GST/HST Memoranda Series

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17.16 GST/HST Treatment of Insurance Claims

March 2001

Disclaimer

The information in this memorandum does not replace the law found in the Excise Tax Act and its Regulations. It is provided for your reference. As it may not completely address your particular operation, you may wish to refer to the Act or appropriate Regulation, or contact a Canada Revenue Agency (CRA) GST/HST Rulings Centre for more information. These centres are listed in GST/HST Memorandum 1.2, Canada Revenue Agency GST/HST Rulings Centres. If you wish to make a technical enquiry on the GST/HST by telephone, please call the toll-free number 1-800-959-8287.

If you are located in the Province of Quebec, please contact Revenu Québec by calling the toll-free number 1-800-567-4692 for additional information.

Note
This memorandum supersedes GST Memorandum 700-5-10, GST Treatment of Insurance Claims, dated January 31, 1994. Due to the number of significant changes, the revisions have not been side-barred.

Note - HST
Reference in this publication is made to supplies taxable at 7% or 15% (the rate of the HST). The 15% HST applies to taxable (other than zero-rated) supplies made in Nova Scotia, New Brunswick and Newfoundland (the "participating provinces"). If a person is uncertain as to whether the supply is made in a participating province, the person may refer to Technical Information Bulletin B-078, Place of Supply Rules under the HST, available from any Canada Customs and Revenue Agency (CCRA) tax services office.

• General
• Insurance services
• Life and health insurance claims
• Property and casualty insurance claims
• The net-of-GST/HST method
• Meeting documentary requirements
• Invoicing methods
• Leased cars and net-of-GST/HST insurance claims
• Property repairs made by an insured person
• Treatment of legal costs

General

1. Financial services are exempt under Part VII of Schedule V with the exception of those that are specifically zero-rated under Part IX of Schedule VI. The financial services that fall under the zero-rating provisions generally deal with non-resident persons, property situated outside Canada and suppliers of precious metals. This memorandum deals only with exempt supplies of financial services.

Listed financial
institution
subpara 149(1)(a)(v)

2. Certain providers of financial services are specified as listed financial institutions. Included in this group are insurers or any other person whose principal business is providing insurance under insurance policies.

3. This memorandum sets out the treatment of insurance claims under life and health insurance policies, property and casualty insurance policies, including the net-of-GST/HST method, and legal costs arising from insurance claims.

4. For additional information concerning the application of ITC rules to financial institutions, refer to GST Memorandum 700-5-1, ITC Allocation for Financial Institutions, dated July 27, 1992 (which will be replaced by GST/HST Memorandum 17.12, ITCs for Financial Institutions).

Insurance services

Financial services

5. Generally, for purposes of the GST/HST, when an insurance company pays out benefits to compensate a claimant under the terms of an insurance policy, it is providing a financial service that is exempt. A financial service is defined, in part, to include the payment or receipt of money as benefits in respect of a financial instrument. The definition of "financial instrument" includes an insurance policy.

Definition of financial
service
para 123(1)(f.1)

6. The definition of "financial service" also includes the payment or receipt of an amount in full or partial satisfaction of a claim arising under an insurance policy. As such, the settlement of an insurance claim through payment in kind and the payment of money under an insurance policy are financial services, and therefore, are exempt supplies.

Definition of insurance
policy
ss 123(1)

7. The definition of an "insurance policy" clarifies what types of policies or contracts of insurance are financial instruments. For GST/HST purposes, an insurance policy means:

(a) a policy or contract of insurance (e.g., property and casualty policies but not certain warranty contracts - as explained in paragraph 8), that is issued by an insurer, including

(b) a policy or contract relating to accident and sickness insurance, whether the policy is issued or the contract is entered into by an insurer, and

(c) certain types of construction bonds (i.e., a bid, performance, maintenance or payment bond issued in respect of a construction contract). Policy Statement P-210, which provided detailed information on how the GST/HST applies to various methods used to settle a claim arising from a default of a construction contract under a performance bond supplied by a surety to a contractor, including the situation where a surety steps into the shoes of the defaulting contractor and carries on the construction, is being revised to take into account legislative provisions contained in Bill C-24 which received Royal Assent on October 20, 750.

