On Taxes and Timing

If a plea is made for a lighter tax burden and governments don’t want to hear it, will it make a sound?

Canada’s property and casualty insurance industry has a legitimate tax beef, but this is a difficult time to raise it with cash-strapped governments looking for ways to bring in more revenue.

In fact, given recent government pronouncements and activity related to the GST and HST, the industry may be fortunate simply to come away with its current (albeit very high) level of taxation.

Without question, the industry does pay out its fair share. A recent PricewaterhouseCoopers LLP report commissioned by the Insurance Bureau of Canada (IBC) indicates the industry collected $38.4 billion in revenues in 2008. Taxes and regulatory costs, $4.3 billion, ate up 11.3% of that total.

For consumers, that means 13.8% of the average insurance policy premiums they paid simply made up for the tax and regulatory burdens insurers face.

PwC uses what it calls a ‘total tax contribution’ method to determine the industry’s tax burden. This includes the aggregate of all taxes borne by the industry. As noted above, the total taxes borne by the industry in 2008 amounted to $4.3 billion.

This number is then compared to the insurance industry’s profit before taxes. In 2008, the industry’s net income before taxes was $6.3 billion.

When you divide the taxes borne by the industry ($4.3 billion) by the industry’s net income before taxes ($6.3 billion), you get 67.1%. In other words, according to PwC, the Canadian property and casualty insurance industry’s total tax rate (TTR) in 2008 was 67.1%.

This is a significant jump over the industry’s TTR in 2006 (47.8%) and in 2007 (47.8%). In fact, PwC says in its report to the IBC, it is “among the highest calculated around the world.”

Be that as it may, it seems unlikely governments plan to do anything about it. Just like the industry’s call for boosting premium rates is coming at a time when consumers don’t want to pay more, the timing isn’t good right now for the government to be heeding the industry’s call to reduce taxes.

Governments throughout Canada are starting to think of ways to claw back the spending they did to prop up the economy during the economic recession. They are all preparing to slash services, engaging in the same kind of belt-tightening that consumers have had to undergo during this time of economic recession. In short, they are looking for more ways to make money.

Ontario and B.C. have harmonized their tax regimes with the GST (for which the provincial governments will each receive tidy sums from the feds). This harmonization is anticipated to cost the Canadian P&C industry a one-time hit in the neighbourhood of $350 million, the IBC says.

To confuse matters more, the federal government has issued new GST legislation that is somewhat vague. Finance Minister Jim Flaherty has clarified in the press that the new legislation does not represent a new, broader tax regime. Assuming his reassurances can be taken at face value, all is well and good. Still, it would be helpful if something in the legislation made it clear that broker commissions and other insurance services not currently taxable under the GST remain GST-exempt. Otherwise, the industry is nervous this might significantly increase the tax base.

The point is, the government is talking about increasing taxes and levies at the same time the industry is shouldering a very heavy tax burden. Given the power of governments to set tax policy, and that their tax policies are affected by the current recession, it’s difficult to see how the industry’s plea to reduce its burden is going to end well.

This isn’t to say the message shouldn’t be delivered. But the project to lower taxes is probably best considered a long-term project that isn’t going to garner instant results. The message may be playing over a loudspeaker right now, but the ears on which it falls are plugged.