Directors and Officers Liability Insurance
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 Please be aware that any statute or policy referred to in this letter may have been superseded.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-0017, May 2003
Thank you for your facsimile message dated February 27, 2003, concerning the Ontario retail sales tax (RST) status of a directors and officers liability insurance policy.
This interpretation is based on the information provided and which is conveyed in the "Understanding of Facts" portion of this ruling. Please review the information for its completeness and accuracy. If it is determined that the information is incomplete or inaccurate, this interpretation will not be binding. In the event that our understanding of the facts is incomplete or inaccurate, please notify the undersigned, in writing, so that we may reconsider our opinion.
Understanding of Facts
It is our understanding that one of Company A's clients is a registered corporation in the USA. The corporation's insurance contracts are handled by its Ontario office by an Ontario insurance broker. Company A would like to know how RST would apply to the corporation's directors and officers liability insurance policy which has been placed with a USA insurer.
Legislation and/or Administrative Policy
Subsection 2.1(16) of the Ontario Retail Sales Tax Act states:
"Where a contract of insurance (other than group insurance) relates to a risk, peril or events both in Ontario and outside Ontario, the tax payable under this section shall be calculated only upon the portion of the premium relating to the risk, peril or events in Ontario determined in the manner prescribed by the Minister".
Analysis
Directors and Officers Liability Insurance covers liabilities incurred by a corporation or the directors for "wrongful acts" by the directors. It is the loss that is insured and not the officer or director. A wrongful act by a director or officer would incur a loss to the company as a whole, regardless of where the individual resides. These policies are taxable contracts of insurance.
Conclusion
Premiums of directors and officers liability insurance is taxable at 8%. Where a policy covers risk both inside and outside of Ontario, the RST payable may be calculated on the portion of the premium that relates to the company's risk in Ontario. The taxable premium for the Ontario portion is not based on the place of residence of the directors and officers, but rather on the portion of the company's assets that are located in Ontario.
For example:
If the corporation has 45% of its assets located in Ontario, RST is payable on 45% of the total premium (RST = 8% x 45% of the total premium), and the remainder (55%) of the premium that covers risk outside of Ontario is not taxable.
ISBN 0-7794-2507-3
© Queen's Printer for Ontario, 2005