Warranties

8. Warranties issued by insurers for the quality, fitness, or performance of tangible property where the warranty is supplied to a person who acquires the property otherwise than for resale are excluded from the definition of insurance policy, and therefore are supplies taxable at 7% or 15%.

9. Since financial services in relation to products included in the definition of insurance policy are exempt, no ITCs can be claimed for tax paid or payable for taxable inputs acquired to provide these services.

10. For further information on financial instruments, refer to GST/HST Memorandum 17.1, Definition of "Financial Instrument".

Life and health insurance claims

11. Under life and health insurance contracts, the settlement of a claim is usually limited to payment of financial benefits such as death benefits, endowment benefits, cash surrender value of a policy, annuity benefits, benefits under segregated fund contracts, accident and sickness benefits, and disability and income replacement payments.

12. These payments are financial services under the definition of "financial service" since they are made pursuant to an insurance policy. Therefore, no tax is collectible in relation to these payments.

Property and casualty insurance claims

13. Contracts or policies of insurance covering property losses contain provisions under which the insurer agrees to indemnify the insured for loss or damage to property. Usually, insurance claims arising under these types of policies are settled by the insurer either by making a cash settlement with the insured once the amount of the loss has been determined, paying the cost of repairs to the damaged property, or paying the cost of replacing the damaged property.

Cash settlements

14. Making a cash settlement once the amount of the loss has been determined is a financial service and is exempt in the same manner as cash payments under life and health insurance policies.

Repairs and
replacements

15. When the insurer indemnifies the insured for the loss related to the damaged property, the indemnification is generally provided in one of two ways:

• The insurer repairs or replaces the damaged property. In this case, the insurer purchases repair services or replacement property directly. The insurer would not be entitled to claim an offsetting ITC as the insurer would not be acquiring the property or service for consumption, use or supply in the course of a commercial activity.

OR

• The insurer compensates the insured for the cost of repairing or replacing the damaged property. In this case, the insured acquires the repair services or replacement property directly, and is the recipient of the services or property. The insured, if a registrant, may be eligible to claim an ITC provided the other requirements of section 169 are met. If the insured is a public service body, it may be eligible to claim a rebate. In this situation, it may be appropriate for the insurer to use the net-of-GST/HST method for settling the property and casualty insurance claim.

The net-of-GST/HST method

16. The net-of-GST/HST method for settling property and casualty insurance claims ensures adherence to the principle of indemnity in the settlement of insurance claims under the GST/HST. Under the principle of indemnity, an insurer is required to make payment in respect of an insurance claim only to the extent of the actual loss suffered by the insured in accordance with the terms of the insurance policy. The net-of-GST/HST method provides that the amount paid by an insurer to indemnify an insured will be reduced by the amount that the insured is eligible to claim as an ITC and/or rebate related to the tax portion of the repair or replacement expense.

17. Where an insured person such as a final consumer or other person is not eligible to claim an ITC or rebate, the amount paid by the insurer to indemnify the insured will include an amount in respect of the GST/HST that is charged related to the repair or replacement expense.

18. Where an insured is eligible to claim an ITC that is related to the tax portion of the repair or replacement expense, the amount paid by the insurer to indemnify the insured will not include the amount for which the insured is entitled to claim an ITC in respect of that expense.

19. Where the insured is a selected public service body, charity or qualifying non-profit organization eligible to claim an ITC and/or rebate in respect of tax paid or payable on purchases, the insurer would indemnify the organization by paying an amount that includes the GST/HST less that portion of the tax that is recoverable by the organization as an ITC and/or rebate.

