Businesses are urged to update their Canadian tax insurance policies

Tax directors claim that businesses are experiencing uncertainty as they attempt to maintain compliance as a result of the CRA's crackdown on unpaid taxes on insurance premiums.

Following increased official scrutiny, tax experts have urged multinationals to review their Canadian cross-border insurance coverage to ensure compliance.

The phone calls come in response to reports that the Canadian Revenue Agency (CRA) has tightened enforcement measures in the wake of the COVID-19 pandemic and the global economic crisis.

Clients have been reporting an increase in enforcement notices from the tax authority to recover unpaid taxes on insurance premiums, according to John Frim, director of indirect tax at EY in Ontario.

Companies that have policies from insurers based outside of Canada as well as those who are covered by a global policy as part of a multinational structure are both impacted by this rule under the Excise Tax Act (RSC, 1985, c. E-15).

It also results from how Canadian businesses acquire insurance. They can either purchase it locally or abroad, typically as a component of the company's global insurance policy.

Frim says about the CRA's approach: "Until now, it was really kind of quiet on the enforcement side."

He claims that after receiving CRA notices about the need to pay taxes on non-resident business insurance policies, clients are raising the issue more frequently.

According to Frim, "I'm seeing it pop up more and I take it the CRA has put a little [enforcement] project together"

RiskTech Insurance Services, an Edmonton-based insurance brokerage and advisory company, has seen a significant increase in the number of auditors employed by the CRA, according to Sean Morrow, managing partner and cross-border practice leader at the company.

The increased audits of international business insurance policies is one of the problems that have surfaced, he continues.

"We are disproportionately seeing the CRA come after anyone who is not paying taxes."

"Like everywhere in the world, through COVID-19 and with the economics of the country being as they are, they’re scraping everywhere for money," according to Morrow.

On certain cross-border insurance premium types, such as those where businesses are covered by companies that are not residents of Canada, the CRA imposes a federal tax rate of 10%.

It also covers businesses that have an overseas insurance policy obtained through a subsidiary company that purchases from a non-Canadian provider.

An example of this might be a Canadian subsidiary that participates in a multinational corporation structure and receives group insurance benefits.

The problem has worsened, according to Simon Proulx, partner for indirect tax at KPMG Law in Toronto. He attributes this to changing multinational business models. Prior to this change, Canadian subsidiaries had a higher level of autonomy from their foreign owners, including the ability to buy their own insurance.

According to Proulx, "Today these businesses function in a more integrated capacity, they may have a smaller physical footprint in Canada, which means they resort to centralised procurement for a lot of their global needs including insurance."

According to him, there also seems to be a tendency for businesses to buy specific insurance products centrally, such as those that cover cybersecurity and directors and officers.

According to Proulx, "Today these businesses function in a more integrated capacity, they may have a smaller physical footprint in Canada, which means they resort to centralised procurement for a lot of their global needs including insurance."

Following the federal tax filing requirements imposed on both insured parties and non-resident insurers, Frim claims the CRA may also be becoming aware of this issue.

According to Frim, "There is an obligation on the non-resident insurer to file a tax return and list all their Canadian clients who have purchased insurance from them, and I think that’s one of the ways the CRA may be getting that information [on insurance customers]."

Businesses that disregard Canadian tax regulations regarding non-resident business insurance risk being held responsible for multiple tax obligations.

Companies might also be charged provincial sales tax (PST) and insurance premiums in addition to the federal tax. This is true if a company has insurance that is not authorized in the provinces in which they conduct business.

If a business purchases insurance from a provider that is not authorized to do business in the region where the insurance is applicable, the company may also be liable for provincial insurance premium taxes.

According to Proulx, provincial tax administrations also seem to be taking regulatory action, indicating that tax enforcement is not only being carried out by the CRA.

"It's more of a compliance challenge for businesses: they have to keep track of the premiums, they have to do the exercise of allocating the premium not just to Canada, but within Canada to the various provinces," according to Proulx.

He continues that one reason for enforcing provincial taxes is to level the playing field with Canadian insurance companies, whose premiums already include insurance taxes.

"Tax authorities don’t want to create an incentive for businesses to purchase insurance outside Canada," according to Proulx.

Types of insurance contracts are subject to PST in Newfoundland and Labrador, Ontario, Quebec, Saskatchewan, and Manitoba, respectively.

Companies that do not register with provincially based insurers may also be required to self-assess PST on associated insurance premiums.

Businesses face additional risks, such as penalties for failing to pay provincial taxes, such as the 200 percent penalty in Quebec for unpaid taxes. Despite being one of the harshest sanctions, each provincial authority also charges fines and interest for late filings.

"People forget that Canada is a federation and in the worst-case scenario a business could be dealing with up to 14 provincial, territorial and federal tax returns at different times," according to Proulx.

To ensure compliance, the CRA is authorized to conduct audits going back a maximum of four years.

The CRA may levy a further 4 percent late payment penalty on providers in addition to the 10 percent federal excise tax charge and the provincial insurance taxes. This could be used going back up to four years before the audit, for each year.

Businesses can take certain actions to make sure they abide by the non-resident insurance regulations. These include seeking advice from advisors or conducting internal analyses of insurance payments to determine whether Canadian subsidiaries are being charged any intra-company fees.

Companies should check if they are required to pay excise taxes on the insurance premiums.

According to Proulx, businesses should think about the tax repercussions of purchasing firm-wide insurance for both their domestic and international operations.

He claims that while buying insurance on a global scale may result in some savings, businesses must also take into account the local tax ramifications.

It is crucial for multinational corporations to conduct thorough analyses of the tax implications of central purchasing arrangements, including those for insurance coverage, in a world that is becoming more and more globalized.

It makes sense that tax authorities would continue to closely examine business tax structures as more governments look for ways to close gaps in their fiscal budgets.

By fLEXI tEAM