Interpretation Letter IN-0006, September 2000

Thank you for your letter dated June 29, 2000 to the Regional Tax Office regarding the application of Ontario retail sales tax (RST) to insurance premiums.

Understanding of Facts

We understand that Company A is incorporated in the Province of British Columbia and provides administration services for group benefit plans. Company A is currently expanding its operations to include the administration of Private Health Services Plans and Health Care Spending Accounts for clients in Ontario. It is your understanding that the premiums for these accounts are subject to RST. You enquire if certain charges and fees are also subject to RST.

Legislation and/or Administrative Policy

Under the Ontario Retail Sales Tax Act (the Act),

2.1(1) Every person who is a resident of Ontario, or who carries on business in Ontario, and who,

1. enters into a contract of insurance with an insurer;
2. is a person whose risk is covered by group insurance;
3. is a planholder or member of a benefits plan; or
4. is required to contribute to an insurance scheme or a compensation fund established by or under any Act of the Parliament of Canada or the Legislature of Ontario,

shall pay to Her Majesty in right of Ontario a tax at the rate of 8 per cent of the premium payable.

Group Insurance

Under section 1 of the Act, "group insurance means a policy of insurance that covers, under a master policy, the participants of a specified group or of a specified group and other persons".

Under section 1 of the Act, premium" means,

1. any payment in respect of a contract of insurance and includes dues, assessments, administration fees paid for the administration or servicing in respect of the contract and other considerations, but does not include a reasonable financing fee or a prescribed underwriting fee that is shown separately from other charges,
2. any charge made by the holder of group insurance to any person whose risk is covered by the policy,

Funded Plans

Under section 1 of the Act, a "funded benefits plan means a plan, including a multi-employer benefits plan, which gives protection against risk to an individual that could otherwise be obtained by taking out a contract of insurance, whether the benefits are partly insured or not, and which comes into existence when the premiums paid into a fund out of which benefits will be paid exceed amounts required for payment of benefits foreseeable and payable within thirty days after payment of the premium".

"Protection against risk to an individual" is defined in section 1 of the Act to include "any undertaking to pay on death, or disability, or for supplemental health care, drugs, dental care, vision care, hearing care, or for protection against loss of income due to illness or accident or that provides any other similar benefits to an individual".

Under section 1 of the Act, "premium" means,

5. in respect of a funded benefits plan,

   1. any amounts paid by the planholder less any amounts paid to the planholder by members in order to receive benefits under the plan, and
   2. any amounts paid by members in order to receive benefits under the plan,

   and includes dues, assessments, or administrative costs and fees paid for the administration or servicing of the plan to the vendor".

A funded benefits plan is a plan under which the planholder/employer pays amounts into a fund to cover all potential benefit payments to members for a 30 day period. Benefit claims are paid out of this fund. The payments into the plan are considered premiums and RST is payable on these amounts less the total payments to the planholder by members of the plan. Payments made by members to receive benefits are also taxable premiums.

Unfunded Plans

Under section 1 of the Act, an "unfunded benefits plan means a plan which gives protection against risk to an individual that could otherwise be obtained by taking out a contract of insurance, whether the benefits are partly insured or not, and where the payments are made by the planholder directly to or on behalf of the member of the plan or to the vendor upon the occurrence of the risk".

Under section 1 of the Act, "premium" means,

4. in respect of an unfunded benefits plan,

   1. any amounts, other than an amount that would be included in the total Ontario remuneration of the planholder under the Employer Health Tax Act, paid by the planholder by reason of the occurrence of a risk, less any amounts paid to the planholder by members in order to receive benefits under the plan, and
   2. any amounts paid by members in order to receive benefits under the plan,

   and includes dues, assessments, or administrative costs and fees paid for the servicing of the plan to the vendor.

The Act, as it applies to unfunded employee benefit plans, has been designed to tax all benefit claims paid from such plans, subject to the provision of an exemption where the premiums, as defined in the ORST Act, are subject to the payment of employer health tax (EHT). This is accomplished by reference to amounts included in the total Ontario remuneration of an employee as defined in the Employer Health Tax Act. Where an amount is not subject to EHT (e.g. disability plans), the exemption available in the RST Act does not apply and the amount, if it meets the definition of a premium, is subject to RST. Payments made by members to receive benefits are also taxable premiums.

Since the administration fees paid to the administrator of an unfunded disability plan are not subject to EHT, the fees remain subject to RST within the extended definition of "premium".

Taxable administration fees are meant to include such charges that are made for claims management, processing and servicing of the insurance or benefit program. In the legislation, the words "other considerations" are meant to capture charges that are not specifically identified as administration fees. However, "other considerations" will not include charges for consulting, nor will they include late payment charges, NSF or similar such charges.

Fees that are for the privilege of paying the premium over a period of time rather than paying the premium in full at the beginning of the contract are considered non-taxable financing fees, if identified to the customer as such and shown separately from taxable charges. Interest charges are also not subject to RST if shown separately from taxable charges.

Conclusion

The RST status of the various charges and fees listed in your letter is as follows:

1. Commission paid to Company C on deposited amounts.

   If this commission is paid directly by the client, or charged back to the client, it is subject to RST.

2. Association Membership fee - clients in the product industry must pay this fee before they will be allowed to participate in the benefits program. Company A collects the fee on behalf of the association.

   The association fee is not subject to RST.

3. Initial start-up fee for the administration of the account, payable to Company A.

   This fee is subject to RST.

4. Monthly administration fee, payable to Company A.

   This fee is subject to RST.

Our records indicate that Company A does not have an Ontario RST Vendor Permit. Please contact the office listed below in order that Company A may become registered for the collection and remittance of RST.

If you have any further questions, please contact our office.

ISBN 0-7794-2507-3

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