Example 1 - insured is a registrant

Company A is a registrant located in Ontario. During a recent fire, its computer that it used exclusively in the course of commercial activities was irreparably damaged. Company A arranges to buy a replacement computer from Computer Supplies Inc. Under the insurance policy covering property at Company A there is a deductible of $200. The invoice made out by Computer Supplies Inc. shows the following information:

Name of supplier	Computer Supplies Inc.
Business number	999999999
Invoice number	001
Date	(current date)
Purchaser	Company A
Price of computer	$3,000
7% GST	210
Total purchase price	$3,210

The bookkeeper at Company A makes a cheque payable to Computer Supplies Inc. and notes in the records for the company's current reporting period that the $210 in tax payable can be claimed as an ITC.

The bookkeeper at Company A forwards a copy of the invoice to the company's insurer and asks for compensation less the tax portion. The insurer pays Company A as follows:

Total of invoice	$3,210
Less GST (7% of $3,000)	- 210
Less deductible	- 200
Total compensation from insurer	$2,800

Example 2 - insured is a non-registrant

If Company A were not a registrant, the invoice sent to it by Computer Supplies Inc. would not change, but the total amount paid by the insurance company would change. Company A, as a non-registrant, cannot claim an ITC in respect of the tax payable on the cost of replacing its computer. Accordingly, to indemnify for the full extent of the loss, net of the deductible, the total amount paid by the insurer to Company A will equal:

Total of invoice	$3,210
Less deductible	- 200
Total compensation from insurer	$3,010

Example 3 - insured is a specified claimant

If Organization XYY were a charity and used its computer exclusively in its exempt charitable activities, it would be entitled to a rebate. Pursuant to section 259, a selected public service body, a charity or a qualifying non-profit organization is entitled to claim a rebate equal to the prescribed percentage of the non-creditable tax charged in respect of the property or service (other than a prescribed property or service) for the claim period. Detailed information on rebates is available in the guide, GST/HST Public Service Bodies' Rebate.

The invoice sent to Organization XYY would contain the same information as the example of the invoice sent to Company A by Computer Supplies Inc. in Example 1, but the amount paid by the insurer would change. Since Organization XYY is a charity and used its computer exclusively in its exempt charitable activities, it would be entitled to claim a rebate of 50% of the tax. Accordingly, to indemnify the full extent of the loss, net of the deductible, the amount paid by the insurer would include the unrecovered portion of the tax (the other 50%). The total amount paid by the insurer to Organization XYY would equal:

Total of invoice	$3,210
Less deductible	- 200
Less GST rebate ($210 × 50%)	- 105
Total compensation from insurer	$2,905

Note that the percentage of the rebate under section 259 is prescribed under the Public Service Body Rebate (GST/HST) Regulations and will vary depending on the type of specified claimant.

Meeting documentary requirements

20. The recipient of a taxable supply is liable for the payment of tax in respect of the supply pursuant to section 165 and may be eligible to claim an ITC under section 169 or a rebate under section 259. For GST/HST purposes, the recipient of the supply is generally the person who is liable to pay the consideration for the supply under the agreement for the supply.

21. Generally, for purposes of claiming an ITC where the total amount payable is $150 or more, invoices should clearly identify the recipient of a supply. If the insurer were the recipient of the repair services and invoiced for the repairs, the insurer would be unable to claim an ITC for the tax included in the invoice. The insurer would have acquired the property or service for exclusive use in the course of exempt activities (i.e., the payment of a claim under an insurance policy).

22. These documentary requirements are set out in subsections 169(4) and 223(2) and in the Input Tax Credit Information (GST/HST) Regulations (the Regulations). Subsection 169(4) provides that the recipient must obtain certain documentation to claim an ITC. Subsection 223(2) states that the supplier must, on request by the recipient, provide particulars of the transaction that are sufficient to support a claim for an ITC or rebate. The Regulations specify the invoicing requirements necessary for claiming an ITC. Further information regarding documentary requirements will be available in Chapter 8, Input Tax Credits: Eligible ITCs, of the GST/HST Memoranda Series.

