Corporate Tax Drive – it’s a home run

Each year, for the last several years, federal and provincial governments have collected $4 billion in taxes from home, car and business insurance — an amount equal to the industry’s entire value-added. This 100% tax burden is more than three times the average tax burden borne by other financial services industries in Canada. On its own this is a pretty good reason for action…but it gets worse.

While an efficient tax system taxes products once, property and casualty (p&c) insurance is rife with double and triple-taxation. Taxes are applied to business inputs (retail sales tax and GST on claims and operating costs), on the final purchase price (premium tax), and again at the time of sale (retail sales tax). This increases the tax burden on insurance products. It also distorts price signals, and leads to an inefficient allocation of resources and reduced production.

As a result of this system of taxation, Ontario drivers have been paying $139.76 of hidden transaction tax on every $1000 of car insurance. For every $1000 in property insurance premiums, homeowners pay $181.33 in hidden transaction taxes. Between $7 and $10 of this excessive tax results from “taxes on taxes”. Although these amounts may seem small at first glance, then consider the fact that Ontario’s auto insurance premiums in 1998 totaled more than $5.39 billion and personal property premiums $1.39 billion.

At “sin” levels

Canadians’ purchases of insurance and financial security are among the most heavily and inefficiently taxed transactions in Canada. Taxes paid on insurance purchases are in the same league as the so-called “sin” taxes applied to gasoline, cigarettes and beverage alcohol. While transaction taxes form the lion’s share of the industry’s overall tax burden, corporate income taxes are also very high. In a 1998 paper, the Conference Board of Canada found that the financial service sectors continue to pay significantly higher income taxes relative to their share of total corporate profits. Why? The Conference Board contends that this raises serious questions concerning sustainability and fairness. These are the same questions that are put to Canadian insurance CEOs on a regular basis as head-offices look for the most profitable locations for world-wide capital investments — and increasingly find Canada coming up short. Canadian governments now realize that they cannot continue to tax corporate income at rates far exceeding those in competing jurisdictions, or businesses and the jobs they create will leave for foreign shores.

Speaking at the IBC Financial Affairs Symposium in March, Dr. Jack Mintz, president of the CD Howe Institute reported that “Canadian companies are some of the most heavily taxed companies in the world”. By 2000, he notes, Canada will have the second-highest general corporate income tax (43%) with only Japan clocking in higher. In contrast, other countries have undertaken reform measures. As a result, the average corporate income tax rate among members of the Organization for Economic Co-operation and Development (OECD) is now 34%, compared with more than 45% less than 20 years ago.

Scoring a triple

Having been in the “seeking tax reduction” game for almost a decade, 2000 has so far been a springtime of delights for the property and casualty insurance industry. The Insurance Bureau of Canada (IBC) and its insurance tax experts (under the direction of Eileen Young of Royal & SunAlliance) have hit a triple in terms of tax relief for the industry in a few short weeks.

Rounding first… After months of appealing to federal tax authorities, the federal government conceded in its 2000 Budget to a reduction in the corporate income tax rate of 7% in 5 years. Is it enough? Most argue no, but it is a meaningful start towards what some have argued is the most urgent public policy need in the country if we aspire to provide good jobs, rising incomes and a continued high standard of living for our children. Insurers, their investors and consumers are sure to notice the impact of this important policy change.

On to second… In March, the Saskatchewan government agreed not to extend provincial sales tax to insurance premiums. The annual tax take from this initiative would have been $40 million. Instead, the government opted to increase premium taxes by 1%. This is an important win for consumers and insurers alike.

Safe at third…the big one in Ontario. For the last several years, insurers have pressed the Ontario government to remove the “temporary” tax placed on insurance premiums in 1993. The latest IBC pre-Budget submission, in February 2000, was followed quickly by a special submission on transaction taxes, and meetings with senior Finance Department officials. The announcement to eliminate the sales tax on auto insurance premiums over four years came in the May Budget.

Was this welcomed by insurers? Absolutely. Is it without flaws? Definitely not. The quick pace at which this tax must be introduced raises a number of serious administrative problems for insurers — but it is an important step forward.

Heading for home

With the dust still settling from the federal, Saskatchewan and Ontario wins, insurers are looking to home plate…turning their attention west to Alberta. The Klein government has expressed interest in outside advice on improving the province’s corporate tax environment. As such, insurers have submitted an appeal for a comprehensive corporate tax review and a reduction in personal income taxes and regulatory and legislative issues affecting insurers in Alberta.

Is this the final out? Time to retire the IBC tax panel? Not likely. Many governments across the country have now reduced or eliminated budget deficits and policymakers are no longer as pressed to look for new sources of tax revenue — indeed they are looking to tax reduction and reform.

At the same time, despite improved fiscal positions, some governments continue to look for new ways to tax insurance, including rapidly increasing health levies. These challenges require insurers to stay in the game, but it is important to recognize that the rules have changed. We are no longer bound to the strictly defensive plays of the last several years. The climate for continued tax relief seems to be right. Insurers are at bat ready for a new ball game.

Insurers have long pressed for relief from excessive taxation of property and casualty insurance products. Finally, after almost a decade of study and appeal on the complexities and inequities of insurance taxation, the industry has scored a triple and is poised to steal home.