tax cuts

With the holiday season behind us, it is time to relax and unwind. For some, it will be a time to prepare a list of New Year’s resolutions. Cut out sweets. Cut calories. Cut taxes? The property and casualty insurance industry certainly hopes this will be the case for governments in Canada.this is the year that insurers hope to see lower taxes – in particular, the elimination of provincial premium taxes, removal of capital taxes in Manitoba and Nova Scotia, and further cuts into corporate income tax cuts.

In this unprecedented era of strong economic performance and record government budget surpluses, insurers hope that governments will start the year off right by rewarding the industry (and ultimately insurance consumers) with well-deserved tax reductions. The insurance industry pays a disproportionate amount of tax to the federal government and provincial governments. The difference in the tax burden between the insurance industry and other financial services industries in Canada is primarily accounted for by the excessive transaction tax burden resulting from non-recoverable taxes being applied on business inputs (claims and operating costs), again on the purchase price, and again at the time of sale.

– heavy burden –

In a 1998 paper (Supporting Governments: Transfers from Financial Institutions to Governments), the Conference Board of Canada found that, as a whole, the financial services sector continues to pay significantly more income taxes relative to its share of total corporate profits. This raises serious questions concerning sustainability and fairness. Ultimately, it is the insurance consumer who bears the brunt. In a highly competitive industry like insurance, taxes must be passed on to the consumer.

The tax bill of insurers is more than three times the average tax burden of Canada’s other financial services industries. In 1998, insurers and their customers paid $3.4 billion in taxes to federal and provincial governments in Canada. This would have been substantially higher had it not been for high industry claims (including ice-storm claims) and a dramatic decline in investment gains. Last year, reduced industry earnings led to a 60% reduction in income tax payments to federal and provincial governments. In contrast, and compounding the problem for insurers, is the fact that transaction taxes have risen steadily over the years. In 1998, transaction taxes on insurance totaled $2.7 billion across Canada.

Insurers are simply looking for more fairness in the tax system. In some cases, their consumers are paying retail sales tax on a hidden premium tax, which has been applied to both the retail sales tax and goods and services tax (GST) on claims. Most consumers are not even aware that they are paying a tax on a tax on a tax. Insurance is the only financial services product in Canada that is taxed at the retail level.

– taking a position –

On several occasions last year, the Insurance Bureau of Canada (IBC) put forward the industry’s position to special government committees studying corporate taxation. These included Saskatchewan’s “Personal Income Tax Review Committee” (in February), the Alberta “Business Tax Review Committee” (May), and Ontario’s “Business Tax Review Panel” (December). A common theme of these submissions was the need to expand the federal-provincial review of capital taxes levied on Canadian financial institutions to include a review of the significant amount of premium taxes that provinces levy on the insurance industry.

IBC tax panel chair Eileen Young notes, “a comprehensive review of the taxation of Canadian financial institutions will help to ensure that they remain competitive with other jurisdictions.” She points out that the MacKay Task Force on the Future of the Canadian Financial Services Sector had recommended a comprehensive review of the double taxation consequences, or cascading effect, of transaction taxes (GST, PST, and premium taxes) on insurance products and their cumulative negative impact on consumers. The task force found that transaction taxes on p&c insurance are layered, which leads to a cascading effect. This is not consistent with the principles of effective taxation – simplicity, equity and efficiency.

Canadian tax experts Jack Mintz and Duanjie Chen of the University of Toronto recently completed a comprehensive analysis of the impact of premium and capital taxes on the p&c insurance industry in Canada. Their report cites conclusions of past studies regarding taxes on the insurance industry in Canada – specifically:

The insurance industry is the most heavily taxed among those in the financial services sector, and is taxed more heavily than non-financial sectors;

Transaction taxes, particularly premium-based taxes are the main cause for the heavy tax burden on the p&c insurance industry;

Transaction taxes, particularly premium-based taxes are cascading taxes and have a negative impact on the economy as a whole; and

The premium tax is equivalent in revenue impact to a provincial capital tax ranging from 6% to 10%.

The Mintz report found inconsistencies in governments’ tax treatment of the insurance industry. Under federal and provincial tax systems, p&c insurance is sometimes treated like a financial service (exempt from GST), while at other times it is treated like a non-financial service (subject to provincial general capital taxes and sales taxes). The report notes, “with insurance premium taxes applied in all provinces in addition to possible capital and sales taxes, it seems that the overall policy of governments is to treat the industry as a ‘cash cow’ for tax purposes”.

– devil’s levy –

The p&c insurance industry pays federal and provincial corporate income taxes and several other business-related taxes, including capital, property and payroll taxes. However, unlike other industries, the industry is subject to an additional levy – the insurance premium tax.

The Mintz report observes, “our analysis of the tax treatment of insurance suggests that the insurance premium tax, sales taxes and capital taxes are not fairly applied on the industry, creating inefficiency in the tax system. A large part of the unfairness results from the schizophrenic treatment of the industry – it is sometimes treated like a financial firm and other times as a non-financial firm. Such schizophrenic tax policies, in turn, result in excessive taxation of the economy as a whole.”

IBC president George Anderson comments, “the findings of this study confirm that it is time to address the inequities in the tax system facing p&c insurers. We need to press for lower premium taxes.”

The p&c insurance industry will through the IBC be taking this message to governments in the weeks and months ahead. It is hoped that governments will keep this message in mind as they make final revisions to their list of New Year’s resolutions.

New Year’s Resolution?