From: AlanBaggett@volcanomail.com   
      
   'Accidental' GST legislation set to grab extra $1 billion from insurers : CRA   
   SOTW   
      
   By: Dean Beeby, The Canadian Press   
   Posted: 11:25 AM |    
      
   OTTAWA - Canada's insurance industry faces a $1-billion GST bill at the end of   
   this month, thanks to a federal tax move critics say smacks of a 'banana   
   republic'.   
      
   The massive tax hit applies to some financial services that insurers say were   
   never before subject to GST.   
      
   The GST now owed is retroactive seven years, back to 2005, when the federal   
   Finance Department issued a news release saying it planned to amend tax   
   legislation — something it didn't get around to implementing until 2010.   
      
   Critics say that apart from the body blow to the books of domestic insurers,   
   the "massively distortive" tax grab sends a signal to global investors that   
   Canada is no place to do business. That message, they say, challenges any   
   claim the Harper government    
   is a tax-cutter and a good steward of the economy.   
      
   "I have lost count of the number of times that global tax directors have used   
   the words 'banana republic' when I describe this legislation to them," says   
   Michael Firth, a tax partner at PricewaterhouseCoopers Canada, and chief among   
   the critics.   
      
   "They don't believe it. They go, 'You're kidding me? Can they really do this?'"   
   For its part, the Finance Department says it hasn't changed GST legislation at   
   all, but rather clarified rules that were poorly drafted when the GST was born   
   in 1991.   
      
   The slow-motion train wreck began with an obscure Tax Court of Canada ruling   
   in 2003, in which the judge sided with insurer State Farm against the Canada   
   Revenue Agency.   
      
   The company successfully argued the GST does not apply to certain common   
   financial transactions, and therefore it owed no money to the taxman.   
      
   The Finance Department issued a statement and background document on Nov. 17,   
   2005, saying it planned to amend GST legislation to effectively overturn the   
   judge's ruling, warning the amendments would be retroactive to the date of the   
   release.   
      
   Controversial draft legislation appeared Jan. 26, 2007, and the measure was   
   finally passed in an omnibus budget bill in 2010, whacking certain kinds of   
   financial services with GST retroactively.   
      
   The amendments, however, have sown as much confusion as the original law, at   
   least as it applies to the arcane world of insurance financing.   
      
   Only last year did the industry wake up to the reality that the revamped GST   
   rules left them exposed to as much as $1 billion in back taxes.   
      
   "In discussions I have had with affected insurers, most only became aware of   
   the issue in 2012," Denis Brown of MSA Research Inc. wrote in an industry   
   newsletter this April.   
   "Like me, many did not take it seriously until December of 2012, always   
   assuming that wiser heads at Revenue and Finance would intervene and fix the   
   problem."   
      
   Insurance companies caught by the new rules must pay their now-higher GST   
   bills for 2012 by June 30, and face having their filings for the previous six   
   years retroactively revised upward.   
      
   The rules directly affect companies who have cross-border transactions with   
   related firms for reinsurance, a term for the method by which insurance risk   
   is spread around by insuring the insurers.   
      
   Calculating just how much extra GST is owed has been likened to counting   
   moonbeams, with no consensus on precisely what gets counted as taxable or how.   
   The original 2005 release and backgrounder from Finance Canada did not mention   
   reinsurance at all;    
   only in 2011 did the Canada Revenue Agency indicate that some reinsurance   
   transactions could be caught by the new rules.   
      
   Joel Baker, president and CEO of MSA Research Inc., which closely monitors the   
   property, life and health insurance industries, has estimated the additional   
   GST bill for 2012 alone could be up to $200 million, or more than $1 billion   
   in total once    
   retroactivity to November 2005 is counted.   
      
   Baker notes not all insurers will be affected, and that the impact on premiums   
   for customers is unclear.   
      
   The beneficiary of all that tax money is the federal treasury, as well as   
   provincial treasuries where the GST has been harmonized with provincial sales   
   tax. Many insurance firms are based in Ontario where the so-called HST or   
   harmonized sales tax is 13    
   per cent.   
      
   "The unduly expansive and retroactive application of this initiative based   
   upon a 2005 news release, creates an unreasonable and unmanageable retroactive   
   liability that is incompatible with the commercial certainty that should be   
   inherent in tax policy,"    
   Frank Swedlove, president of the Canadian Life and Health Insurance   
   Association Inc., complained to Finance Canada in a letter last August.   
      
   Finance Canada, meanwhile, insists it has not changed any GST rules.   
      
   The GST amendments "were introduced in response to court decisions that   
   extended tax relief beyond what was intended under the GST/HST," spokeswoman   
   Stephanie Rubec said in an email. "The amendments did not change tax policy in   
   this area."   
      
   The insurance industry is clinging to the faint hope Finance Minister Jim   
   Flaherty will cede ground before June 30. In the meantime, industry   
   accountants are busily completing 2012 GST forms for the end of June.   
      
   Finance Canada created a small internal group last year charged with reviewing   
   how GST impacts the financial sector, which is generally exempt from the   
   value-added tax. But the result of the exercise, which is examining tax   
   regimes in other countries, is    
   at least a year away.   
      
   Firth says Canada's tightening of the screws on the financial sector is the   
   polar opposite of the policy of the European Union, whose countries also have   
   value-added taxes like the GST. In Europe, policy-makers do not want their   
   financial sector tax-   
   hobbled, unable to complete with global financial leviathans.   
      
   But in this country, he said, federal politicians are acutely aware that big   
   financial institutions have little sympathy among ordinary Canadians.   
      
   "The government seems to be confident that if you extinguish the rights of   
   financial institutions, it is an unattended funeral," Firth said.   
      
      
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