Interpretation Letter IN-0010, May 2001

Thank you for your letter of March 18, 2001 inquiring about the application of Ontario retail sales tax (RST) on insurance premiums for agricultural property.

Understanding of Facts

Company A is registered as a farm and leases property owned by Company C & Company D. Company A's business consists of apple orchards, a packing plant and a retail store.

Company A would like to know whether all or a portion of its insurance premiums for agricultural property qualify for the available exemption from RST.

Legislation and/or Administrative Policy

Clause 2.1(8)(b) of the Ontario Retail Sales Tax Act (Act) exempts insurance premiums for agricultural property when:

• the insured property is agricultural property as defined under section 3.2 of Regulation 1012, and
• the insured property is used by a person engaged in the business of farming, and
• the insurance is not automobile insurance with respect to motor vehicles that are required to be insured under the Compulsory Automobile Insurance Act.

Agricultural property is described in section 3.2 of Regulation 1012 to the Act and states:

"For the purposes of clause 2.1(8)(b) of the Act, 'agricultural property' means tangible personal property and real property that are used or located on a farm, including dwelling-houses, stables, barns, sheds and outbuildings and their contents, wagons, carriages and other vehicles except motor vehicles required to be insured under the Compulsory Automobile Insurance Act, saddles, harnesses, agricultural engines, implements, tools, instruments, appliances, machinery, household goods, wearing apparel, provisions, musical instruments, libraries, livestock, growing crops, crops severed from the land, fruit and ornamental trees, shrubs, plants and live and standing timber."

Farming includes:

• tillage of the soil for the purpose of growing sod, trees, shrubs, bushes, seed and seedlings, flowers, flowers for use as cut flowers, plants and bulbs from which plants or flowers may be grown,
• breeding of fur bearing animals for the purpose of selling their pelts,
• propagation and cultivation of plants within a hothouse, greenhouse or other enclosed structure designed for the protection of plants,
• growing food for human or animal consumption,
• raising livestock

Subsections 3(1) and 3(2) of Regulation 1013 requires that all vendors of insurance charge and collect RST on premiums paid by persons actively engaged in the business of farming, for insurance of agricultural property, unless the insured provides a properly completed purchase exemption certificate (PEC) certifying that:

• they are a person actively engaged in the business of farming, or are leasing the insured agricultural property to a person actively engaged in the business of farming, and
• the insured property is agricultural property.

There are no specific exemptions from RST under the Act, on insurance premiums paid to insure the production equipment of a manufacturer.

Analysis

In order for an insurance premium for a farm dwelling to be exempt from RST, the purchaser of the contract of insurance must be actively engaged in the business of farming and the property must be located on the farm as farm/agricultural property. A "person engaged in the business of farming", means a person who undertakes farming with a reasonable expectation of profit. Hobby farmers are not entitled to the exemption, since hobby farmers are not considered to be in the business of farming.

If the original operator/owner of a farm leases the farm to someone else and the lessee continues to operate as a farmer, the owner/lessor may purchase the insurance for that property exempt from RST. The original farmer would not be eligible for the exemption if the lessee did not continue in the business of farming after leasing the farm. If the owner of the agricultural property is not in the business of farming, RST must be paid on insurance purchased to cover the property used by the owner.

If an active farmer acquires another farm property, uses the acreage for pasture or feed crops, but rents the farm dwelling to non-farmers, the farmer would be required to pay RST on the homeowner's insurance premium for the dwelling since the house is not being used by a person engaged in the business of farming. Any premium paid with respect to the acreage that is being used for farm purposes would be exempt provided this portion of the premium is shown separately on the billing.

Conclusion

The growing of apples is considered to be a farming operation. Based on our understanding, Company A is a person actively engaged in the business of farming and is eligible to purchase, exempt of RST, that portion of their insurance premium that covers the farm/orchards. In order to claim the exemption, Company A must provide its insurance provider with a properly completed PEC.

However, a packing plant or retail store is not considered to be part of the farming operation. Therefore, Company A must pay RST on the portion of its insurance premium covering the packing plant and the retail area regardless that it is located on agricultural property.

Enclosed for your information is Retail Sales Tax Guide #519 - Insurance - General Information.

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

ISBN 0-7794-2507-3

© Queen's Printer for Ontario, 2002