Invoicing methods

23. There are several methods that suppliers of repair or replacement services can use to establish clearly that the insured and not the insurer is the recipient of the supply. For example, the supplier may invoice the insured and send a copy of the invoice to the insurer. Under the terms of the insurance policy, the insurer undertakes to indemnify the insured for the costs of the insurance claim. Accordingly, the insurer indemnifies the insured by forwarding an amount equal to the repair or replacement cost net of GST/HST to the insured where the insured is a registrant and eligible to claim a full ITC. The insured then pays the supplier the full amount of the repair or replacement cost, plus tax.

24. Another way for a supplier to establish that the insured is the recipient of the supply is to have the supplier of the repair or replacement service directly invoice the insured for the whole amount of the repair or replacement cost. The insured then sends a copy of the invoice to the insurer. Where the insured is a registrant and is eligible to claim a full ITC, the insured pays the portion of the invoice equal to the sum of the deductible and the tax, while the insurer pays the balance of the cost, the net-of-GST/HST amount. Both the insured and the insurer send their payments directly to the supplier. In this situation, as the recipient of the supply, the insured is invoiced and is liable to pay the tax to the repair shop, even though part of the total amount has been forwarded to the repair shop on behalf of the insured by the insurer.

25. As stated in paragraphs 23 and 24, the insured, as the recipient of the services, would be eligible to claim an ITC, provided the other requirements of section 169 are met. The amount paid by an insurer directly to the insured, or on the insured's behalf to the supplier of a repair or replacement service, represents indemnification under an insurance policy.

26. If, on the other hand, the invoice is made out directly to the insurer, and the insurer is the recipient of the repair service, the insured would not be eligible to claim an ITC. In this situation, the insurer would be liable to pay the 7% GST or 15% HST.

Leased cars and net-of-GST/HST insurance claims

Policy statement
P-091R

27. The eligibility of the lessor who is a registrant to claim an ITC for GST/HST paid on repairs to a leased car relating to an insurance claim depends on the lease agreement, insurance policy and the repair shop's invoicing procedures.

28. The lease document usually indicates whether the lessor or the lessee is responsible for repairs to the leased car. If the lessee is responsible for repairs to the leased car, the lessee will contract with the repair shop for the repair services. In this situation, the lessee would be the recipient of the supply.

29. The insurance policy may indicate how a claim will be settled under the policy. If the insurance policy requires the insurer to repair or replace the damaged property in the settlement of an insurance claim, the insurer will contract with the repair shop for the repair services. In this situation, the insurer would be the recipient of the supply.

30. The repair shop's invoice should generally identify the recipient of the supply. As well, certain other information is required in order for the documentary requirements for the claiming of ITCs to be met. Even if the lessor has contracted with the repair shop for the repair services, if the repair shop does not provide the lessor with the proper documentation, the lessor will not be eligible to claim an ITC. Where the repair shop does provide the proper documentation, this information establishes whether the lessor may be eligible to claim an ITC under section 169 of the Act.

31. The lessor is eligible to claim an ITC for GST/HST paid on car repairs for a leased car covered by an insurance policy, if the lessor is the recipient of the repairs and the other conditions in section 169 respecting ITCs are satisfied.

The lessor is a registrant in the business of leasing cars. A lease agreement between the lessor and the lessee requires that the lessee acquire an insurance policy for the car which identifies the lessor as the insured. The insurance policy provides that the insurer will indemnify the lessor for its loss (i.e., the insurer does not provide a repair service). The lease agreement also provides that the title to the vehicle and any parts replaced during repairs remain vested with the lessor. The invoice issued for the repairs identifies the lessor as the party that acquired the repairs, and therefore the lessor is liable to pay for the repairs.

In this example, the lessor is the recipient of repair services acquired in the course of its commercial activities and is eligible to claim an ITC for the GST/HST paid on the repairs to the leased car covered by an insurance policy. In this situation it is appropriate for the insurer to pay the insurance claim on the net-of-GST/HST basis.

