Administration and Surety Bonds
Information and Disclaimer
This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued. Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter. Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a retail sales tax publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided. In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.
Interpretation Letter IN-0009, May 2001
Thank you for your facsimile message of March 29, 2001 inquiring about the application of Ontario retail sales tax (RST) on administration bonds and surety bonds.
Understanding of Facts
Your company, Company A, has requested a written ruling as to whether RST applies to administration bonds and surety bonds.
Legislation and/or Administrative Policy
Subsection 2.1(1) of the Ontario Retail Sales Tax Act (Act) taxes the purchaser of insurance and states:
- Every person who is resident in Ontario, or who carries on business in Ontario, and who,
- enters into a contract of insurance with an insurer;
- is a person whose risk is covered by group insurance;
- is a planholder or member of a benefits plan; or
- 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.
However, clause 2.1(8)(h) of the Act provides an exemption from RST for premiums to obtain a surety and states:
- Despite this section, no tax is payable on premiums for,
- the obtaining of a surety;
"Surety" is defined in section 1 of Regulation 1013 as "a contract in which one party agrees to be bound to the other party by the same obligations as may be owing by the named debtor or principal to the other party and agrees to pay an amount to the other party upon the happening of an event or upon a default in payment to the other party by the named debtor or principal, and includes a letter of credit".
ANALYSIS AND CONCLUSION
In order to distinguish between a contract of insurance and a contract of suretyship, it is important to characterize the differences. In general terms, a contract of insurance is an agreement whereby the insurer agrees to indemnify the insured against loss. The liability for indemnification rests entirely with the insurer.
On the other hand, a contract of suretyship is one whereby the surety agrees to indemnify another against loss resulting from the non-performance of the principal or named debtor. The surety has legal recourse to recover from the principal or named debtor any monies it may have paid on its behalf.
Premiums for surety bonds such as bid bonds, contract bonds, performance bonds, etc. are exempt from RST.
As a consequence, Company A is not required to charge RST on premiums for surety bonds or administration bonds provided these latter bonds are contracts of suretyship.
If you have any further questions, please contact our office.
ISBN 0-7794-2507-3
© Queen's Printer for Ontario, 2002
