Interpretation Letter IN-0016, October 2002

Thank you for your facsimile dated May 29, 2002, inquiring about the Ontario retail sales tax (RST) on group insurance premiums purchased by manufacturers.

Your letter pertains to a hypothetical situation. The Branch does not provide interpretations concerning hypothetical situations as the information may not necessarily apply to the transactions of an actual taxpayer due to possible differences in the taxpayer's situation. However, we are providing you with a general ruling based solely on the information which you have provided. Please note that this is not a ruling specific to any one taxpayer.

Should you require a ruling for a specific client please provide us with the name of the client along with written authorization from the client to deal directly with you.

Understanding of Facts

You have requested clarification regarding a manufacturer and a manufacturing contractor. You have also asked if there is relief for manufacturers or manufacturing contractors from RST charged on manufacturing employee group insurance premiums.

Legislation and/or Administrative Policy

Manufacturer

A "manufacturer" is defined under section 1 of Regulation 1013 under the Ontario Retail Sales Tax Act as a person who manufactures, fabricates, produces or assembles as applicable, tangible personal property for sale, where the fair value of such tangible personal property sold to others exceeds $5,000, or where the fair value of such tangible personal property manufactured for that person's own use, exceeds $50,000 in the fiscal year. Paragraph 7(1)40 of the Act allows such machinery, equipment or processing materials that are purchased to be used by a manufacturer or producer primarily and directly in the manufacture or production of TPP to be purchased exempt from RST.

Manufacturing Contractor

A manufacturing contractor is someone who manufactures taxable goods and installs them as part of real property, provided the cost to produce the goods in a fiscal year is more than $50,000. The manufacturing contractor must pay RST on the manufactured cost (which includes materials, labour and overhead) of the goods that they produce for use in fulfilling supply and install contracts. Manufactured cost does not include the labour to install the TPP into real property.

Direct materials include all processing materials and consumables that are used directly in producing the goods. Included in the cost of direct materials is shipping cost to transport the goods to the manufacturing location and any federal duty and excise tax.

Direct labour means any labour used to produce the goods, but not labour to install the goods.

Manufacturing overhead should include all manufactured costs not classified as direct materials and direct labour.

Insurance

Contracts of insurance are taxable under subsection 2.1(1) of the Act, which states in part:

Every person who is a resident of Ontario, or who carries on business in Ontario, and who,

(b) is a person whose risk is covered by group insurance;

(c) is a planholder or member of a benefits plan; or

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

However, paragraph (j) of subsection 2.1(8) of the Act states:

Despite this section, no tax is payable on premiums

(j) a contract of insurance entered into by an employer in respect of employees who ordinarily work outside Ontario or whose salary is ordinarily paid outside Ontario, or in respect of former employees who are no longer resident in Ontario;

Analysis and Conclusion

Qualifying manufacturers are entitled to purchase exempt from RST machinery, equipment or processing materials to be used primarily and directly in the manufacture or production of TPP.

Qualifying manufacturing contractors are also entitled to purchase exempt from RST any machinery, equipment and processing materials used primarily and directly in the manufacture or production of TPP. Manufacturing contractors must pay RST on the manufactured cost (which includes materials, labour and overhead) of the goods that they produce for use in fulfilling supply and install contracts. Items such as installation equipment are also taxable to manufactuirng contractors.

Both manufacturers and manufacturing contractors are required to pay RST on other overhead expenses including insurance premiums. Also, there are no exemptions from RST on insurance premiums covering manufacturing plants or equipment and/or third party liability.

Group Insurance Premiums

Employer premiums under group insurance are taxable dependant upon place of employment and not residency. If an employee works in Ontario, or whose salary is paid in Ontario, then employer premiums are taxable.

Employee premiums under group insurance are taxable dependent upon both place of employment and residency. An employee must live in Ontario and work in Ontario in order for employee premiums to be taxable.

Benefits Plan

Employer premiums are taxable for employees who work in Ontario or are paid through a location in Ontario.

Employee premiums are taxable for employees who reside in Ontario.

The following outlines the application of RST to group insurance premiums:

Application of RST to Group Insurance Premiums
Where The Employee Lives	Where the Employee Works	Employer Premiums	Employee Premiums
Ontario	Ontario	Taxable	Taxable
Outside Ontario	Ontario	Taxable	Exempt
Ontario	Outside Ontario	Exempt	Exempt

Where an employee lives in Ontario and reports to work at the employer's location in Ontario, RST applies to both the employee's premium and the employer's premium. Where an employee lives outside Ontario, but reports to work in Ontario, RST will apply to the employer's premium.

ISBN 0-7794-2507-3

© Queen's Printer for Ontario, 2005