32. The lessor will not be eligible to claim an ITC for the GST/HST paid on car repairs for a leased car if the lessor is not the recipient of the service. For example, where the lessor is not a party to the agreement to have the repairs performed and does not incur a liability to pay the consideration for the repair services to the supplier under that agreement, for GST/HST purposes, the lessor is not the recipient of the repair services provided by the supplier. Therefore, the GST/HST in respect of the repair services is not payable by the lessor and the lessor is not entitled to claim an ITC even though the lessor is the owner of the vehicle.

33. The fact that the supplier of the repair services includes the lessor's name on an invoice is not, by itself, clear evidence that the lessor has incurred a liability to pay the consideration for the repairs. Furthermore, the fact that the lessor is included as an additional insured or a "loss payee" under the insurance policy acquired by the lessee is not relevant to the issue of liability for the payment of the repairs to the vehicle.

34. Even if the lessor were to pay the GST/HST to the supplier of the repair services, the lessor would not be entitled to claim an ITC where the consideration for the repair service was not payable by the lessor under the agreement for the repair services. The act of paying the GST/HST does not make the lessor liable to pay the consideration for the supply.

35. As stated in paragraphs 23 and 24, the insured as the recipient of the services would be eligible to claim an ITC, provided the other requirements of section 169 are met. The amount paid by an insurer directly to the insured, or on the insured's behalf to the supplier of a repair or replacement service, represents indemnification under an insurance policy.

36. If, on the other hand, the invoice is made out directly to the insurer, and the insurer is the recipient of the repair service, the insured would not be able to claim an ITC. In this situation, the insurer would be liable to pay the 7% GST or 15% HST.

Property repairs made by an insured person

37. If an insured person does its own repairs related to a claim under an insurance policy itself, and the policy provides for the indemnification of a loss by compensating the insured for the cost of the repair rather than requiring the insurer to repair the property, the payment of the insurance claim by the insurer would represent an exempt financial service under paragraph (f.1) of the definition of "financial service" in subsection 123(1).

Example

A municipality in Alberta assigns one of its own work crews to repair storm damage to a garage that was used exclusively in an exempt activity of the municipality - maintenance of the municipality's garbage trucks. The municipality assesses the cost of repairing the storm damage as:

Labour	$5,000
Materials	12,000
GST on materials (7% x $12,000)	840
Total	$17,840

The municipality did not pay the 7% GST on its labour costs as the labour was performed by its employees. As the municipality is able to claim a rebate for part of the tax paid on the materials used in the repair, the insurer under the net-of-GST/HST method would not indemnify the municipality for that portion of the tax recoverable as a rebate. Assuming that the policy had a $1,000 deductible, the insurer would pay:

Total paid by municipality	$17,840.00
Less
Amount recovered as rebate (57.14% x $840)	-479.98
Deductible	-1,000.00
Amount paid by insurer	$16,360.02

Treatment of legal costs

38. In the course of the settlement of insurance claims, an insurer may incur legal costs, plus tax, related to its obligation to defend the insured in the courts or to pursue its rights under a subrogation clause. Generally, an insurer that is the recipient of such services will not be eligible to claim ITCs for tax paid or payable in respect of the services. The reason for this is that, in the majority of cases, the legal services are acquired by the insurer for use in the course of its own exempt activities.

39. For example, under a subrogation clause the insured's right to sue is transferred to the insurer after it makes indemnification under the insurance policy. The insurer therefore seeks to recover from the third party who caused the loss, the amount it has paid to the insured.

40. Under a duty to defend clause, an insurer assumes the obligation to defend the insured against legal actions in addition to its principal obligation to indemnify the insured for a specific loss (e.g., damages suffered in an automobile accident).

