Interpretation Letter IN-0020, May 2004

We refer to your facsimiles of February 9, 2004 and March 31, 2004 and our telephone conversation of March 3, 2004 regarding the application of Ontario retail sales tax (RST) to premiums for insurance on international shipments of goods.

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 inaccurate or incomplete, please notify the undersigned, in writing, so that we may reconsider our opinion.

Understanding of Facts

We understand that Company A is a freight forwarder for shipments of goods originating in Canada and the U.S.A. The shipments are moved by air, ocean or truck (in the case of shipments to the USA). The goods are not stored by Company A before shipping. Marine Insurance policies for the goods shipped are issued to customers by an insurance company through an insurance broker and countersigned by Company A. Company A collects the insurance premiums from the customer and forwards the premiums to the insurance broker.

Company A's insurance broker has stated that RST applies to these premiums. Company A believes that the premiums are not subject to RST since the moves are international. You request a ruling on the application of RST to these insurance premiums.

Legislation and/or Administrative Policy

Section 2.1 of the Ontario Retail Sales Tax Act (Act) states in part that:

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

(a) enters into a contract of insurance with an insurer;

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

(17) Where a contract of insurance relates to a risk, peril or event that is taxable and exempt from tax or that is taxed at different rates under this section, the portion of the premium that is taxable or that is taxable at a particular rate shall be determined in the manner prescribed by the Minister.

Clause (d) of subsection 8 of section 2.1 of the Act provides an exemption from tax on premiums for marine insurance in respect of a vessel where the purchaser of the vessel is exempt from tax under paragraphs 29, 30 and 61 of subsection 7(1). The definition of marine insurance is provided in section 1 of the Insurance Act and states:

"marine insurance" means insurance against,

(a) liability arising out of,

(i) bodily injury to or death of a person, or

(ii) the loss of or damage to properties, or

(b) the loss of or damage to property occurring during a voyage or marine adventure at sea or on an inland waterway or during delay incidental thereto, or during transit otherwise than by water incidental to such a voyage or marine adventure".

Also, clause (l) of subsection 8 of section 2.1 of the Act provides an exemption for property damage insurance in respect of property that is wholly outside Ontario or other insurance in respect of a risk, peril or events wholly outside Ontario. The definition of "property damage insurance" is provided in section 1 of the Insurance Act and states:

"property damage insurance" means insurance against loss of or damage to property that is not included in or incidental to some other class of insurance defined by or under this Act;

Subsection 2.1(17) of the Act provides that where a contract of insurance relates to a risk, peril or event that is taxable and exempt from tax or that is taxed at different rates under this section, the portion of the premium that is taxable or that is taxable at a particular rate shall be determined in the manner prescribed by the Minister.

Subsections (1) and (5) in section 18 of Regulation 1012 to the Act provides that the vendor of the insurance policy must determine the portion of the policy that is in Ontario and calculate the RST, if applicable, to that portion and states:

(1) In this section, "Ontario portion" means that portion of a premium under a contract of insurance that relates only to the risk, peril, or events in Ontario where the contract applies to a risk, peril or events both inside and outside Ontario.

(5) For the purposes of subsection 2.1(17) of the Act, the insurer shall calculate the portion of the premium that is taxable and exempt from tax or that is taxable at different rates as if rated under separate contracts of insurance.

Analysis

The Ontario Retail Sales Tax Branch does not have the authority to tax insurance premiums in respect of goods that are aboard an aircraft in flight.

The exemption for marine insurance is not restricted only to the vessel but also includes insurance on persons and goods where they are transported on an exempt vessel.

The portion of premiums paid to cover the following risks for cargo would be exempt:

• risks occurring during air transport;
• risks occurring during transport on an exempt vessel;
• risks to transport the goods from the vessel to a first temporary storage warehouse in Canada, including transport within Ontario to the first temporary storage;

The portion of the premiums paid to cover the following risks in Ontario would be taxable:

• any transportation of the goods occurring in Ontario after the first storage;
• storage in warehouses or retail outlets in Ontario until the goods are shipped outside Ontario or sold to consumers in Ontario.

There is a difference between "marine" insurance and "cargo" insurance. Marine insurance is exempt under the Act and includes coverage of goods during voyages by sea and incidental land based travel.

Cargo insurance, on the other hand, is property insurance and is taxable regardless of who is purchasing it and what is being insured. Cargo insurance is designed to cover goods in transit, usually while the goods are in the custody of a haulage company. As property insurance, cargo insurance is subject to prorate rules where the risk occurs both inside and outside Ontario.

Conclusion

RST does not apply to premiums for marine insurance policies that insure goods shipped by sea or inland waterways. Marine insurance includes incidental land based travel either before or after the actual sea voyage.

RST does not apply to premiums for insurance policies that insure goods while they are aboard an aircraft in flight.

For goods shipped by land (cargo insurance), RST applies to the portion that relates to risk inside Ontario. In order to determine the taxable portion of the premium where the risk is both inside and outside Ontario, the distance travelled in Ontario should be calculated as a percentage of the total distance travelled. As an agent for the insurer, Company A must collect the applicable RST from th customer and forward the tax with the premium to the insurance broker for remittance to the Ministry.

If the policy is combined insurance with one premium paid, the premium (i.e., the exempt air and marine portions and the taxable cargo portion) must be apportioned and RST charged to the client on the taxable portion.

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