the intermediary is not providing an exempt financial service:

• Example 6: A “car replacement contract” is not an insurance policy, because it is not issued by an “insurer” and, because what is being sold and distributed is not an insurance policy, the intermediary is not “arranging for” the issuance of a financial instrument.
• Example 7: The provision of an “administrative service” with respect to the adjudication of drug benefit claims made by employees that obtain coverage under a group health insurance policy is not a supply of a financial service (this is similar to the services that were rendered in The Great-West Life Assurance Company v. The Queen 2015 TCC 225 [affirmed 2016 FCA 316]).

The takeaway

As the agreements between an intermediary and an insurer play a significant role in characterizing what is being supplied, insurers and intermediaries should:

• review their contracts to confirm the GST/HST status
• to the extent appropriate, amend the agreements to support the parties’ intention for the supply to qualify as an exempt financial service

In particular:

• as the “end result” of the intermediary’s service often involves the issuance of an insurance policy, and
• from the insurer’s perspective, causing the insurance policy to be issued is the element upon which the commercial efficacy of the transaction critically depends,

the services being performed by the intermediary should be described in a consistent manner (i.e. the agreement should accurately describe the parties’ intention, which is that the intermediary ultimately causes the insurer to issue an insurance policy).  

MGAs, MGUs and TPAs should also consider whether their particular arrangements are similar to the examples provided in Notice 325, and provide feedback on these examples to the CRA by October 31, 2023. PwC can also help structure agreements in a tax-efficient manner and bring additional examples to the CRA’s attention.