41. In both cases, counsel acts to protect the financial interest of the insurer which also controls, directly or indirectly, the conduct of the proceedings. Therefore, the legal services are considered to have been acquired by the insurer and not the insured. As a result, ITCs will be denied to a registered insurer since these services have been acquired for use in the course of its own exempt activities.

Exceptions

42. Where, under certain types of insurance policies, the insured is not completely indemnified and conducts its own defence, the insured as the recipient of the legal services may, if a registrant, be eligible to claim ITCs.

43. There are some exceptional cases in which legal costs could be paid on a net-of-GST/HST basis, such as insurance against legal expenses. For example, if an insurance contract specifies that if the insured who is a registrant were to be sued, the insurer would do no more than reimburse the registrant for legal expenses, then the insured would clearly have acquired the legal services. Under the indemnity principle, the insurer would be liable only to reimburse the net-of-GST/HST amount, providing the insured is eligible to claim an ITC related to the legal expenses.

Enquiries

If you wish to make a technical enquiry on the GST/HST by telephone, please call one of the

following toll-free numbers:

1-800-959-8287 (English service)

1-800-959-8296 (French service)

General enquiries about the GST/HST should be directed to Business Enquiries at one of the

following toll-free numbers:

1-800-959-5525 (English service)

1-800-959-7775 (French service)

If you are in the Province of Québec please call the following toll-free number:

1-800-567-4692 (Ministère du Revenu du Québec)

All GST/HST memoranda and other Canada Customs and Revenue Agency publications are available on Internet at the CCRA site http://www.cra-arc.gc.ca/ under the heading "Technical Publications" in "Tax".

APPENDIX

Other examples of claim settlements net of GST/HST

Example A

The insured is a registrant located in New Brunswick that uses its property (e.g., an automobile) exclusively in a commercial activity. The insured, as the recipient of the goods and services related to the repairs, is entitled to claim full ITCs. The remainder of the loss is recovered by the insured from the insurer under the net-of-GST/HST method.

Amount of repair billed to the insured	$10,000
HST (15% of $10,000)	1,500
Total paid by insured for repairs	11,500
ITC (claimed on return)	-1,500
Deductible	200
Net loss recovered by insured from insurer	$9,750

Example B

The insured is a registrant located in British Columbia that uses its property (e.g., an automobile) in both commercial and exempt activities. Accordingly, the claim settlement, net of GST/HST, is based on the percentage of the repair cost attributable to its commercial activities. In this particular example, it is 50% ($700 ´ 50% = $350.00). The insurer will therefore settle the claim based on the cost of the repair less that portion of the tax recoverable as an ITC.

Amount of repair billed to the insured	$10,000
GST (7% of $10,000)	700
Total paid by insured for repairs	10,700
ITC ($700 x 50% claimed on return)	-350
Deductible	-200
Net loss recovered by insured from insurer	$10,150

Example C

As noted earlier in Example 3 (insured is a specified claimant) following paragraph 19, the insured as a selected public service body, charity or qualifying non-profit organization is entitled to claim a rebate equal to the prescribed percentage.

The insured is a registered municipality which uses its property (e.g., an automobile) in both commercial and exempt activities. The claim settlement net of the GST/HST is based on the percentage of use of the repaired vehicle in commercial activities. In this particular example, it is equal to 50% ($700 × 50% = $350). In addition, the GST/HST rebate is calculated on the basis of the 50% use of the repaired vehicle in exempt activities. In the case of a municipality, the prescribed rate is 57.14% ($350 × 57.14% = $199.99). The insurer will therefore reimburse the municipality an amount based on the cost of the repair less the deductible and that portion of the tax recoverable as an ITC and rebate.

Amount of repair billed to the insured	$10,000.00
GST (7% of $10,000)	700.00
Total paid by insured for repairs	10,700.00
ITC ($700 x 50% claimed on return)	-350.00
Municipality GST/HST rebate	-199.99
($350.00 x 57.14%)
Deductible	-200.00
Net loss recovered by insured from insurer	$9,950.01