Premiums poised to increase with harmonization tax

Financial services — ranging from advice and mutual funds, to life, health and P&C insurance — will be the biggest losers in the push for tax harmonization within Canada.

This was the message Danny Cisterna, partner at Deloitte & Touche LLP, offered delegates at the Insurance Bureau of Canada’s Financial Affairs Symposium in Toronto on April 23, 2009.

Cisterna was referring to the implementation of the Ontario tax reform, scheduled to take effect in July 2010.

Implications of broad new tax

Ontario currently imposes a single staged retail tax (RST) of 8%, which is generally applicable to most goods and certain services. However, examination by government and other parties recently highlighted the inefficiency of this type of tax.

As a result, on July 1, 2010, the RST will be combined with the federal GST to create a federally administered single value added sales tax (aka: OHST). The combined rate is set at 13% — with the provincial portion remaining at 8% and the federal portion at 5%.

“There will be winners and losers, and the losers are financial services and insurers,” said Cisterna, “because now the tax is broad based.”

Premiums effected

Those products currently taxable under the RST will be subject to the new tax, explained Cisterna. However, carriers will need to examine whether or not the harmonized tax will increase claims costs, given that more goods and services will be subject to the single value added sales tax.

“You will need to determine how this will effect your claims costs and how you will deal with these [additional costs] and how it will impact your premiums.” said Cisterna.

He suggested carriers talk to their suppliers. “Ask them if they can pass on some of the savings they will see;” savings that include exemptions and rebates offered by both levels of government.

Under the current legislation, large businesses, with annual taxable sales in excess of $10 million, and foreign institutions will be unable to claim input tax credits (ITCs); businesses selling taxable/zero-rated goods/services will be able to claim ITCs for the provincial portion of the OHST paid on their purchases; the same process as the GST rebates.

And this will probably become a national movement to harmonize taxes, said Cisterna. “Watch for other provinces to come on board; that is one of the reasons why there is such a long lead time — to allow for other provinces to get on board.”

(04/24/09)